By: Cadet Jonathan Schwerer
Mrs. Melissa Hart
4th Pennsylvania Congressional District
4655 Route 8, Suite 124G
Coventry Square Shopping Center
Allison Park, PA 15101
Dear Mrs. Hart:
The United States has one of the most complicated tax systems in the entire world. There are numerous reasons as to why this is so, including the existence of tax preferences and tax credits. Not only do these complications lead to inefficiency, they also limit business growth and distort consumer decision making. There are currently three tax altering proposals: The President’s Panel on Tax Reform, the Flat Tax, and the Fair Tax. I am here on behalf of our Congressional district to offer to you, Congressman Hart, an argument to support the implementation of the Fair Tax. As you will see, this tax proposal is easy to understand and will eliminate an enormous amount of confusion caused by our current tax code.
In order to appreciate the advantages of the Fair Tax, you must realize the problems with our current tax system. As you know, taxable income is reduced in three ways: exclusions, exemptions, and deductions. These three forms of tax reduction alone are enough to prove that the system is not working. For example, while these reductions were implemented in order to achieve some kind of equity, all they did was shift the burden of the tax to others. In addition, the tax code is not broad-based, and it creates a tax gap due to tax evasion and avoidance. The ability to avoid the tax by way of loopholes, avoidance, and evasion (illegal), makes for a corrupt system which is not equal to all citizens and has a massive economic effect. A ridiculous amount of time and energy is put into an inefficient system that isn’t fair. In fact, author Neal Boortz estimates “that in 2002 individuals, businesses, and nonprofits spent 5.8 billion hours complying with the tax code—an effort that cost an estimated $194 billion.” With a system such as the Fair Tax, these hours spent on compliance with the tax code could be converted into more hours of labor to increase output to strengthening the economy and increasing GDP. Instead, the current system simply leaves citizens in doubt about what they are being taxed on, for how much, and why.
The main advantage of the Fair Tax is simplicity. There is only one way tax revenue is generated, and that is through the tax on retail items. No gray area will exist; consumers know how much they will pay in taxes because it will be on what they buy. The Fair Tax is a tax on consumption. This not only simplifies things, but also allows us to avoid all the problems of the old tax system of who pays how much and why. The Fair Tax is designed to rid citizens of almost all the major problems associated in our current code such as the endless hours with accountants, unfair reductions, and the efforts spent on trying to avoid them. In the words of Boortz, “the Fair Tax will repeal: the individual income tax, the alternative minimum tax (AMT), corporate and business income taxes, capital gains taxes, social security taxes, Medicare taxes (along with all other federal payroll taxes), the self-employment tax, estate taxes, and gift taxes.” However, the funds created by these taxes will still be fulfilled when the Fair Tax is implemented. Although all the existing taxes will be eliminated, the same amount of revenue will be generated because all retail items will be taxed. The advantage to this is that everyone has control over the degree they’re taxed. Individuals will be the sole determinant of how much they pay in taxes since the only tax that will exist will be the 23% on retail items.
Granted, a 23% rate does seem high. But, Congressman Hart, put into perspective that this one rate will replace all other taxes. The tax amount citizens pay will be in direct correlation as to the amount of retail items they buy. This gives consumers the advantage of freedom of choice as to how much they pay in taxes. In addition, the 23% rate does not mean everyone will now have to buy a $100 coat for $123. The Fair Tax calls for all embedded taxes to be removed from merchandise. This means the 23% rate will only be calculated based on the manufacturing cost of the producer. For example, the $100 coat may only cost $85 without the embedded taxes. This puts the retail price at $104.55, much less than some of the tax rates we experience today.
In addition to the removal of embedded taxes, this new system will put confidence in consumers because they are controlling the amount of taxes they pay. Also, if the 23% rate still seems rather high, there is an ever larger economic effect: saving. A rate like this will increase saving because people will be more cautious as to what they buy and will put more into savings, which is something the United States needs. The U.S. has one of the poorest savings rates in the world. The Fair Tax would solve this problem. These are just a few examples of how effective the Fair Tax will be. Remember, as Boortz & Linder state, “it’s simply a new and equitable method for raising the same amount of money our old and complicated code does today. Don’t let anybody fool you into thinking this is a tax increase. . .and don’t any of you fool your friends into thinking that it’s a tax cut. It is neither. It is simply a tax replacement.” The Fair Tax will be a more efficient and equitable solution for all.
However, like all proposals, there are foes of the Fair Tax. For example, the hot question of Social Security is always in debate. Opponents of the Fair Tax may wonder where the funding for Social Security will come from. Here’s how Social Security is taken care of within the Fair Tax system: “the FairTax would give the average income worker a 50 percent increase in take-home pay. Americans become an investor class of unprecedented proportion; they will find themselves less dependent on Social Security for their retirement income.” Furthermore, tax revenue collected on retail merchandise will fund government programs such as Social Security. Revenue for the program will be generated from the overall economy rather than just raising marginal tax rates on individuals like the current tax system does. The current system is inefficient, putting the burden on law-abiding taxpayers, whereas the tax burden in the Fair Tax system is minor. Its broad base allows everyone to pay the same rate on what they spend, creating an equitable solution.
What is not equitable in our current system is tax evasion. Tax evasion is a huge problem and is illegal. If the Fair Tax is implemented, tax evasion doesn’t exist. Of course, there will always be cheaters. Some crooks may get their hands on goods prior to putting them in retail stores and circulate them through the black market. The Fair Tax is not a fail-safe system, but it does allow for many fewer loopholes. But look at the Fair Tax. How can you avoid a tax when it’s on spending? As put forth by Boortz, “Under the FairTax Plan, criminals will pay their taxes every time they spend their money on personal consumption—after all, even criminals and other tax evaders like to eat, buy homes, and drive nice cars.” Under the current system, these evaders contribute to the massive tax gap. This will not happen under the Fair Tax.
As you already know, Congressman Hart, there are plenty of problems with the current tax system. I hope my discussion of the benefits of the Fair Tax has shown you how much more powerful and efficient a tax on consumption can be compared to that on income. With the Fair Tax, it’s all based on spending and consumption. Additionally, the Fair Tax is the essence of capitalism, which is what America stands for. Capitalism embraces free choice, which is what the Fair Tax allows citizens to do—have the ability to choose what they purchase, which in turn determines how much they are taxed. A powerful tool in the economy is spending, so why not use that to generate all the tax revenue? When Americans are actually given the control of how their taxes are paid, there is no opposing argument as to why they are being taxed. I hope I have influenced you in a decision to implement the Fair Tax system. Thank you for your time, Congressman Hart.
Jonathan P. Schwerer
Cadet, Virginia Military Institute
Boortz, Neal and Linder, John. “The Fair Tax Book.” Pg. 94
Boortz, Neal and Linder, John. “The Fair Tax Book.” Pg. 74-75
Boortz, Neal and Linder, John. “The Fair Tax Book.” Pg. 74-75