Second Jon

This is the second of a 3 part series on taxes.

1. Flat Tax

2. Fair Tax

3. Basic Economics and the Laffer Curve

Here in Colorado, appointed-never-elected Democrat Senator Michael Bennet launched a deceptive attack ad on his opponent, Ken Buck, claiming he wants a 23%  tax hike.  Here’s the ad:

Other Democrats around the country are attacking conservatives for the same thing.

And really, who would want a 23% sales tax?

To answer the question, we have to clarify what we’re talking about.  The conservatives talk about two types of tax alternatives. A Flat Tax and a Fair Tax. I wrote about the Flat Tax previously. The sales tax is called the “Fair Tax.”

The basic idea is this: Instead of penalizing earning money (income tax), saving money (interest tax), investing money (capital gains tax), and passing money on (death tax), we just collect taxes when money is spent.

Some liberal Democrats have suggested adding a federal sales tax in addition to income taxes. Some Conservatives are in favor of the sales tax, but instead of income taxes. This would likely require an amendment to the constitution.

The Math: Tax inclusive or exclusive?
The math on this is a bit tricky. We speak of income tax in tax-inclusive terms. A 23% tax means that 23% of your money goes to the taxes : out of $100 total, $23 is paid in taxes, 23/100 is 23%. We use different, tax-exclusive, terminology with sales tax. If a purchase total is $77, and the tax is 23%, we’d normally say it’s a 30% sales tax, as 23 (taxes)/77 (purchase amount) = 29.8% tax-exclusive.

This causes some confusion because the 23% tax could also be called a 30% tax when calculating it differently.

The Math: Why is 23% the magic number?
23% sales tax would be collected in place of income tax, Medicare tax, self-employment taxes, and corporate taxes.  This would pay for:

• replacing the revenue the government currently makes with the current system.
• sending prebate checks for low-income Americans
• a few percent to pay retailers and local governments for collecting the sales tax.

23% Seems really high, even as an income tax. However, our current system taxes us more than just our tax bracket. Most people fall in the 15% income tax bracket, everyone has 7.65% taxed in payroll taxes, and the employer has to pay an additional 7.65%. That’s already more than 23%.

What’s a prebate?
The fair tax prebate  is a check mailed to poorer Americans at the beginning of every month to pre-emptively pay the sales tax for them.

What’s the benefit?
Suddenly everyone’s income would jump up without having to get a raise. Businesses would no longer have to pad their prices to pass corporate taxes on to consumers so every product becomes cheaper. Only new products are taxed, not used items, so anyone shopping at a thrift store for clothes just gets cheaper clothes.

Your life savings is no longer taxed, so everyone’s retirement funds are more valuable. The IRS would be able to be dramatically downsized because retailers and states would receive a portion of the tax revenue as payment for their collecting it. There would be no tax filing every spring.

The “fair tax” sales tax, like the flat tax, removes the system of loop-holes and allows everyone to pay a lower tax rate instead of just the poor and the super-wealthy. Both would stimulate the economy. Both would remove government financially rewarding and punishing Americans for behavior politicians favor or disfavor.

For more information, check out the FAQ over at the fair tax website.