The Fairtax BookThis week I finished reading The Fairtax Book, by Neal Boortz and John Linder. This is an excellent dive into the Fairtax proposal that is going around, a taxing method that will rid us (in the U.S.) of the income tax and change our whole methodology of taxation from an income-based system to a consumption-based system. The Fairtax System is rather uncomplicated, so the book is a pretty quick read (and the audio book is a quick listen, coming in at just under 5 hours total - Don’t ask why I have both). The book is well written and entertaining, and does a great job of making a good story out of the mundane details.

Neal and John start out the book by giving us a short history lesson on the history of taxes in America. Starting with the government’s tariffs and tobacco and alcohol taxes, to the several proposals, the supreme court battle, and the promises & lies that eventually got the American Citizens to concede to being taxed on their income.

From Mike – It’s interesting how they describe the battles between the citizens of the newly formed U.S. and the government over taxation, how people took offense to being run by the government. The government is there to serve the people, not the other way around. Of course, that’s far from how it is today in “complacent America”.

They then explain how taxes worked, Americans would get a bill at the end of the year and would cut a check to the government for how much they owe. When you write a check for taxes each year, you tend to want to know what you’re getting for your money, and that’s exactly how the citizens who paid taxes felt. Of course the government didn’t like it, and so they worked on how to get the citizens to go with withholdings. After much fighting with the citizens of the States, the government won the ability to start withholding taxes from paychecks.

It’s a psychology game. When you don’t see the money coming out, you tend not to care. The authors point out several times how people have pretty much accepted that they earned their “take home” pay, not their gross pay. They don’t see the taxes go up, ever so slightly, in their withholdings, and so the people don’t complain. The funniest, is how everyone has accepted April 15th as a good day, a day the government “gives” you money…

Boortz further explains other ways in which the government taxes us, through deception such as the “Corporate Tax.” He explains how there is no such thing as the corporate tax, and that all “corporate taxes” are taxes paid by individuals, whether the investors, employees, or customers. Realizing this makes you understand that your tax rate on income taxes is only the beginning of the taxes you pay in the U.S.

He dives into the cost of compliance for our current tax code. Our tax code, as it is, is a huge mess, and no one person can give you the “correct answer” on how to file your taxes. In this chapter, they do an experiment by sending out tax information to 47 tax professionals to prepare their taxes, and received 47 different results, and none of them were correct. They discuss the cost of compliance in business decisions made by companies, and how they can’t always seek out the business options that would be most profitable, because they have to take into consideration the tax consequences of such decisions. Estimated cost of compliance for U.S. businesses and citizens each year: $400-$500 billion (that a “B”) dollars.

Boortz also highlights how many of the modifications to the tax code each year are just put in by politicians to scratch the back of a wealthy campaign contributor or lobbyist. Government corrupt? Nah…

That brings us to chapter 5, in which Boortz explains how the embedded costs in our products today that go to taxes are roughly 22% of the item’s retail cost. This is the tax-impact costs of every company and person that had a hand in producing that product all the way up the line. The “corporate taxes” that those people pay, yep, some is wrapped up in the price you pay at the register.

Finally, he wraps up our current tax system with the impact to American jobs and businesses. The embedded taxes that cause our products to start out with a higher base price prevent our products from competing in many otherwise-viable international markets, and are driving our own businesses and jobs away from the U.S. He explains how financially savvy wealthy people store their money off-shore to avoid the taxes, and how bringing that money back to the U.S. would be good for the economy.

So how exactly do we fix that mess of a tax system?

Glad you asked. Neal starts explaining the Fairtax in chapter 7, from where the idea was born, into chapter 8 where he explains the full details of it. Note: Chapter 8 in the audio book is only 11 minutes, 43 seconds long. This is how long it takes him to fully explain the “new” tax system that he is proposing.

How much of the current tax system could you explain in the first 11 minutes and 43 seconds?

The Fairtax, in it’s simplest explanation, is a 23% inclusive tax on all new purchases and services at the retail register. New purchases, not used stuff. Retail, not business or inventory purchases. That’s it. Eliminate the entire income tax, Alternative Minimum Tax (AMT), all tax deductions, all payroll taxes. Everything. And put a 23% inclusive income tax on everything.

Note the 23%. It’s a topic for much controversy. Opponents say it’s actually 30%, and that’s true, it’s both. If an item costs $77.00, the new price under Fairtax would be $100. 23% of the $100 would go to the government in taxes, $77 to the retailer. Opponents structure it as a $77 price tag, plus $23 Fairtax added on, which is 30% of the $77. That’s expressing it as an exclusive tax, much like todays sales tax in most states… They express it as an inclusive tax because that’s how our current income tax is structured. If you make $100 and are in the 25% tax bracket, you pay $25 in taxes, you don’t flip it around and say you brought home $75, paid $25 in taxes, therefor paid out 33.3% in taxes…

See? So inclusive tax replaces inclusive tax. Onward…

While you ponder this new 23% tax on everything, check your paycheck and see how much more you would bring home each payday, because none of those “pre-tax” charges would be “pre-tax” anymore. If you make $10 an hour and work 40 hours, sans any other “pre-tax” deductions you have, you would bring home $400, not the approximately $300 you do now. And remember, you’re only taxed on what you spend, not what you make, so if you throw $200 in the bank for savings, then spend $200 for groceries, your only taxed on the groceries, not the investment. Nice huh?

Now, let’s make it fair to the poor, who rarely pay income taxes today…

The Fairtax calls for a prebate check to be cut to ALL head of households in the U.S., every month, to cover the amount of taxes that they would pay on all purchases up to the recognized poverty line. The idea is, give people back the taxes that they would pay for basic living necessities. If you live on less, then congrats, the remainder of the prebate check is yours to keep. If you splurge for a banquet for your daughters wedding, well, that’s beyond necessities and you’ll eat the taxes for the rest of the purchases about the poverty line.

He further rounds out this fairness section with how the Fairtax will increase tax income by reaching out to those who don’t pay any taxes now, namely the underground economies, gangs, etc. They don’t report income, so they don’t pay income taxes, but they DO spend their ill-gains, and it’s the spending of the money that will open them up for tax collection.

He then starts to paint a picture of what life would be like, under the current Fairtax plan, starting January 1st the year after it’s enacted. How all our paychecks will go up, jobs will start to come back, product pricing, for the most part, won’t change. Then he dives into the oppositions arguments, Social Security and Medicare, some Income tax stories that are just funny and sad, all at the same time, and then wraps up.

Many of the objections I’ve read of the Fairtax after I read this book have answers in the book. While I did find some interesting arguments against it that made me think, many of the opponents just showed they didn’t understand the Fairtax or hadn’t read it before opposing to it, in my opinion.

The only argument against it that I think is sound is one that is countering what rate of Fairtax would be necessary to maintain current government incoming taxes. But Boortz counters this with the understanding that Fairtax isn’t about overhauling our cash-bleeding government, just the tax system that feeds them.

Short of aboloshing the 16th amendment and citizen taxes altogether, I find this a suitable alternative to our current income taxes. The ability to throw out our current unfair, overburdening, and unpopular income tax in favor of a voluntary taxation system that allows me to keep everything that I earn, make choices on how I spend, and therefore how I’m taxed, increases America’s competitiveness in the international markets, and brings more jobs home… Who wouldn’t be for it?

If you’ve read the Fairtax and are a proponent or opponent of it, I would love to hear your opinion on it. This is something that I currently support, but am always open to hearing other insights that can help me mold my own impression of it.

You can learn more at Fairtax.org.

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