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A Real Stimulus, the Fair Tax

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While economic stimuli and bailouts are in today's news, a true economic stimulus is getting too little attention - the Fair Tax. A bill in Congress, HR.25, with 34 co-sponsors at its 2009 re-introduction, the Fair Tax would jolt the economy back to life in months by quickly repatriating over $10 Trillion of capital invested offshore. The Fair Tax would then help fix the long-term structural problems of the economy by changing the tax code to reward thrift, effort and productivity in a way that is fair to the poor. The Fair Tax could possibly salvage Social Security and Medicare, which together represent a $53 Trillion present unfunded government liability for the year 2040. See I.O.U.S.A., Peterson Foundation (2008).

If you are like most middle-class people, would you not like to be the one decide how much tax you pay and when you pay it? Would you not like to take home your entire check without any federal withholdings and see your real spending power increase? Would you not like to skip the April 15 filing deadline and instead "do your taxes" at the checkout counter - and walk away with no chance of an IRS audit? Would you not like to know that the Fair Tax, which allows all this, fully funds the federal government at current spending levels and is actually better for low-income people than today's taxes? Would you not like to know that $23 Million of research says the plan will work?

The Fair Tax is a progressive national retail consumption tax that replaces payroll taxes, estate, gift and generation-skipping taxes, and corporate and personal income taxes. The Fair Tax meets all four objectives of tax policy: transparency, efficiency, economic growth and fairness.

Most people on this site are concerned about the last goal: fairness. They want to be assured that a consumption tax such as the Fair Tax can be equitable to low-income people and not balance the budget on the backs of the poor, while letting wealthy individuals escape with less than their fair share of the tax burden. One of the keys to fairness is that, on a first-in first-out basis, all wealth is eventually spent. The Fair Tax taxes wealth when it is spent. Today’s income and payroll taxes do not.

Another key to fairness is the use of correct methodology in analyzing resources. Economists, instead of using a single-year window considering only income, use a multi-year window, computing average remaining lifetime resources for a cross-section of stylized households and discounting those resources back to present value.

One study employing such methodology was performed by economists Sabine Jokisch and Laurence J. Kotlikoff, in their paper, "Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax," National Tax Journal 60 (2), 225-252 (2007). They state in their analysis:

    ... The low-income members of this cohort experience a sizeable 9.4 percent welfare gain. Their middle-income contemporaries experience a moderate 1.0 percent welfare gain, while their richer contemporaries experience a small 0.4 percent welfare loss.

    Id. at p. 17.

Another study by Professors David G. Tuerck, Ngo, et. al., in their paper: "A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the FairTax Plan," Beacon Hill Institute at Suffolk University (2007), concludes:

    ... On this basis, we show that the FairTax benefits households and individuals in the lower expenditure categories, while imposing a higher burden on those in the higher expenditure brackets. When the dynamic effects of the FairTax are included, only those households in the top per-capita-expenditure decile would be worse off after the 25th year of the implementation of the tax, and then by a relatively small amount. Thus, we conclude that replacing income and payroll taxes with the FairTax would make the United States federal tax system more progressive than it is now and would benefit the average individual in almost all expenditures deciles.

    Id. at p. 26.

The time has come to revisit the Fair Tax. People on this site should make the effort to properly understand the Fair Tax and then demand that their representatives in Congress co-sponsor the bill. People then should demand that President Obama support it and sign it when it arrives at his desk.

~Jim Bennett
Summit, NJ

Jim Bennett is the New Jersey State Volunteer Co-Director of Americans for Fair Taxation
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A Real Stimulus, the Fair Tax

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