April 15 – TAX DAY!

It’s time to gather your statements and run the numbers through your favorite income tax software, whether it’s software you purchased in a store or software provided by one of many online tax companies.  Or if you prefer, take your statements to an accountant and let him handle the dirty work.

Yes, the federal government is holding out its grimy hand, eagerly waiting for you to fork over your “fair” share of the tax burden, whether you want to or not.

I must say that the massive number of people turning out for the anti-tax, anti-government spending rallies has been nothing short of amazing.  These Tea Parties are picking up steam as more companies are bailed out by the federal government (mainly by us taxpayers), and as the government continues spending money like crazy in the name of stimulating the economy.

Neil Cavuto from Fox News was covering the Tea Party here in Atlanta, GA, and of course, people were waving their pro-FairTax signs in the background.  Not as many as I saw last year, but the FairTax peeps were still trying to get their message across to the nation.

It doesn’t help that Neal Boortz, Atlanta resident, self-proclaimed Libertarian and co-author of an incredibly popular FairTax book or two, rules the airwaves and will gladly debate the FairTax unless you start hitting its flaws.  Before I go any further, I’ll say that I am conservative and do agree with Boortz on many issues, but the FairTax is one of the few cases where I draw the line.

I’m sorry people, but no matter how loud many of you scream about it online and in the protests, the FairTax is not the answer to the high tax rates and anger towards the federal government.  Cutting government spending across the board and drastic reductions in corporate and personal taxes are the keys for stimulating the economy and getting out of debt.  Redistributing the way that they collect taxes won’t do jack squat except for severely penalizing those buying high ticket items like new cars and new homes.

I do find it hard to believe that all of the people who support the FairTax have actually read and understood Boortz’s book completely, reading between the lines and understanding that we do not live in a fantasy world where everything behaves exactly as predicted.  My own theory is that most of the FairTax fans are people who are simply fed up with the government and paying an income tax.  After all, the book implies that the FairTax would abolish the 16th Amerdment and get rid of the IRS.  That notion alone would draw a lot of support.

In short, the FairTax is a national sales tax.  I’m not going to get into the details here, but in essence, it’s pretty much a national sales tax (on top of any county or city sales taxes you’re already paying).  Big ticket items will be hit the hardest, hitting the new car and new home industries particularly hard.  The biggest advantage is that you can earn all the money you want as the government would only collect when you make a purchase of a new good or service.

FairTax problem #1:

One of the biggest controversies is whether the FairTax really taxes at a 23% rate as advertised in the book, or if it’s really 30% as pointed out by many websites.

At FairTax.org, it claims that the FairTax plan taxes “new retail goods and services at a rate of 23 cents out of every dollar spent at the time of purchase and only paid once for new goods and services.”

Okay, if a merchant wants $77 for an item, how much money am I shelling out at the cash register?

If the FairTax plan calls for collecting 23 cents on the dollar (23%), then that means that I need to pay $94.71 ($77 + $17.71) at the cash register for the $77 item, right?

Well, not really.

23% of $94.71 is $21.78.  $94.71 (total cost) minus $21.78 (the 23% tax-inclusive rate required by the FairTax) equals only $72.93.  That’s not quite enough money to pay for the $77 item.

In reality, we would be paying $100 for the $77 item to meet the 23 cents on the dollar tax-inclusive requirement by the FairTax.

30% of $77 is $23.10.  $23.10 + $77 = $100.10.  $100.10 – $23 (23% tax-inclusive rate) = $77.10, close enough to the cost of the item.

You need to add 30% to the $77 item to ensure that the government receives its required 23 cents on the dollar and you still have enough money to pay for the item itself.  In reality, you’ll still be paying even more in sales tax depending on where you go shopping when you factor in the county and/or city sales taxes.  In reality, you can expect to add on 35-40% in tax to accommodate the 23% tax-inclusive rate for the FairTax in addition to the taxes required by the local area.  Imagine buying a new car or even a new high definition TV and paying that much extra money for the item.  How about back-to-school clothes shopping for the kids?

The 23% is correct when talking about the tax-inclusive rate, which is proudly stated by the pro-FairTax people.  The problem is that it takes a 30% tax-exclusive rate to reach that lower, 23% tax-inclusive rate.

That’s how you turn 23% into 30% and require the FairTax supporters to explain themselves.

What I don’t get (perhaps I’m just stupid), is why the website FairTax.org addresses this issue specifically, but it cannot explain it in plain English!

If this is such a hot topic, why can’t the website give us a simple example involving real items and show us how much money a person will be spending at the cash register?

I don’t care about lots of text and a fancy graph.  I know that the thousands of businesses become tax collectors in the new system, sending the money to Uncle Sam instead of us doing it ourselves each April.  Give us real life examples showing how much a merchant wants for an item and how much money we’ll be paying at the cash register.  Use round figures and keep it simple for us idiots.

This is just one issue that I have with the FairTax.

FairTax problem #2:

Another issue involves senior citizens and those already living in retirement.

