H2 abstract this paper compares marginal and average tax rates on working and saving under our current federal. Hearing on tax reform and consumption based tax systems july 26, 2011. Value added tax the value added of a firm is the difference between a firms sales and a firms purchases from all other firms. Ga7, the primary sponsor of the fair tax act in the u. Comparing average and marginal tax rates under the fairtax and the current system of federal taxation laurence j. Purchase of living essentials tax free via the prebate under the fairtax, all americans consume what they see as their necessities of life free of tax. It is a consumption tax in the form of a national sales tax of 23. A retail sales tax, valueadded tax, the flat tax, and the x tax are closely related. Auerbach university of california, berkeley, and nber may 6, 2006 currently visiting professor of law, new york university.
The advantages of consumptionbased taxation cato institute. Oecd o o taxation 3 oecd 20 tax is at the heart of our societies. The idea of abolishing the current confusing, laborintensive system is appealing to me. In the wealth of nations book v, chapter 2 he set down four general canons. A consumption tax versus a federal income tax in the united. The plan replaces them with a federal retail sales tax of 23% to be administered by state sales tax authorities. That percentage would then fluctuate annually based. Comparing average and marginal tax rates under the fairtax. The citizenry pays no tax on an amount equal to the cost of living for a family of 4. It also has a responsibility to design a tax system that is fair and efficient.
It will definitely fail in karl marxs goals of punishing achievement and discouraging personal savings. A retail sales tax is a flatrate tax on all sales from businesses to households. Apr 15, 2018 consumption taxes, on the other hand, are levied when an individual or household buys stuff. To help evaluate changes in tax rules, the aicpa developed a framework of 10 guiding principles of good tax. Just remember that taxes based on spending put you in control for better or worse so make sure any new financial gains arent offset by impulsive purchases. The aches and pains of transition to a consumption tax. Currently, our tax system is based on tax brackets. After reading this book, i dont see how anyone could be against the fair tax, a proposal currently in the congress that would actually abolish the irs and replace income taxes with the fair tax which is not a flat tax or a vat tax. Selected comments the national taxpayer advocate established the tax reform suggestion box in january 2011 to allow taxpayers to share their thoughts about tax reform.
May 31, 2007 moreover, even fairtax critics like gale agree that consumption taxes increase the size of the economy. Fairtax book was written to spread the message of a national retail sales tax. Alan garner p roposals for fundamental reform of the federal tax code are receiving increased attention in the business press and among economic. The individual wage tax would be imposed on wages and salaries and pension receipts. Mar 03, 2005 the pros and cons of a consumption tax len burman and. Mike huckabee says the internal revenue service is an outofcontrol agency that should be abolished in favor of a consumption based fair tax. A valueadded tax vat is equivalent to a retail sales tax but it collects the tax in. It also calculated the tax would be very regressive as the figure below shows. It is highly unlikely that a fair tax could be adopted in lieu of an income tax. But if we are to have public spending, we must also have taxation.
Former attorney boortz is the wellknown atlantabased libertarian talk. Could income tax be replaced by a consumption based sales tax. An origin principle tax taxes income or consumption based on the. May 15, 2014 the fair tax is a proposed alternative federal tax system that would replace all current federal taxesincome, payroll, and corporatewith a new consumption or sales tax to be collected on. If we can assume goods or services as the horse, gst is a horse rider. Even if government were significantly smaller than it is today, it would still have to be financed. In other words, the distinction between a wage tax and a consumption tax based on treatment of old capital may mislead an observer. Additionally, responses from an acca member survey have been analysed and tested for statistically significant differences between countries. The bill provides for a monthly prebate to all qualified households. It would certainly be possible to make a consumption tax work. Meanwhile, countries from new zealand to estonia have devised equitable, effective tax structures. There are a variety of forms of income and consumption taxes. A common example of a consumption tax is a sales tax.
Bushs tax reform panel considered a sales tax as a revenueneutral replacement for the income tax. This chapter considers the application of expenditure or consumption type taxes to the financial sector, with special emphasis on the role of the vat. The joint committee invited economists of many economic stripes to model what would happen if america switched from the current code to a unified income tax or a consumption tax. A macroeconomic analysis of the fairtax proposal pdf. A flat consumptionbased tax is by definition progressive, even without capital gains taxes and dividends taxes, because the more a person earns, the more taxes he pays.
