The reason most tax books are convoluted is because the U.S. income tax is more complicated than the World War II-era Enigma code. While the feds eventually cracked Enigma, the IRS hasnt had much luck deciphering its own regulations. According to Boortz and Linder, 40 questions to the IRS help line about a single deduction usually produce 40 different wrong answers. This mass confusion saddles U.S. businesses with $194 billion in compliance costs while the average taxpayer wastes 27 hours filling out his return. Wary of the wasted time and effort, a group of Houston businessmen (Americans for Fair Taxation) devised a simple plan: the FairTax. After years of studying the idea, Boortz and Linder make a compelling case for the FairTax. And with a little history on the failures of the income tax and an economics lesson behind the benefits of a national sales tax, theyre sure to win over some converts.
The FairTax is a 23 percent inclusive sales tax that would replace the entire income tax scheme and end the IRS. This plan would mean the end of all the achievement-punishing tax brackets, capital gains taxes, corporate taxes, Social Security taxes, and FICA. The FairTax is revenue-neutral, meaning that the 23 percent sales tax would generate enough revenue to maintain the same level of government spending. The sales tax rate is set at 23 percent because that is the forecasted decline of the price level once the income tax is phased out. The beauty of the FairTax is, as Boortz and Linder note, Once the FairTax takes effect, youll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes and youll be paying just about the same price for consumer goods and services that you were paying before the FairTax.
The duo also illuminate the best political selling point of the plan: the FairTax could turn out to be the best poverty-fighting tool devised in this country since the concept of hard work. If the income tax were phased out, the poor would take home every penny of their paychecks, thus increasing their spending power and personal savings. In addition, the creators of the FairTax knew that a 23 percent sales tax on the basic necessities of life would be politically and economically untenable. So, the plan includes a prebate based on the governments definition of poverty level spending for different family sizes. For example, a family of four would be given a $5,902 refund for the sales taxes on their first $25,660 of spending; approximately $492 per month. As a result, every taxpayer, regardless of income, isnt taxed on spending for basic necessities. As Boortz and Linder explain, This, of course, presents something of a problem to politicians who like to use the tax code to foment class distrust or outright warfare.
The introduction to one chapter asks, So lets say the FairTax is adopted tomorrow. What happens to the American economy? According to Boortz and Linder, economists estimate that in the first year the economy will grow by 10.5 percent. Exports will grow by 26 percent. And capital spending will increase by more than 70 percent. Because corporate taxes and other embedded duties would be eliminated, businesses could make decisions based on whats good for commerce instead of spending so much time and effort minimizing their exposure to taxes.
And the IRS? The authors note that the $400 to $500 billion we spend complying with the IRS would be additional dollars in our pockets available to spend, to invest, or to use in creating jobs. Boortz and Linder cover all of the bases, pointing out everything from how the underground economy would no longer enjoy tax-free status to how the FairTax would make it profitable for domestic companies to keep jobs at home and for foreign companies to send jobs here.
For obvious reasons, Boortz and Linder title their last chapter, Okay. Great Idea. So What Do We Do Now? They readily admit that the FairTax will not be a popular idea in Washington, since it would fundamentally change the business of government. Many K Street lobbyists and tax attorneys would become irrelevant if the tax code were simplified. The authors note, Our current income tax plan was designed by politicians; as such, it was designed to benefit politicians and serve their ends. Even though the FairTax is looked upon favorably by the White House, the House Majority Leader, and countless movers and shakers in Washington, it stands virtually no chance unless Beltway politicians know that the American public is behind this change. In short, this idea needs a public groundswell to become reality.
If that indeed happens, well know who to thank.