What is the fair tax? How it would work and its advantages and disadvantages

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fair tax

The Fair Tax system is a tax system that eliminates income taxes (including wage taxes) and replaces them with a sales or consumption tax. The 23% sales tax would apply to all retail and service transactions.

Under the fair tax system, individuals would no longer have to file taxes. Individuals simply pay tax every time they buy something from a store or service provider.

While the IRS would no longer be required to collect money from individuals, an enforcement agency would be needed to ensure that businesses levy appropriate taxes on consumers. Read on to learn how the fair tax would work.

What is the fair tax?

The fair tax system most often refers to the abolition of income taxes and their replacement with sales taxes. The system is considered fair as people are taxed on what they spend rather than the money they make.

Americans for Fair Taxation is a political group dedicated to promoting the Fair Tax plan in the United States. According to his research, a sales tax of 23% could effectively replace all income and wage taxes.

It is important to know that the 23% sales tax is a tax rate. If you buy something for $ 1,000, you pay a 30% or $ 300 tax. Their total price is $ 1300. Since $ 300 / $ 1300 is 23%, it is “fair” to call this the 23% rate. However, the effective sales tax rate would be 30% of the purchase price.

One of the first targets of this sales tax is for people who live near or in poverty. These people can barely afford food and rent as it is. A fair tax system would put them in trouble. The Americans for Fair Taxes propose a monthly “pre-fund” that proactively gives each individual some money. Each person would receive a monthly check from a government agency. This money could be used to offset taxes up to the poverty line.

While the fair tax system is not part of US tax law, proponents of the law drafted Bill HR25. The 2017 bill provides for a major overhaul of US tax law. It would replace all income and wage taxes with a single consumption tax.

Do we have fair tax systems in the United States?

The federal tax system in the United States is primarily a progressive income tax system. By and large, the more money you make, the higher the rate you will pay. The exact tax rate depends on your tax bracket, the number of deductions and credits you qualify for, and other factors.

While the federal tax system is not a “fair tax system”, consumption taxes (also called sales taxes) are usually applied in accordance with the ideals of fair taxation. In general, everyone pays the same sales tax rate. Certain products like alcohol or tobacco can be taxed at a higher rate while other products like food can be taxed at a lower rate.

But all the people who buy these products pay the same price. As a rule, government agencies are responsible for collecting sales tax from various business associations.

connected: Effective Tax Rates: How much you REALLY pay in taxes

Advantages and disadvantages of the fair tax system

While the fair tax system has great marketing (it’s fair!), The system has both advantages and disadvantages. Here are a few important points to keep in mind.

Benefits of a fair tax system

  • Eliminates IRS filings. Individuals would not have to file tax returns every year.
  • Isaves and invests. The tax is only applied to expenses. More productive options like saving and investing can be done tax-free.
  • Less tax evasion on an individual level. Individuals have fewer opportunities to evade taxation. You pay tax when you buy an item. That’s all there is to it.
  • May increase economic performance. As more money goes into savings and investment, more people and businesses may have the resources to build new businesses that can produce new goods and services.

Disadvantages of a fair tax system

  • Increases the incentive for private companies to cheat. Companies that want to undercut the competition can remove VAT. This problem could be especially common when businesses are dealing with cash or checks rather than electronic payments.
  • Tax rates can fluctuate over time. Changes in consumption can increase the tax rate in the long term.
  • Middle-income families can see higher taxes. While “prebates” can keep taxes low for low-income people, those with middle-income can see higher tax rates overall. This is especially true for families who pay out of pocket for childcare and other high expenses.
  • Possible dampening effect on overall economic growth. At higher prices, many people may choose to “store away” their consumption rather than spend on haircuts, meals, childcare or car repairs. This could lead to a slowdown in GDP.

Learn how the fair tax is compared to the flat tax >>>

Final thoughts

The fair tax system would replace complex wage and income taxes with a simple sales tax on all consumption. This would reduce tax preparation headaches and create incentives to save and invest.

However, it is unlikely to become law anytime soon. That means filing taxes is going to be considerably more complicated than paying 30% more for your morning latte for the foreseeable future.

Fortunately, you can minimize tax problems and headaches by choosing the right software program for your situation. Our guide goes into all the details so you can find the most affordable, easy-to-use software for you.

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