October, 2013

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FairTax And Efficiency

fairtax


The FairTax is basically a national sales tax that would replace the current individual and corporate income and payroll tax.  It is HR25 in the House and S 122 in the Senate.  Unfortunately govtrack.us gives this bill a 0% chance of being enacted.  This is the best idea for streamlining tax collection ever, period.  So, if this is such a good idea, why will it never see the light of day?

Here at iManage4Results we usually focus on efficiency at a micro level.  However, sometimes great examples of inefficiency present themselves at a macro level.  Today we focus on our income tax system.  There is no greater example of inefficiency than our own federal government.  Talk about too big to fail, it’s too big to succeed as well (a future topic).

Currently, the Internal Revenue Service requires all citizens and US businesses to file an income tax return.  Over the years, Congress has changed and added to the Internal Revenue Code so many times that the entire collection is over 5,000 pages.  Of these 5,000 pages a very small number actually apply to the majority of taxpayers.  Yet the complexity of the code makes it nearly impossible for most taxpayers to prepare their own returns.

The billions of dollars paid every year for tax preparation, tax planning, record retention, training, lobbying, and IRS audit and enforcement adds up to one of the best examples of waste, inefficiency, and non-value added activities I can think of.  The family earning $40,000 annually pays at least $100 to have their tax return prepared.  The largest corporations have tax preparation expenses in excess of $1,000,000.  What payback do we receive from this expenditure?  We don’t get charged with tax evasion.

The FairTax aims to eliminate this waste and provide the tax revenue needed for our government to operate.  I encourage you to head over to FairTax.org and take a look for yourself.  I don’t want to recap all of the details, but I do want to list a few points that most folks are missing.

Pros

  • Tax dodgers (illegal immigrants, criminals, cash employees) would pay when they buy.  This alone has the potential to increase total tax revenue.  If you want to research further, look at GDP times 23% versus the current tax system revenues.

  • Sales tax infrastructure is already in place at the local level.  Is it possible to travel anywhere in the US and not pay sales taxes?  Currently only 3 states do not have any sales taxes, either local or state level.  These states are Montana, New Hampshire, and Oregon.

  • The IRS is reduced greatly in size because retail businesses now become the taxpayer.  Since most states already have a sales tax infrastructure, the enforcement authorities are in place as well.  The IRS would be limited to minimal oversight of these collection points.  In light of the ethical issues facing the IRS these days maybe it is time for their power to be reduced.

  • Income taxes and payroll taxes are eliminated for individuals and corporations.  Take a look at your tax withholdings and calculate the percentage.  Don’t forget Social Security and Medicare, this is 7.65% in addition to your federal withholding.

  • The price of goods will not change due to competition.  If corporate taxes are eliminated, selling prices will be reduced because we have a capitalistic market economy.  Shareholders demand a certain return on investment.  If expenses are reduced competition will take over and force selling prices to be lower.  The models predict selling prices to return to normal levels within a few months even with the 23% national sales tax included.  Remember, corporations will not pay any taxes either.  This is a critical point the opposition likes to gloss over.

  • The wasted effort of tax planning and preparation is eliminated.  There’s not much to say about this.  Billions of dollars annually could be saved and invested in activities that generate payback.

Cons

  • Lots of IRS employees would be unemployed.  Let’s face it, if we have the same revenue stream we can redeploy these folks to other areas of the government that are in constant shortage.

  • Lots of tax preparers, accountants, and attorneys would be unemployed.  These are smart people who will find jobs.  We have a shortage of talented number crunchers.

  • Low income earners would pay more.  See note above describing competition, prices will go up briefly but then return to normal levels with competitive pricing.

  • Corporations will lose their influence over politicians.  With no more income taxes, corporations would have very little need to lobby (aka contribute to reelection funds) politicians for favorable legislation.

  • Politicians would lose lots of campaign donations.  This is ultimate the reason The FairTax will never happen.  Politicians need the lobbying money to keep their jobs.  Without this money, challengers would be on a more even playing field with an incumbent.  Term limits would fix this, but why would a politician ever want that to happen?  Our founding fathers never intended to create career politicians but that’s exactly what we have now.

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HR25 is finally getting a vote in the House Ways and Means Committee.  However, it is expected to receive little support.  Political action committees donated over $42 million to the members of the House Ways and Means Committee during the 2012 election cycle, while individuals donated another $33 million.  This is a powerful committee and the members are heavily influenced by these donations.  Eliminating the current income tax system would significantly reduce the donations.

Regardless of whether you agree with the concept of The FairTax, you have to admit that it eliminates billions of dollars of waste.  Let’s cut out the middle man and fund our government efficiently.  Unfortunately, our federal government is the inefficient middle man in too many situations.  At least in this case, The FairTax is a valid solution to a giant problem that will keep getting larger.