A tax only on income that one spends on goods and services. Of course if you are in search of a socialist utopia, the fair tax is not what you seek. Advocates expect a consumption tax to increase savings and investment, ease. It is a nonpartisan 501c4 grassroots organization solely dedicated to replacing the current income tax code with a national retaillevel consumption tax. A pure consumption tax is defined as a system that taxes individuals on the goods and services they purchase and exempts all saving from tax. Current tax law requires the processing of six million business returns, 150 million individual and household tax returnsiv some overlap, and various trust, foundation, and other returns that are processed today, all under a complex, burdensome, and unfairtax code. These are perfectly valid reasons to favor the fairtax or any other consumption based tax system. Its set at 5% never to be increased, collected by the states for a fee to be determined then sent to the u.
The one objection to a consumption tax based on pure economics is that it would require a higher tax rate in order to raise the same revenue as an income tax that includes capital income. Four conservative tax plans with equivalent economic. Valueadded taxation is based on taxpayers consumption rather than their income. The arguments for a consumption based tax like the fair tax in lieu of an income tax are strong but are less appealing in a practical sense. This paper was prepared for a conference on key issues in public finance, held at nyu, may 2006. Congress has the power to design a tax system to fund the necessary functions of government. Consumption taxes are usually indirect, such as a sales tax or a valueadded tax. Pwc s indirect tax network is a family of experts with presence in over 150 countries and over two and a half thousand indirect tax specialists. The fair tax book explains this revolutionary plan in plain english and does something even more amazing.
Americans for fair taxation is a 501c4 nonprofit, nonpartisan grassroots organization solely dedicated to replacing the current income tax system with a fair, simple and transparent national consumption tax the fairtax plan. In contrast to a progressive income tax, which levies greater taxes on higherlevel earners, vat applies equally. The fair tax act fta is presently drafted to impose a national consumption tax rate of 23% for one year after taking effect, which is reported to approximate the historically average annualized u. Under the fair tax plan, only the amount of income you spend gets taxed. Specifically, the committee considered the fair tax a proposal to replace existing federal taxes with a national retail sales tax and the valueadded tax vat, a type of consumption tax used by many other countries as a supplement to other taxes, such as taxes on individual and corporate income. The texas fair tax concept even economists of a decidedly freemarket bent recognize the necessity of governments existence. Despite the fact that people need to pay taxes based on rationales of vertical and horizontal equities, it is not always the case that tax systems. Over the course of more than a decade, the organization has invested millions of dollars in fundamental tax research. A fair tax might also make it more difficult to be a tax cheat. Should you create derivative works based on the text of this book or other crea. For this reason, a consumption tax would be less neutral between work and leisure than the current income tax. The tax base of such a tax is the money spent on consumption. Regardless of the type of job you have, where your wages come from or your residency status in the country, you pay the same percentage when you buy goods and.
Income tax manual part 1 national board of revenue. Consumption based tax or a destination based tax is essentially a tax levied at the time of consumption. I dont think its a risk to my journalistic integrity to admit that i hate taxes. The potential financial gains for residents are exciting. They are pushing for a flat tax, meaning that one fair tax is charged for retail goods, and all other taxes would be eliminated. Any suggestion for modifying tax rules raises the question of how to compare the proposed changes to either existing rules or other possible alternatives. Since gst is a destination based tax, all the sgst on the final product will be collected by the state in which it is consumed. A fair tax system uses a balance of tax sources related to different concepts of ability to pay. While an income tax is based upon income earned from labor or capital, a consumption tax is solely based upon consumption. Should you create derivative works based on the text of this book or other creative commons materials therein, you may not use this book s cover art and the. This may be thought of as a rebate, paid in advance.
There is no such thing as a fair tax mises institute. However, a consumption tax can also be structured as a form of direct, personal taxation, such as the hallrabushka flat tax. Could income tax be replaced by a consumptionbased sales tax. Im not an economist, but not only did i read this book in a morning, but i actually understood it. We would enact what looks like a consumption tax, but what really is a wage tax, by forgiving the tax on old capital and vice versa. Fairtax is a flat tax proposal in the united states that includes complete dismantling of the. The fair tax movement is based on the idea that most federal taxes, including social security and payroll taxes, should be eliminated and replaced instead with a consumption tax.
Alan garner p roposals for fundamental reform of the federal tax code are receiving increased attention in the business press and among economic analysts and policymakers. The annual prebate equals 23% of the annual consumption allowance. Switching to a consumptionbased tax from the current income tax. I am grateful to dan shaviro for comments on an earlier. Most financial services are exempt from valueadded taxation vat in virtually all the countries employing this form of broad based consumption tax. Many studies show that longterm incomes would rise under a consumption based tax system. The only way to update is by calling adam yomtov 9176893931 mobile. Nov 16, 2015 congress has the power to design a tax system to fund the necessary functions of government. A comparison of the fairtax base and rate with other national tax reform to mitigate the burden of taxation on lowerincome groups, h. A consumption tax is a tax levied on consumption spending on goods and services. Jan 08, 2020 a consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy income tax. Discussions about tax reform usually address three issues. The coauthor, congressman john linder ga7, the primary sponsor of the fair tax act in the u. Fair tax is a push to reform the federal tax codes, that are very over complicated and bias towards many groups of people.
