“Fair Tax” System is a Gift for the Wealthy

September 1, 2015

In August, Senator Jerry Moran and Representative Lynn Jenkins made presentations advocating for a fair tax plan, a 23% national sales tax designed to replace our income tax system. On the surface, this sounds appealing because it seems simple and easy. But, if this were implemented, it would be tremendously unfair to most Americans.

The primary problem with this approach is that no tax is paid on unspent income. This means that people at lower income levels would pay a much higher tax rate than those with larger incomes.

According to a 2012 article in The Atlantic, most individuals at the lowest income levels are required to spend almost all their income to make ends meet while those at higher income levels of $150,000+ have about 40% of their income remaining after paying for monthly needs.

For those who spend the vast majority of their income, a national fair tax would mean paying 23% in tax on virtually every dime they earn. On the other hand, those with high incomes could avoid paying taxes on huge portions of the their income by choosing to save rather than spend the money.

An individual making $30,000 a year who needed to spend everything would pay the full 23%. A couple making $60,000 who only needed to spend $50,000 to make ends meet would pay only 19% in taxes. A family with a higher income of $150,000 who only needed to spend $90,000 would pay a mere 13.8% tax rate.

Those who are extremely wealthy would see the biggest benefit. Imagine a very high income family making $3,000,000 yearly needed to spend only $600,000 to cover their costs. Such a family would pay only a 4.6% tax rate on their yearly income.

The bottom line is the higher an individual or family income and the greater proportion that is saved and not spent, the lower the overall tax rate.

This is a complete reversal of our current progressive income tax system that taxes all earned income and charges higher tax rates for those at higher income levels. Under a fair tax system, those at the bottom would pay the highest rates and those at the top could avoid substantial amounts of taxes and pay very low tax rates.

Not only would such a system hurt those with lower incomes by ensuring they pay the highest tax rates, but it could make costly items very difficult for some families to afford. Add 23% to a $500 appliance and the cost increases to $615. Add 23% to a $3,000 repair and the bill is $3,690. Moreover, the cost of a $25,000 new car would increase to $30,750 after adding federal sales taxes. And, don’t forget these cost examples don’t include the 8–10% we all pay in state and local sales taxes, which would be added on top of the 23% for the “fair tax”.

It is laughable that this plan is referred to as “fair”.

Those who favor these approaches surely realize that sharing the implications I have outlined would create outrage and opposition. This is precisely why those advocating for this terrible system use the strategic name “fair tax” and attempt to persuade people about how wonderfully easy such an approach would be.

Using crafty language to create a misleading positive impression for horrible proposals is rampant in today’s talking point, sound bite world. If something sounds too good to be true, you can be assured that there is something problematic under the surface.

Attempts are constantly underway to persuade us to support proposals that are not beneficial or in our best interests. Don’t be fooled by crafty, appealing names for terrible ideas.

Many politicians take advantage of the fact that people are very busy in their own lives and often don’t have time to delve into the details of proposed plans. They count on people accepting the spin and positive talking points offered up during the few minutes of news coverage that folks have time to listen to during the week.

Beware! When politicians are working hard to convince you that a plan is fantastic, that is your cue to dig a little deeper and examine who actually benefits. The vast majority of the time, it won’t be you!

Don’t be tricked by the ongoing avalanche of political BS!

  • Trialkat

    The author Ms Johnston intentionally or ignorantly ignores the provision of H.R. 25 The FairTax Act of 2015 at Chapter 3, Section 301 creating a Family Consumption Allowance. No citizen will pay any tax on any spending up to the monthly poverty level. What this means is that a family of 4 spending $50,000, who today are paying a minimum 7.65% payroll tax (conveniently left out by the author as one of the taxes replaced and the most regressive tax on low wage earners) plus a 15% income tax plus embedded or passed through taxes in goods or services amounting to an effective rate of 23-30% will pay a net effective rate under FAIRtax for ALL federal taxes of a maximum of 11%. No one spending under $2,000,000 will pay a full effective tax rate of 23% inclusive or 30% exclusive. The biggest benefit to middle and low income families under the FAIRtax in addition to the prebate from the Family Consumption Allowance is the fact that they have $0 in federal tax removed from their paychecks. That family then has the FREEDOM to decide when, why and how much they are taxed. They can buy used goods (no tax), they can invest with being taxed on the growth of those investments and they can increase their opportunities and income when the millions of jobs that the majority of honest economists agree will come when the failing income tax, payroll tax, investment tax system is gone. Learn a little more Ms Johnston. FAIRtax.org/faq

  • Tony Leach

    Lisa Johnston…are you sure you’re referring to HR25 The Fair Tax Act…or another bill you’ve confused it with?
    I ask because you’re completely skipped any explanation of the ‘prebate’ which makes this plan progressive (not regressive).
    Where did you get your information?
    So how exactly does a tax system that un-taxes poverty level spending (thus un-taxing the poor) and ‘only’ taxes ‘new’ retail spending above the poverty level help the rich?
    Sure they keep their income free from federal taxes the same as the rest, but they’re the ones paying the majority of taxes because it’s ‘progressive’. More progressive in fact as the loopholes and exemptions are gone.
    Seriously, where did you get your information on this plan because it’s WILDLY inaccurate.
    http://www.FairTax.org for those who wish to actually learn the facts.

