Fair is Fair: The Legend of the FairTax

By Dallas Brooks

On a cold December night in 1773, American Colonists in Boston had decided they’d had enough. The Sons of Liberty, a group of such notable Americans as Samuel Adams, Patrick Henry, and Paul Revere, had voiced their strong opposition to the Tea Act of 1773, a bill that gave the East India Company a monopoly on the trade of tea in the American Colonies.

By threatening to tar and feather British captains who made port, they avoided confrontation up and down the eastern seaboard. Three ships, however, entered Boston’s harbor carrying tea (the Dartmouth, the Eleanor, and the Beaver), while the governor of Massachusetts, Thomas Hutchinson, refused calls by the Sons of Liberty to have the ships immediately depart the colony.

It’s important to remember that the penalty for theft in Massachusetts in 1773 was death. In response to a rise in burglaries earlier in the 18th century, Massachusetts implemented stiff punishments. As a holdover from Puritan settlers, New Englanders, at the time of the Boston Tea Party, would put people in the pillory for such petty offenses as failing to show up to church services or idle gossip.

King George wasn’t known for his peaceful and understanding nature when it came to insurrections, either. Despite the threats to their lives, early American Colonists took it upon themselves to dump out almost 400 chests of tea, valued at over $700,000 in today’s standards, in an act of ultimate defiance that helped to spark a full-scale war for Independence.

All of that was over a 3 pence tax per pound of tea. That’s the equivalent of adding a couple of bucks to the price of a large bag of coffee at Starbucks, and remember, that’s without an income tax in 1773!

Fast forward to 1894. The United States is a federal republic, founded on a Constitution that limits the powers of the central government in such a way as to prevent direct taxes on citizens of the United States, even though it tried. The US Supreme Court ruled that the federal government had no right to tax incomes in Pollock v. Farmers Loan Trust Co.

Only 19 years later, in 1913, the 16th Amendment was added to the Constitution, effectively creating a legal income tax for the first time in American history. For Libertarians who often decry that “taxation is theft,” the last 103 years has given them plenty of cause to be angry. The current American tax code is over 74,000 pages long. That’s a 187-fold increase since its creation.

Today you need to hire a tax attorney, use specialized software applications, or pay a professional accountant to really do your taxes properly. According to Neal Boortz’s The FairTax Book: Saying Good-Bye to the Income Tax and the IRS*, Americans spend nearly $200 billion per year in compliance costs alone! That’s not even the worst part of the income tax. It results in a complete lack of privacy and an overbearing, ever-watchful government looking over our shoulders at all times.

The Internal Revenue Service can, at any time, go over all of your detailed financial records to make sure they got theirs. As we’ve seen under Lois Lerner’s leadership, the IRS can also be used as a political tool to help to stifle free speech. Depending on your income bracket, you could be paying as much as HALF of your earnings to various taxes on income (state, federal, local).

Thankfully a group of dedicated Americans came up with a better way. It’s called the FairTax. It is not perfect, but it does a few good things that are worth considering.

Here’s what the FairTax eliminates:

Income taxes on individuals

Corporate and business income taxes

Capital gains taxes

Social Security taxes

Medicare taxes

Payroll taxes

Estate Taxes

Gift taxes

The Alternative Minimum Tax (AMT)

Now I know what you’re thinking. What’s the catch? There has to be some kind of tax revenue, or are you advocating for anarchy? No. I’m not an anarchist. We need government to do what it’s meant to do. It needs money to do that. We just don’t have to continue the kind of thinking that’s brought us to the point in time where we’re nearly $20 trillion in debt, with no sign of Congress ever doing anything to correct the problem, while we bury our heads in the sand, and let special interest groups dictate the outcomes of our lives. Let me answer the questions I usually hear from concerned citizens who are still skeptical of the FairTax.

Q: How does the FairTax fund government?

A: It applies a 23% sales tax on goods and services in the United States at the retail level. This means it’s applied to new items only, not your used items on Craigslist or at your yard sales.

Q: But Dallas, won’t that make my $2.00 beer cost $0.46 more?

A: Yes, in theory. But do you ever notice those pesky little FICA, Social Security, Medicare, and Withholding deductions on your paychecks each payday? Those would be gone. You keep 100% of your money. What’s more, you’re already paying 23-26% in embedded taxes on everything you buy anyway. Those payroll and income taxes you’re paying? Corporations pay them too, only they don’t really pay them. They pass the costs on to you.