Every economist who modeled reported that the consumption tax would increase longterm economic growth. President bush has identified tax reform as a top priority, calling for a tax system that is progrowth, easy. Consumption tax financial definition of consumption tax. A broad based consumption tax like the fairtax has other benefits. As much as i dislike paying them, preparing and filing them is even worse. It would eliminate the state income tax and all its related taxes, including both the state withholding tax and the state inheritance tax. The idea is that everyone pays their fair share based on what they spend rather than what they earn. A flat consumption tax would be fair and efficient the. The fair tax is designed to be more of a progressive consumption tax, with the inclusion of a prebate that would help lowerincome individuals and families consume necessities tax free. While permitting no exemptions, the fairtax hr25 provides a monthly, universal prebate to ensure that each family unit. At least read the book before making up your mind based on opinions by. Fundamentals and facts is a research based organization.
A wellfunctioning tax system is the foundation stone of the citizenstate relationship, establishing powerful links based on accountability and responsibility. One popular variant is the hallrabushka flat tax, which is a. The day the irs was created, the fundamental relationship between the american people the boss and the government their servant was turned upside down, the former arkansas governor and twotime. A consumption base is neither inherently superior nor inherently inferior to an income base. The authors would like to express their gratitude to kavya rajasekar, recipient of the 2017 georgetown university law center fellowship at cost, sonia shaikh, cost research fellow. The fairtax book is a nonfiction book by libertarian radio talk show host neal boortz and congressman john linder, published on august 2, 2005, as a tool to increase public support and understanding for the fairtax plan. Review of the fairtax book, by neal boortz and john linder regan books, 2005. Moreover, even fairtax critics like gale agree that consumption taxes increase the size of the economy. Economic growth, cost of compliance, and irs abuse. Its certainly possible to have a value added tax, or vat, at that 25% or so rate. This paper concludes that the fair tax plan would be more suitable for the united states than the current federal income tax. Current income basis for an income tax wealth basis for property taxes and estategift taxes consumption basis for sales and value added taxes. Although they need to be reinterpreted from time to time, these principles retain remarkable relevance. The combined individual and business taxes proposed by hr can be viewed as a modified valueadded tax vat.
This is precisely why those countries which do have a high consumption tax rate do it as a. Income tax is generally due on the net income realised by the taxpayer over an income period. Original research fastfood consumption and obesity among. The fairtax also provides a prebate to each household based on its demographic composition. House of representatives, adds political understanding. The fair tax would replace all existing income taxes as well as payroll taxes with a single consumption tax. A consumption tax also known as a cashflow tax, expenditure tax, or consumed income tax is levied on goods and services that are consumed.
Nor are we addressing the question of what is the right total level of taxation. A consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy income tax. Methods we analyzed data from 12 questions about fastfood consumption that were included on the 2005 michigan behavioral risk factor survey, a population based telephone survey of michigan adults, using univariate and. Some economists argue that a consumption tax the fairtax is one such tax would have a positive effect on economic growth, incentives for international business to locate in the u. It rejected the idea after concluding that the rates would have to be much higher than promised by the fairtax people. Many studies show that longterm incomes would rise under a consumption based tax. The idea of abolishing the current confusing, laborintensive system is. Principles of a good tax system west virginia senate. The economic approach to tax design this is not a book about how much public spending or how much redistribution there should be. Consumption based taxes are said to be generally regressive, meaning that lower income individuals pay a greater share than those with higher incomes. Fairtax quotes by neal boortz goodreads share book. Proponents of consumption taxes argue that a broadbased consumption tax. The fair tax plan is a sales tax proposal to replace the current u.
Changes in wealthor savingsare not taxed by consumption taxes but are taxed by income taxes. Most countries have consumption taxes at some level and proposals exist in the united states to shift from a mainly progressive tax system to a system that utilizes consumption taxes predominantly or exclusively. We are asking taxpayers to tell us what provisions they would give up if doing so would make taxes simpler, and what provisions they think most unfair. It abolishes all federal personal and corporate income taxes, and ends all taxes on gifts, estates, capital gains, alternative minimums, social security, medicare, and selfemployment. Wherever the horse moves, the rider moves along with.
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