| The FairTax |
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| Written by Tom Clougherty | |
| Thursday, 08 November 2007 | |
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The FairTax
first came to my attention when it was endorsed by Republican
presidential hopeful Mike Huckabee, the former Arkansas governor,
Baptist minister, self-help author and blues-rock guitarist. It involves abolishing all existing US federal taxes (income corporate, social security, capital gains, etc.) and replacing them with a flat-rate sales tax of 23 percent, payable at the point of purchase. To make the system progressive, everyone would receive a prebate, based on the necessary level of basic spending for a household of a given size. Essentially, you get back the sales tax you would have spent on essential consumption (based on the federal poverty line) in advance every month. There are clearly some advantages to this system, which its proponents say make it preferable to flat tax proposals*. First of all, it would allow the abolition of the income tax infrastructure (the IRS) and the intrusion it entails. The tax would be collected by state sales tax authorities, and individuals would not have to file tax returns or keep records. The compliance costs would therefore be minimal, and would limit fraud and evasion. The chances of a complex tax system re-emerging would also be much diminished. Secondly, the FairTax would be highly visible and transparent. Whereas the burden of taxation is often hidden under the existing system (workers pay corporation taxes and payroll taxes through lower wages, for instance), the FairTax would make it painfully obvious – forcing politicians to keep it as low as possible. The flat tax is somewhat less transparent, since it is based on taxes being withheld at source. One might also expect the FairTax to have greater dynamic effects since it does not tax labour or profit but consumption. That means more economic growth and higher revenue from lower tax rates. Overall, it strikes me as an outstanding idea, perfectly suited to America. I'm not sure it would work as well in the UK, however, where the rate would have to be far, far higher and HMRC would still have to exist. For us, working towards some version of the flat tax remains the best and most realistic way forward. * A fully-fledged flat tax is a single-rate tax payable on wages, salaries and pensions (minus the personal allowance) and on corporate revenue (minus purchases of inputs from other firms, wages and pensions paid to workers, and purchases of plant and equipment).
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