  • marshwill

    This is certainly not the FairTax plan that I have been studying for several years. I can assure you that every single one of the adverse effects noted in this article is false. I recommend that everybody who is reading this and, ESPECIALLY, those who WROTE it go to the website and steady the plan that is being PROposed and not the one that is being SUPposed by people who don’t know what they are talking about–OR are attempting to confuse the issue intentionally. No tax system Will ever produce a quality of income or spending power between the rich and the poor. The FairTax is good for everyone. I would appreciate the opportunity here to look at the circumstances of someone poor who is supposed to be harmed by the FairTax and explain how their circumstances would change under it. Just give me the family income and family size and I will do the rest! For starters, let me assure everyone that, contrary to the misinformation given above, NO POOR PERSON WILL PAY 23% TAX!

  • Kicker

    “I am going to keep beating myself with this baseball bat until you feel bad”. This is the logic employed by the author, or perhaps it is just a pathological desire to hurt those who she feels have more than she does.

    Her argument, that the rich will pay a “lower rate” than the poor is based on outmoded and, frankly, warped, thinking. To use her numbers, a family making $3,000,000 spends $600,000 on living expenses, and pays $138,000 in taxes under the FairTax, for a 4.6% rate (BASED ON INCOME). It totally ignores the fact that this family paid $138,000 in taxes, or a rate of 23%, based on their purchases.

    Now, let’s look at the $30,000 individual. They spend their entire income, and for the sake of argument, they are fiscally foolish, and don’t spend any of it on used goods, so they pay the FairTax on every penny they spend, or $6,900. And, under the FairTax family consumption allowance provision (called the Prebate), they are refunded the taxes paid on all purchases up to the poverty level, or $2,680. Their net tax bill would be $4,220, for an effective tax rate, under the FairTax, of just 14%. If we used a family of four, as in the “rich” family above, the prebate would be $4,552 per year, for a net tax paid of $2,348. This is an effective tax rate of 7.8%.

    So, the rich, in this case, pay a higher effective rate on their purchases, and pay much, much, more in taxes.

    But, but, she might fluster, under the income tax system, we get to milk the rich, and collect all their income as taxes.

    Nothing could be farther from the truth. Under the current income tax system, it is the poor and middle class who are really getting raped, not the rich. The rich have the lawyers, accountants, and CPAs to make sure they pay absolutely no more than necessary.

    Let’s look at just how punitive the income tax system is to the poor family the author used in the example above. The income taxes paid on $30,000 of income are $4,050. To that we have to add the payroll taxes of 7.65%, or $2,295, for a total of $6,346. But, that doesn’t count the 20% embedded taxes in everything our poor family has to buy, for another $4,730 in hidden taxes. Our poor family is paying $11,076 in taxes, or almost 37% of their income!!! (And remember Warren Buffet. The truly rich use various tax dodges to pay an effective tax rate of about 15%, less than half of what our poor family is paying!!)

    Now, compare this to the FairTax: A net tax bill of $4,220, for an effective rate of 14%, versus a total tax bill of $11,076, and a rate of 37%.

    It seems that, although the author is trying to work the class warfare tactic against the FairTax, it is the rich she is actually protecting, and the poor who she is going to hurt.

  • SRQTad

    1) Poor people are ALREADY spending a vastly higher percentage of their income on needed goods and services than the rich are AND, buried in every retail dollar they spend, is 20-25% federal income-based taxes that are paid by employers all along the production and distribution chain and passed along to the consumer…. The Fair Tax totally eliminates those buried taxes.

    2) The Fair Tax “prebate” pays the full tax amount on taxable expeditures up to poverty-level incomes.

    3) I have run a 2014 IRS 1040 form for a single person, with 1 dependent making $10/hr and, even aftyer the EIC and the CTC and the extra deduction from $50/wk child care, that person, assuming they spend all their income on Fair-taxable goods and services, STILL comes out about $25/year better off than they are right now. If you assume that person has a $150/mo car payment, it works out even better, because loan payments (P&I) are not Fair-taxable.

    4) Even consignment shops and used goods dealers have those federal taxes to pay. Which means that poor people are also paying those taxes, buried in the price of the used stuff… The Fair Tax does NOT tax any used item.

  • Frank Gilbert

    Obviously, the writer of this article has an agenda as they have left out increased wages for all, the prebate, job creation, etc… But I know there are those who will believe this as gospel without checking it out.