The FairTax information states that families would receive “prebates” for the taxes collected on essential items (namely food).  For all other new items and services, the 23%/30% tax rate would be used as a way to collect income.

Well, what about all of those people who have spent a lifetime paying their federal income taxes?  Now when they buy new items under the FairTax, they’ll be taxed again!  I hate to think of those retirees who saved up to buy a new Cadillac or purchase new items such as cameras, golf clubs, new clothes, a security system for their home, rent money, etc.

What about when grandma sends little Billy a $50 check for his birthday for him to spend on toys?  That money has presumably already been taxed when grandma and grandpa were working for a living.  But now through the FairTax, that money is going to be taxed again when little Billy tries to buy a new toy or video game that he’s been wanting.

FairTax problem #3:

Aside from the 23%/30% tax rate and the retirees with their previously taxed money, yet another problem deals with the proposed “prebate” program.

You know that this is going to be abused like crazy and just encourage more deadbeat people to have even more kids, getting a bigger welfare and monthly prebate check in the mail.  This is nothing more than redistribution of income, especially when you know that a lot of those people abusing the system are not going to put the money back into the system as designed.

FairTax problem #4:

Okay, so the FairTax collects government tax revenue through consumer spending instead of through a person’s income.

What happens during a recession and consumer spending drops?

What about when there is a decline in the purchase of big-ticket new items, such as cars and homes?

Will that proposed 23% tax-inclusive rate still provide the big spending government with enough tax revenue, or will that tax rate have to be increased to cover from the loss of income?

One way or another, the government is going to get your money.  It seems like cutting spending is the last thing in the minds of Congress as a whole.  If we did have the FairTax, what would stop the government from simply increasing the tax-inclusive rate by a percentage point or two until it sees the tax revenue that it desires?

The problem is that increasing the tax-inclusive rate will just drive that many more people to the purchase of used goods.  This would also boost consumer sales through black markets, wiping the local and federal government of any tax revenue.

FairTax final thoughts:

These are just a few major issues that I have with the proposed FairTax.  I’m not going to spend all night listing the flaws and other areas that are still being debated.  Nor do I care that Boortz’s most common answer to FairTax questions is simply, “Read the book!”  Listen to the callers on his show and count the number of times that he tells them to go out there and read the updated version of his book.

It doesn’t help Boortz’s case when other websites that have analyzed the FairTax show that in reality, the income bracket most likely to benefit the most from the FairTax are those earning $200,000 and more.  At times like this I can only wonder if all of the talk about the FairTax is just to boost book sales and stuff even more cash into Boortz’s and Linder’s pockets.  It’s hard to look at the FairTax seriously and see if it really does help average Americans with their tax problems, or if it’s nothing more than a talking point, and lousy one at that.

I find it really hard to believe that conservatives actually support such a ludicrous taxation proposal.  This is even more ridiculous when the biggest proponent and driving force is Neal Boortz, a talk radio host of all people, not an economist.  Let me know when Boortz earns a Masters or even a Bachelors degree in economics and establishes academic credibility in the subject matter.  The ironic thing is that Boortz likes to ridicule people who whine about it not being “fair” when things don’t go their way, yet his own proposal is called none other but the FairTax.

Our taxation system is in serious need of overhaul, but the FairTax is certainly not the way to do it.

Flat tax:

The root problem is that the government is spending money like crazy, sending us on a steeper and tightening downward spiral to bankruptcy, destroying our credibility and nation as a whole.  The reckless spending has to stop, period!

If we must be taxed, I’m a believer that the flat tax is the way to do it.

Set up standard deductions for single and married people, and have a limit on the number of deductions for family members.  This may sound mean, but a limit on family member deductions will help stop unproductive people from having large families in the name of collecting more money from the government.  They can still have a large family, but they’ll be on their own for making up the difference in money to pay for everything.

After that, each April you’ll pay a flat tax rate on your salary, wages and commissions.  Businesses will pay a flat rate on their profits.  Throw in proper usage of the Laffer curve to keep the tax rate as low as possible while ensuring maximum collection for the government, and there you go.

Opponents of the flat tax like to mention that our current taxation system started out as a flat tax before it evolved into the monstrosity that it is today.

The answer sounds really simple.

You wipe the slate clean and basically start over again.  Keep the system simple and only focused on certain types of income.  You then stay disciplined without increasing government spending or appeasing to groups, increasing the number of deductions or making wealthier people pay more simply because they’re rich.

Is this solution perfect?  No.

There will be flaws and problems for every taxation system, whether it collects taxes primarily through income or sales tax.  The tricks are to keep it simple and to keep the tax rates low.  It’s not easy and requires discipline, but it can work in the end.

In a perfect system, the low rates will spur business growth and drastically cut unemployment.  By not having a progressive tax system, people and companies will not be punished for making more money than they did the previous year.  The tax rate would remain consistent at all levels, allowing for companies to seek maximum profits without penalty.

That’s it.

Then again, I’m just a simple minded person looking for a better solution to the current problem.

What I do know is that our current system is in dire need of a reform, and the FairTax is certainly not the way to do it.