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FairTax: Too Good To Be True?

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What would you say if I told you we could get rid of all your existing federal taxes income tax, Social Security, Medicare, capital gains, estate tax, all corporate taxes, all federal excise taxes, the works and get you a big pay raise at work and send you a government check in the mail every month for the rest of your life?

That's not all: you would never have to complete another Form 1040 again. April 15 could once again be known as the day Leonardo was born, the Titanic sank, and Lincoln died. No more "Tax Day" for you.

If you were the average Tea-publican, your reaction might be, "Something for nothing? I'll take it!" If you were anybody else, though, you might recall your parents' warning about things that look too good to be true.

And you would be right.

Meet FairTax

This taxation scheme is called FairTax. It proposes replacing all federal income taxes with a broad-based consumption tax on new retail sales. Rep. John Linder (R-GA-7) has introduced the "FairTax Act" in each Congress since 1999. He coauthored The FairTax Book with right-wing radio talker Neal Boortz in 2005, and FairTax: The Truth in 2008 (the title of the second book makes you wonder what the first one contained).

Republican Rick "Gather your Armies" Barber recently ran for Congress in Alabama's 2nd District on a FairTax platform. He lost.

FairTax piqued my interest because, knowing Conservatives' penchant for deceptive naming (the "USA Patriot Act," and the "government takeover of health care" are just two examples), I had a pretty good idea of what the FairTax was not. I wanted to understand what it was.

Here is an overview of how FairTax is supposed to work.

1. Eliminate all federal taxes. Get rid of the IRS, too.

2. In their place, introduce a national sales tax a federal consumption tax on all retail purchases to be collected at the point of sale. Proponents would collect $23 in taxes for each $100 spent a 30% tax rate.

3. Corporations will pay no taxes under FairTax, so they will be able to lower prices on most goods and services sold at retail.

4. There will be no payroll tax deductions under FairTax, so every working American will receive more money in every paycheck.

5. To accommodate people living on subsistence incomes, the government will send a monthly advance rebate ("prebate") check to every household in the United States to offset the taxes people pay on purchases up to the poverty level.

The theory behind not taxing corporations is that the government exists for its citizens; that corporations are not people; that citizen-stakeholders (employees, customers, shareholders, suppliers, communities) derive economic and social benefit from the corporations' existence; and that, therefore, citizens should bear the full cost of government.

In light of the January 2010 Citizens United vs. F.E.C. decision, this theory may no longer be defensible. If corporations are going to benefit from First Amendment and other Constitutional protections and guarantees, then they are obliged to help foot the bill for government, just as they do now.

Two Threshold Questions

FairTax is a radical departure from the way we fund the government now so much so that two threshold questions seem relevant: (a) is it Constitutional? and (b) does it fund the government? These questions are important because if the answer to either one is "No," then none of the details matter.

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Rick Wise is an industrial psychologist and retired management consultant. For 15 years, he was managing director of ValueNet International, Inc. Before starting ValueNet, Rick was director, corporate training and, later, director, corporate (more...)
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