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Fair Tax, Flat Tax

Posted on Thursday, January 19, 2023
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by Ori Preis
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What are they?

The Budget battle in Congress is heating up. The House of Representatives is starting to look and evaluate 2 proposals to overhaul the Internal Revenue Tax Code. The 2 proposals are H.R. 25, the Fair Tax, and H.R. 1040, the Flat Tax.

To keep our members informed and find out what their preferences are, we have compiled a comparison of the 2 proposals and the existing income tax code.

The following comparison is based on a revenue neutral scenario and on the most important parts of the bills. 

A Comparison of Fair Tax, Income Tax, and Flat Tax

 

Current Law Fair Tax, H.R. 25 Federal Income Tax Flat Tax H.R. 1040
16th Amendment Proposes repeal. No change. No change.
Complexity Individuals do not file. Businesses need only to deal with sales tax returns. Very complex; 20,000 pages of regulations; I.R.S. incorrect over half of the time. Withholding continues. Individuals and businesses must still track income and file income tax forms.
Home Business Must record all business expenses and is subject to IRS audit?

NO!

Must record all business expenses and is subject to IRS audit?

YES!

Must record all business expenses and is subject to IRS audit?

YES!

Congressional ActionFair Tax Act of 2013 (H.R. 25). Employees receive 100% of pay. Social Security and Medicare funded from consumption tax revenue, not your paycheck. (H.J.Res61) – Will repeal the 16th Amendment.Used by lobbyists and the wealthy for tax-breaks and loopholes. Used by bureaucrats for social engineering.H.R. 1040 has some problems, but is superior to current law.Cost of FilingNo personal forms are filed. Significant cost savings.$225 billion in annual compliance costs.1Simplified.  Costs are somewhat reduced.EconomyUn-taxes wages, savings, and investment. Increases productivity. Produces significant economic growth.Taxes savings, labor, investment, and productivity multiple times.Imposes a tax burden some of which is still hidden in the price of goods and services.EqualityTaxpayers pay the same rate and control their liability. Tax paid depends on life style. All taxes are rebated on spending up to the poverty level.Current tax code violates principle of equality. Special rates for special circumstances violate original Constitution and are unfair.The flat tax is an improvement over the current income tax, but it is still open to manipulation by special interests.

Foreign Companies

 

Foreign companies are forced to compete on even terms with U.S. companies for the first time in over 80 years.

 

Current tax code places unfair tax burden on U.S. exports and fails to neutralize tax advantages for imports.

 

Taxes U.S. exported goods, but not foreign imports to the U.S., creating unfair competition for U.S. manufacturers and businesses.

Government IntrusionAs the Founding Fathers intended, the Fair Tax does not directly tax individuals.Current tax code requires massive files, dossiers, audits, and collection activities.A flat tax still requires personal files, dossiers, audits, and collection activities.History45 states now use a retail sales tax.The 1913 income tax has evolved into an antiquated, unenforceable morass, with annual tax returns long enough to circle Earth 28 times.A flat tax just won’t stay flat. Starting out nearly flat in 1913, the income tax grew out of control with top rates over 90% until Kennedy administration.Interest RatesReduces rates by an estimated 25-35 percent. Savings and investment increase.Pushes rates up. Biased against savings and investment.Reduces rates 25-35 percent. Neutral toward savings and investment. InvestmentIncreases investment by U.S. citizens, attracts  foreign investment.Biased against savings and investment.Neutral toward savings and investment.IRSAbolished!Retained.Retained. Reduced role.JobsMakes U.S. manufacturers more competitive against overseas companies. Escalates creation of jobs by attracting foreign investment and reducing tax bias against savings and investment.Hurts U.S. companies and decreases available jobs. Payroll tax a direct tax on labor.Positive impact on jobs. Does not repeal payroll tax on jobs.Man-hours required for complianceZero hours for individuals. Greatly reduced hours for businesses.Over 5.4 billion hours per year.Reduced.Non-filersIndividuals do not file.High tax rates, unfairness and high complexity harm complianceReduced tax rates and improved simplicity will improve compliance.Personal and Corporate Income TaxesBoth are abolished.Retained.Retained in a different form.ProductivityIncreases.Inhibits productivity.Increases.Savings

 

Standard Deductions

 

 

 

 

Tax Rates

 

Increases savings.

 

No deduction

Prebates –

Couple – $5,285

Single –   $2,643

Dependent – $925

 

23% Sales Tax

Decreases savings.

 

Couple- $12,200

Single –  $ 6,100

Dependent- $3,900

 

 

 

Progressive rate from 10% to 39.6%

Increases savings.

 

Couple – $32,496

Single –   $16,248

Dependent – $6,998

 

 

 

19% first 2 years

17% thereafter

VisibilityThe Fair Tax is highly visible and easy to understand. No tax is withheld from paychecks, therefor no fear of audit.The current tax code is hidden, embedded in prices, complex, and incomprehensible. Taxes are withheld from paychecks.Business component of flat tax and payroll taxes are hidden. Would be embedded in prices. Taxes withheld from paychecks.

 

 

[1] Testimony by Arthur Hall, Tax Foundation and before the House Ways and Means Committee, 1998

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