Recently, my sister sent me an e-mail asking what I thought about the "Fair Tax Act of 2005" (S. 25, H.R. 25). I put an hour into reading about it, formulating a response, and then sending her my e-mail. Then I thought "Why share it with only her?"
Here is the e-mail that I sent to her:
I did some searching on the Internet and found a few problems with the Fair Tax proposal. Here is what I found (mostly cut-and-paste from various websites):
First, it exempts all business transactions so the burden of ALL taxation in the country will fall on the American people.
Second, it shifts the burden of taxation towards the poor and middle class. A sales-tax-only system burdens the poor much more than the rich. The poor spend a greater percentage of their income than the rich - if basic necessities cost $15,000 a year, someone making $20,000 a year spends a lot more of their total income on them than someone making $250,000 a year.
As far as non-optional expenditures (food, shelter, heat, cable TV... you know, necessities) the poor spend everything they get. This means that by default, the poor become the highest tax bracket. The richer you are, the more you can invest, the less you're taxed on.
Third, the Fair Tax proposal claims to be "revenue neutral", meaning the total amount of taxes collected will be the same as what is collected now - which lends credibility to the argument that it is just another tax-shift from the rich to the poor and middle class.
Fourth, everything you buy will instantly become 23% more expensive. It'll seem really nice when you get that first untaxed paycheck, until you realize that you weren't in the 23% bracket before, but now you are and now you have even less extra money in your budget. Note: The current tax rate for people earning over $68,500 is 25%. The tax rate for someone making less than $68,500 is only 15%. If you make less than $68,500 per year, this new system will bring you a significant tax increase (once again, shifting the tax burden from the upper classes to the lower classes).
Bottom line: If you make more than $68,500 per year, you should support Fair Tax. If you make less, you should oppose it.
