Fair Tax, Flat Tax or Sales Tax?

Richard Salbato April 9, 2010

Today you have worked 100% for the Federal, State or county Governments.  From January until April 9, 2010 you have worked for government only.  Only from April 9th on do you work for yourself.   In spite of taking almost half your total income, the government now wants to ad a Federal Sales tax. 

They will tell you that most of Europe does this already, and they are fine.  But are they?  If you travel though Europe as I did (almost every country) for seven years, you would not want to be like any nation in Europe.  We cry at 9.7% unemployment, but Europe would love that figure.  Most European nations have 20% unemployment because they have both Federal income tax and Federal sales tax. 

What does that mean for the people?  In Italy I was talking with a young waitress, who wanted to defend Italy against America, thinking that America was too expensive. I asked her to think of hours work vs. what one hour’s work could buy in Italy and I would tell her what one hour’s work would buy in America.

“How many hours would you have to work at your job to buy the meal I am eating right now?”

She answered, “Three!”

“The same American waitress would have to work one hour.  In fact if you think in terms of what we can buy per hour of work, America is the cheapest place to live in the world.” 

Think about Portugal, where the average pay is $4.80 per hour when converted to dollars.  However, they buy gas by the quart at $2.20 per quart or $8.80 per gallon.  Gas in England is $9.00 per gallon.  That is two hours of work for one gallon of gas.  The average worker in Europe will never afford a house, a car or even new clothes. Most ban together to buy a car, with 3 or 4 people sharing it.  Few people live one family per house or even one family per apartment.

This is what America faces if we allow the Federal government to pass a VAT (Value Added Tax) also known as a sales tax.  Unlike the State Sales Taxes, you will not see this tax on your receipt.

Let us see how this works, and remember it will be the same for everything you buy, from your gas, your utilities, your food, your car, your house, everything. 

Value Added Tax, means the feds can tax every stage of added value. You now pay around $3.40 for gas.  After this tax, the man who drills for the oil and sells it to the refiner will add a tax for the Feds, the refiner will sell to the distributor and add a tax for the Feds, the distributor will sell to the station and add a tax for the Feds, and the gas station will add a tax for the Feds before he sells it to you.  Understand that they are taxing the tax and doing it 4 times.  What do you think you will now pay for gas? What about food?  What will that do to jobs?  In Europe the added cost is 30% when calculated.  Imagine paying 30% more for food without inflation.  This is why Europe has this bad hour/buying power ratio.

Federal Income Tax

Everyone knows that the Federal Income Tax is a joke. 47% of Americans pay no tax at all. 4% pay more than 60% of all tax and yet the billionaires pay almost nothing because of the 30,000 pages of IRS loopholes. 

There are many proposals to change the tax laws but we may not understand them.  The art here is to pay less and yet not reduce the money that the government gets in taxes.

Make a bigger pie

Ronald Region’s idea was to build a bigger pie.  By expanding the economy and putting more people to work, the government would get more taxes to use and the individual person would pay less.  In fact, this worked because he made it easier for businesses to expand and to hire people, and there were more people working and paying taxes.  This is called Supply Side Economics.  Unless you make the supply bigger, nothing else works.  All the rest of the ideas have to include this or result in it.

The Fair Tax  (HR 25, S 296)

One man wants to change the entire system and replace it with a retail sales tax, which is different from a VAT. This involves a few comprehensive things including a constitutional amendment.

1. Repeal the 16th Amendment (the law that allows the Federal government to tax income).

2. This abolishes all federal personal, corporate, gift, estate, capital gains taxes, and Social Security, Medicare, and self employment taxes.  If you make $500.00 in pay your check will read $500.00.

3. Replaced with a progressive national retail sales tax.

4. Administered by existing state sales tax authorities.

5. Reimburses the poor by rebates and elimination of FICA

6. Those at twice the poverty level pay only 11.5%

7. All others pay 23%

·                                                                                 Enables workers to keep their entire paychecks

·                                                                                 Enables retirees to keep their entire pensions

·                                                                                 Refunds in advance the tax on purchases of basic necessities

·                                                                                 Allows American products to compete fairly

·                                                                                 Brings transparency and accountability to tax policy

·                                                                                 Ensures Social Security and Medicare funding

·                                                                                 Closes all loopholes and brings fairness to taxation

·                                                                                 Abolishes the IRS

Advantages:

1. Dramatically widens the base of taxpayers.  (Makes a bigger pie)

2. Includes consumer spending from the underground economy (estimated at $1.5 trillion annually), and by including illegal immigrants.

3. 40 million foreign tourists a year will become American taxpayers as consumers here. 

4. Wealthy will pay more because they spend more.

Disadvantages:

1. This is too hard to explain to pass through congress, liberal or conservative.

2. Any constitutional amendment is hard to get by 50 states.

3. It still has a socialist hint, in re-distribution of wealth.

4. It affects the retired much more than anyone else. Their taxes go up 23%.

5. It will reduce sales of everything except food.

6. It will not create any new jobs at all but loose jobs.

The Flat (Income) Tax

 The Flat Tax can best be explained by calling it a Flat Income Tax. In order to understand this you have to understand what income is and is not.  If I work by the hour, by the job or for a percent of what I sell, that is income.  If I make profit on the money I have invested in a stock or a bank and take that out, that is an income.  If I do not take it out, it is not income. If I own stock that does not pay a dividend but goes up and down in value, but I do not take it out when up or down, that is not an income.  If I own a business and the business makes money but I do not take it out as income for myself, it is not income. If I own a house that goes up in value, that is not income unless I sell it.  If I own a house that goes down in value, that is not a loss unless I sell it. 

Nothing is income until I take it for myself. 

A Flat Income Tax is without any deductions whatsoever for anyone.  I means that everyone, the very rich, the very poor, Green Card workers, and even government workers pay the same tax.

All the 30,000 pages of IRS loopholes will be eliminated.

All other Federal Government Taxes included without exceptions – SSI, Medicare, etc.

It has been estimated that a flat tax would be 18% to 21% bringing in the same money for the government as the government takes in now.

So every dime the billionaire takes as profit without any deductions will be 18% taxed.  This is three times what he pays now because of loopholes. 

When you include all Federal Taxes, like SSI, Medicare, etc. the average tax payer will pay 30% less taxes than he does now.

The poor will not be harmed because all hidden business and sales taxes will be eliminated and goods and services will be cheaper.

Advantages:

1. Less taxes on middle class

2. No taxes on business (Makes a bigger pie)

3. No tax on assets like property

4. The very rich will pay much more tax unless they leave the money to expand business (Makes a bigger pie)

5. America will attract business from other nations.  (Makes a bigger pie)

6. Business will expand and hire more people (Makes a bigger pie)

7. Business will save millions in bookkeeping.

8. Changing the tax up or down to account for debt will be easy and transparent

9. No hidden taxes and no penalty on business  (Makes a bigger pie)

10. No IRS at all (close it down)

11. Keep it simple, stupid – KISS

Disadvantages:

None

Richard Salbato