Predicted effects of the FairTax
The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.
[8] The cost of preparing and filing all business and personal income tax returns is estimated to be $250–$300 billion each year.
[9] Supporters argue that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy.
An example might be the purchase of a small company with tremendous financial losses just to avoid corporate income tax on the larger, more profitable business.
With 60,000+ pages now in the tax code, the impact of these decisions both on individual companies and on the economy at large is doubtless significant.
[11] Laurence Kotlikoff of Boston University finds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%.
[13][16] Wall Street Journal columnist James Taranto states the FairTax is unsuited to take advantage of supply-side effects and would create a powerful disincentive to spend money.
The United States currently has the highest combined statutory corporate income tax rate among OECD countries.
[3] Bill Archer, former head of the House Ways and Means Committee, asked Princeton University econometricists to survey 500 European and Asian companies regarding the impact on their business decisions if the United States enacted the FairTax.
[16] Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not compete successfully with foreign producers because of U.S. tax policy.
[25] Under the FairTax, American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America.
[16] John Linder asserts that an estimated 11 trillion dollars is currently held in foreign accounts, largely for tax purposes, and is growing by $800 billion per year.
[26][27] Former Federal Reserve Chairman Alan Greenspan predicts that enactment of the FairTax would result in a large portion of those funds being transferred to U.S. banks, where they would become available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States instead of the countries where those funds are currently held.
Since passing the FairTax would only require a simple majority in each house of the United States Congress and the signature of the President, and enactment of a constitutional amendment must be approved by two thirds of each house of Congress, and three quarters of the individual U.S. states, it is possible that passage of the FairTax bill would simply add another taxation system.
The Americans For Fair Taxation plan is to first pass the FairTax and then to focus grassroots efforts on HJR 16, sponsored by Congressman Steve King (R-IA), that calls for the repeal of the Sixteenth Amendment.
[16] Proponents state the income tax industry often provides year-round services for financial planning and investment, which is expected to increase under the FairTax proposal and could offset some of these changes.
[36] New technologies used by the IRS, such as e-filing, are simplifying the process and already threatening a portion of this industry as goals set by Congress call for at least 80% of federal returns to be submitted electronically by 2007.
[37] According to IRS testimony from 2004, 45% of revenue agents and officers would become eligible for retirement in the following 5 years and there is concern about the loss of their work force as their hiring efforts struggle to keep pace with attrition.
[38] In addition, the IRS would not go completely out of commission until 3 years after the FairTax was enacted, providing employees time to find other employment.
[1] Proponents claim the projected 10.5% growth in the economy during the first year of the FairTax would provide plenty of new jobs to these workers that are typically well educated and well equipped with transferable skills (see creative destruction).
[41] On the other hand, proponents of the FairTax note that this effect could also allow individuals to pay off their existing (pre-FairTax) debt quicker.
However, since several areas would be tax free under the FairTax plan, it could decrease the social incentive to spend more on homes in favor of savings, education, or other investments.
[43] FairTax advocates state that total philanthropy as a percentage of GDP has held steady at around 2% for at least two decades, regardless of changes in income tax deductibility.
FairTax advocates claim this economic boost, along with an estimated 8% real wage increase, would strengthen charitable giving.
This tax discount allows state and local governments to issue debt at low yields, which reduces their interest costs.
[53] Proponents state the FairTax would remove the exemptions and deductions that discriminate against gays, singles, childless couples, and others based on spending and lifestyle choices.
"[54] This situation is no different from the current system of income taxation, in which the government has a "prior lien" on all labor undertaken by its subjects.
[57] Sales taxes are normally considered regressive though the FairTax provides a rebate that supporters argue would create a progressive effective rate on consumption.
These include all food, all prescription drugs and other health care products and services (such as doctor’s visits and laboratory tests), purchases of new homes, and utility bills.
[59] An analysis by Kuang et al. found that "the current federal tax system is more progressive than the FairTax Plan under both annual and lifetime income approaches."