Businesses can choose to either attempt to pocket the profits from no longer having to pay their own taxes, or they can pass the savings down to you. Here’s the beauty of it, though: the free market decides. If Pepsi passes the savings, do you think Coca-Cola is going to fail to do so too? It only takes one company to make that decision for the rest to fall in line.

Q: Is a national sales tax like a Value-added tax?

A: No! The VAT is the antithesis of the FairTax. The VAT adds taxes, secretly, at almost every step of the way from production to the point of sale. What’s worse, it’s just another add-on to income taxes in Europe. The FairTax is applied once, at the point of sale. What’s more, it replaces the income tax (as well as a lot of others).

Q: How much revenue will the government get with a FairTax?

A: As much or more than it does now. About $2.3 trillion if it does $10 trillion in sales. It’s revenue-neutral, meaning it doesn’t increase or decrease the amount of taxes it collects. How much we tax and spend is a valid debate to have at all levels of government, but the FairTax simply changes the way we acquire revenue for the government.

Q: But will the wealthy still pay their fair share?

A: 23% on a luxury yacht is more than 23% on a Corolla, ditto for a mansion versus a suburban ranch-style house.

Q: Does the FairTax have waivers for food and things that I need to survive?

A: No. You pay the tax on everything but the cost of school tuition. However, that’s where the prebate comes in. Whatever it costs you to live, based on the Health and Human Services index published annually, you’ll get 23% of that in monthly checks from the federal government. This means that a family of five that needs to spend $35,000 per year for basic necessities will get about $675 per month from the government to cover the 23% in taxes they spend monthly on necessities. They could live on a farm, grow their own food, never buy a thing at a grocery store, and pocket the money. Good for them!

Q: Does the FairTax eliminate the IRS?

A: No. Despite Governor Huckabee’s promise in the 2008 GOP Presidential debates to “eliminate the IRS,” there will be some kind of government oversight. The FairTax greatly reduces it as the burden of filing because it is only done through states in conjunction with business owners. Individuals do not have to file.

Everyone has skin in the game with a FairTax. Even foreign visitors to our nation, whether here legally or not, will contribute to our tax system as they make purchases. People doing illegal activities, or those who are working simply for cash, will contribute as they buy supplies at their local hardware store. Major corporations who prefer the lower 25% European corporate tax rate to the 35% corporate rate in America would suddenly have a much better option here in the United States at 0%.

No one can predict what those companies will do for certain, but wouldn’t it make sense that they would entertain the idea of setting up shop in the United States? Manufacturers could return. Pittsburgh’s steel industry could be revived. There would be more jobs in the United States than people to fill them.

Do you know what that does to wages? Hint: Supply and demand works well for laborers in this situation.

The FairTax also breaks up the vicious cycle of influence between lobby groups and elected officials. Today if a politician wants cash, he asks special interest groups. Those groups fund his campaign, he gets into power, and then he owes them something in return. What he usually owes them is some sort of break in the tax code. If there’s no tax code to peddle, it reduces the incentive for those special interest groups to get involved in their bribery.

The FairTax is not a magic pill to solve all of our problems. It does not address runaway spending. It has nothing to do with whether or not we keep a bloated federal government with 16 cabinet level departments that mostly perform functions beyond the enumerated powers the federal government was granted. The price of goods and services could go up. I say could because this is going to be left up to the free market. If no company wants to pass on the savings gained by no longer having to pay the withholding and payroll taxes, then prices will increase.

Further, although we will bring more jobs to America, it’s possible that people will seek to find alternatives when purchasing goods if there’s a market advantage to doing so. If it’s cheaper for a Maine resident to buy a new Mercedes in Canada rather than in his home state, he may do so. Some say it’s a regressive tax. I tend to disagree.

People who argue the point that the FairTax punishes the poor are not basing their argument on a level playing field, but rather the “progressive” one that we’ve become accustomed to where the majority of taxes are paid by a small minority of the wealthiest Americans. This is a legitimately debatable point, but I simply think that the FairTax is “not as progressive” as what we have currently.

We’ve come a long way in this country from a society that created an outright rebellion over a tiny sales tax on a pound of tea, to one that willingly complies with tens of thousands of pages of tax laws and constant intrusions into our personal and financial lives. The FairTax would be a fundamental shift in power away from the central government, back to the people of the United States. A voluntary system, the FairTax would be more in line with the founders’ views of a free society. That’s part of the reason why Governor Gary Johnson has expressed his support for the FairTax, and one major reason why I’m supporting his candidacy.