In-Depth: Rep. Rob Woodall (R-GA) reintroduced this bill from the 115th Congress (and multiple Congresses before that) to overhaul the federal tax code by replacing all existing income and payroll taxes with a one-time 23 percent consumption tax on new goods and services at the point of purchase. In 2013, Rep. Woodall said:
“For far too long the existing tax code has been an economic drain on our country. America’s job creators are handcuffed by oppressive tax regulations and consequently seek less costly environments overseas. With the United States having the highest corporate income tax rates in the entire world, it can come as no surprise that businesses are going elsewhere. It is estimated that over $10 trillion is currently being held offshore, but with passage of the FairTax we can incentivize businesses to bring that money back to our shores. When they invest and grow their business, they employ our neighbors.”
Rep. Woodall argues that this bill would help restore the American Dream by letting people keep more of the money they earn:
“Overnight, the FairTax would allow individuals to keep 100 percent of their income without the government first taking a penny… Right now, we are punished by the government for working hard and making money to support our families," he said. "The FairTax would eliminate that unfair burden and lift all income-related taxes. Hard-working Americans would keep their entire salary and pay taxes on their terms."
In a 2015 Atlanta-Journal Constitution article, Sen. David Perdue (R-GA) argued that the FairTax would benefit both individuals and businesses:
“Not only does the FairTax have powerful economic potential but it will also help rein in federal agencies like the IRS, preventing abuse and government overreach. Under this plan, Americans would be encouraged to save and invest and the amount they would pay to the federal government would be based on what they actually consume. The FairTax encourages innovation and investment and creates a level playing field with the rest of the world to support continued American growth.”
Americans For Fair Taxation expressed its support for FairTax in 2015. Its Chairman and President, Steve Hayes, said:
"Americans For Fair Taxation® is thrilled that Senators Jerry Moran and David Perdue are leading the fight for real tax reform. The Senators' sponsorship of the FairTax® serves notice that it is time for Congress to stand with the American people and enact the only tax replacement plan that will generate jobs, stimulate the economy and free the American people from the shackles of a punitive and out-of-control IRS."
FairTax’s critics say that it would be regressive, causing people with lower incomes to pay a disproportionately high amount of tax compared the proportion paid by those with higher incomes. They add that economists say the incentive to buy things "off the books" rises when sales taxes are set at as high a level they would be under the FairTax, which causes taxes to be hiked further to compensate for tax evaders. Economist Dean Baker, co-director of the Center for Economic and Policy Research, adds that abolishing the IRS would exacerbate the problem of tax-dodging.
The Fair Tax’s proponents argue that its prebate would ensure that the tax isn’t regressive. However, Bruce Bartlett, a former Treasury Dept. official, says the prebate would do little to change the tax’s regressive nature, since people would spend their prebate, causing it to be taxed at the same 23 percent rate as normal wages:
“Even with the rebate counted the way the Fair Tax supporters want it calculated — as a reduction in tax liability rather than an increase in income — there would be an enormous shift in the tax burden from the wealthy to those with lower middle incomes.”
Political Correction, a project of the Media Matters Action Network, says FairTax “has numerous problems: It relies on unsound numbers and, in practice, it would cause taxes to rise, incentivize tax evasion, and shift the tax burden onto the middle class.” Among its points, Political Correction argues that FairTax:
- Would effectively tax products at an equivalent of 30, rather than 23, percent;
- Unfairly burdens the lower and middle classes;
- Relies on a flawed rebate system that wouldn’t prevent the tax burden from shifting to the middle class;
- Incentivizes tax evasion through off the books purchases and black markets; and
- Would exacerbate tax evasion problems and necessitate tax hikes.
Writing for the Ludwig Von Mises Institute, a Libertarian political and economics think tank, Laurence M. Vance adds that FairTax would shift tax collecting responsibilities onto ordinary businesses, which would have to collect and report taxes for each good and service. Thus, Vance argues, “the FairTax turns every business into a tax collector.” He contends that this would mean “[e]very small service business and every Internet business that does not currently collect state sales taxes will have to collect taxes for the federal government. Every doctor will now have to charge sales tax on his services.” He asks, “Where will this end? Will the neighborhood boy who mows lawns have to begin collecting federal sales tax on each lawn mowed? Will the neighborhood girl who baby sits have to do likewise?”
This bill has 29 Republican cosponsors in the 116th Congress. In the 115th Congress, it had 47 Republican cosponsors and didn’t receive a committee vote. Prior to the 115th Congress, Rep. Woodall had introduced this bill in the 114th Congress with the support of 75 Republican cosponsors, and it didn’t receive a vote in that Congress.
The FairTax Act was first introduced by then-Rep. John Linder (R-GA) in 1999.
Of Note: According to the National Taxpayers Union, American taxpayers lost $234 billion from spending 1.9 billion hours figuring out and paying their taxes. The NTU says:
“Of this total, $64.6 billion is attributable to lost productivity from 1.9 billion hours spent on the 1040 tax form series alone. While $29.6 billion can be chalked up to software, tax preparation fees, supplies, and other overhead for the yearly tax filing chore. The remainder of the costs, made up mostly of corporate compliance pains, affects the economy in numerous ways such as higher prices for consumers, lower returns for shareholders, and less competitive operations abroad.”
The Tax Foundation adds that the current tax code has grown substantially since the eighties. When President Reagan signed the Tax Reform Act into law in 1986, the tax code was 30,000 pages. Today, it’s over 70,000 pages.
Summary by Lorelei Yang
(Photo Credit: iStockphoto.com / designer491)