What’s up with the “fair tax”?

Let’s talk about the “fair tax”.

👇

Congress recently introduced a bill - the “FairTax Act of 2023” - to replace federal income, payroll, and estate & gift taxes with a national sales tax.

Among other complaints, the bill asserts “the Federal income tax…is unfair and inequitable”.

I 💯 agree.

However, is this because unfairness and inequity are inherent components of an income tax system OR might they instead be the result of ever-changing tax rules and a tax administration agency operating with outdated technology? Is a federal sales tax a better approach or might this is more “straightforward” taxing system itself become a problem?

Let’s explore this a bit by taking a look at how income taxes vs sales taxes can impact taxpayers.

3 categories of tax systems:

👉 PROGRESSIVE || Our current federal personal income tax system is progressive. Tax rates range from 0% to 37%. As you make more and more money, you move up through the range of tax rates resulting in additional income being taxed at a higher and higher rate.

👉 PROPORTIONAL || Also called a FLAT tax. Our current federal corporate income tax system is flat. The current rate is 21%. Whether a C Corporation has taxable income of $100,000 or $10,000,000, the same 21% tax rate applies.

👉 REGRESSIVE || Social Security (SSA) taxes are regressive. For 2023, once your wages hit $160,200, your employer stops withholding the 6.2% SSA tax. Whether you make $160,200 or $2,000,000 this year, you’ll pay the same $9,932 in Social Security taxes. For lower earners, regressive taxes can be a MUCH larger hit to their wallets relative to their income.

Where does a sales tax fall?

It’s REGRESSIVE.

Households only consume SO MUCH. A household bringing in $1,000,000 a year doesn’t necessarily need to buy more groceries, clothes, etc. than a similar household bringing in $50,000 a year. A higher-earning household may make more expensive purchases than a lower-earning household, but in the end, there is still only SO MUCH they can reasonably buy. A higher-earning household doesn’t FEEL a sales tax the same way a lower-earning household does.

How do we keep a sales tax from being “unfair and inequitable” for folks who have less ability to pay it?

Exempt certain essential purchases from tax. Provide rebates based on income and family size.

And now someone will need to ensure that exemptions are properly applied and calculated. That rebates are accurately and timely issued. In general, that the correct amount of tax is assessed and remitted.

The FairTax Act bill accounts for all this. It would see the IRS dissolved and have the national sales tax administered by states and rebates issued by the Social Security Administration.

If it’s not already clear, a sales tax is by default more favorable for higher earners and requires immediately introducing complexity to lessen the blow for lower earners.

What do you think? What seems more “fair” to you - being taxed on your income or on your purchases? Might a national sales tax become as complicated to comply with as our current income tax system?