  • I’m well aware of all the provisions of the Fair Tax proposal. None of what was said below negates my two central points. First, that families who need all their income cannot “choose” how much they are taxed but will pay the full rate on their entire income while those who are more affluent could choose to shelter huge amounts of income from taxes. Second, that this type of federal sales tax coupled with existing local and state sales tax would make many more costly items extremely difficult for some to afford. (New car dealers should be very alarmed about this proposal, for example.)

    The existence of a “prebate” does not negate these two points but does undermine the argument made by “fair tax” proponents that the plan is so simple. Government involvement and administration of this aspect would be required. And, since prebates are based on family size and tax status, we would need something like an income tax form to file to get an appropriate prebate.

    Moreover, the individual below who argues that it is so wonderful for a family with $3,000,000 in taxable income to pay $138,000 in taxes under this system neglects to note that under current tax law such an individual would be paying $1,133,915.90 in federal income tax (nearly 1 million dollars more). That is an enormous amount of lost revenue and, of course, the plan clearly is to try to make up for that by placing the burden on those with lower incomes. Some who have studied this do not agree that 23% would be enough to make up the revenue needed and have suggested our rate could be as high as 34% – which would be more financially crushing to lower and middle income individuals and families.

    My only agenda is to inform people about the real implications of this plan that are never discussed by those arguing for its implementation. Implementing such a plan would create an economic disaster because it disincentivizes spending. So, rather than job creation we would most likely to see the opposite. All in all, I’m glad to see I’ve struck a nerve and people are taking the time to complain because they are concerned about folks understanding the truth I’ve shared.

  • jbennettatty

    The author stated an interesting premise but came to a curious conclusion. The question is: who really has the utility of “unspent income” that arises under the FAIRTax(R)? Let’s say I bring home $200,000 this year, but I spend only $100,000 and put the other $100,000 in the bank. During this year, I own the $100,000 in the bank, but those who have the utility of my $100,000 in the bank are those to whom the bank lends my money out – not me. To me the $100,000 in the bank represents deferred gratification. The tax regime should encourage me to keep the $100,000 in the bank and not take it all out at once and spend it in a night out on the town. (Although under the FAIRTax(R), if I have my night out on the town, the public fiscus collects.)

    Most high-income people do not stuff their unspent income in a mattress. We all benefit more when high-income people put their spare money in the bank. The FAIRTax(R) helps the high-incomers do just that.

  • No one benefits when high income earners put their money in the bank – except the people themselves. Disincentivizing spending shrinks the economy and we get job loss instead of job creation.

  • I’m well aware of all the provisions of the Fair Tax proposal. None of what was said below negates my two central points. First, that families who need all their income cannot “choose” how much they are taxed but will pay the full rate on their entire income while those who are more affluent could choose to shelter huge amounts of income from taxes. Second, that this type of federal sales tax coupled with existing local and state sales tax would make many more costly items extremely difficult for some to afford. (New car dealers should be very alarmed about this proposal, for example.)

    The existence of a “prebate” does not negate these two points but does undermine the argument made by “fair tax” proponents that the plan is so simple. Government involvement and administration of this aspect would be required. And, since prebates are based on family size and tax status, we would need something like an income tax form to file to get an appropriate prebate.

    Moreover, the individual below who argues that it is so wonderful for a family with $3,000,000 in taxable income to pay $138,000 in taxes under this system neglects to note that under current tax law such an individual would be paying $1,133,915.90 in federal income tax (nearly 1 million dollars more). That is an enormous amount of lost revenue and, of course, the plan clearly is to try to make up for that by placing the burden on those with lower incomes. Some who have studied this do not agree that 23% would be enough to make up the revenue needed and have suggested our rate could be as high as 34% – which would be more financially crushing to lower and middle income individuals and families.

    My only agenda is to inform people about the real implications of this plan that are never discussed by those arguing for its implementation. Implementing such a plan would create an economic disaster because it disincentivizes spending. So, rather than job creation we would most likely to see the opposite. All in all, I’m glad to see I’ve struck a nerve and people are taking the time to complain because they are concerned about folks understanding the truth I’ve shared!

  • David Norlin

    Lisa, thanks for responding to the folks who so zealously defend the FairTax. Our esteemed Senator Moran and Rep. Jenkins touring the state stumping for it only increases the reasons we should regard it with deep suspicion. It is the (illogical) extension of Sam Brownback’s no-income-tax philosophy. And that of the mega-rich who fund elections–Just 130 families and their businesses funded more than half the campaigns of the current Republican stable of Presidential candidates. If we think the real impetus for such stumping is the raving of people screaming for fairness, we should all think again, even harder than we did in the election of 2014. Nonsense is nonsense. no matter how it’s dressed up in “prebate” or other fancy language.