They say, in life, nothing is certain but death and taxes, and the only sure-fire way you can escape taxes is to die, which is something people are not very keen about. Between death and taxes, they would rather pay taxes than not pay at all, especially because the tax man would not be so happy if they even attempt tax evasion while still alive and breathing. But our struggle with personal taxes may be lessened with the Fair Tax plan. This refers to a legislation called, the Fair Tax Act (HR 25, S 13) that will keep the federal government from collecting different types of income tax, such as Social Security tax, Medicare tax, personal income tax, capital gains tax, self-employment tax, estate tax, and alternative minimum tax.
Sounds great, doesn’t it? Many proponents believe that the fair tax plan will eliminate loopholes that wealthy people, corporations and special interest groups have been enjoying and abusing. It will also spread tax burden evenly. Opponents, on the other hand, say that the initiative will only allow the wealthy to enjoy an even lighter tax burden, and make middle class handle the bulk of taxes. So it is not entirely good or bad.
If you think about it, however, you would be wondering how the government would be able to generate revenue without collecting the many income taxes that people is burdened today. Under the Fair Tax plan, revenue will be generated through the national sales tax that businesses would collect at the point of sale. The revenue will then be sent to the federal government. Would this kind of arrangement work for everybody’s benefit?
List of Pros of Fair Tax Act
1. Benefit high income earners
Based on the current tax system, the more money you earn the higher the taxes you will have to pay. But under the Fair Tax plan only the amount you spend gets taxed. So even if you make $200,000 and you only spend a total of $50,000 you would only be taxed for the 50 grand you spent, which would make a huge difference. If you work hard to spend zilch, you will have to pay 0 taxes as well.
2. Better investment returns
With the capital gains tax taken out of the equation, an investor can enjoy tax-free compound growth. This gives more people an opportunity to invest, including those that are hesitant to do so because of all the tax implications. Under the Fair Tax plan, you can invest as much you want and withdraw funds without having to pay for taxes or penalties. The same thing can be done with your IRA which would work to your advantage.
3. Dealing with tax will be easier
Preparing and filing personal taxes is no easy feat, considering that the American tax system is very complex. But when taxation is handled by businesses at the point of sale, it eliminates the hassle of filing personal taxes. It would also be easier for businesses to predict tax revenues, especially when consumption rates are stable. Any estimates made will be more accurate.
4. Benefits businesses
Even if there are special arrangements for business owners in terms of business and personal tax, double taxation can still be a problem. The Fair Tax Act, however, will take care of such problem, and would get rid of payroll taxes and capital taxes. And when overheads decrease, prices of commodities could also fall because of lower production costs and increase in spending power.
5. Helps develop disciplined and mindful spending habits
Under the Fair Tax Act, the more you spend the more you will pay, which means you need to curb on your nonstop use of credit cards and clamp down on your mortgage debts. Moreover, you will be mindful of what you buy or spend on because of the taxes imposed. Also, because the money paid on credit card bills will not be taxed you would, stop using plastic.
6. Gives prebates
The prebate system under the Fair Tax is where the government reimburses tax that you paid on taxable items, on a certain amount of course, over the year. This would prove beneficial for families near and below the poverty line.
List of Cons of Fair Tax Act
1. Penalizes the middle and lower classes
The fair tax plan is a progressive tax where the rich pay more and the poor and middle class pay less, but this is only true if an individual spends 100% of his earnings on taxable expenses. Unfortunately, the wealthy don’t live from pay check to pay check and would rather invest than spend their money. This means people above poverty level will bear the brunt of the tax burden.
2. Shows increase potential for tax evasion
If tax evasion is rampant now that the tax system is complex, it would be easier to commit such a crime under the new tax initiative, by simply trading and purchasing goods in other countries. This can even have an adverse effect on the economy because people will not only spend their money in another country, but would also decrease their overall domestic spending.
3. Increases the burden on state income
Under the Fair Tax Act, only the federal income would go away. The state income tax would remain but is no longer deducted against federal taxes. This can be a huge money pit for people living in high income tax states. If you live in Los Angeles, for example, and earning $100,000 you could be paying an overall tax of 40%, which accounts for state’s sales tax, FairTax and state’s income tax.
4. Increase costs for immigrants
Unfortunately for non-citizens, they are not included in the prebate check system, which means their cost of living would be significantly high. This can spell bad news for permanent residence (green) card holders, visa holders, and lower-income immigrants. Worse, it will deter highly educated foreign workers from coming and working in the United States, which will deprive the country a pool of excellent skills and talents. Because of the Fair Tax Act, doctors, engineers, nurses and technology sector workers would choose to work someplace else.