Why fair tax won work

For instance, under S. This is highly unusual. Similar rate recapture provisions exist in only two other states: Connecticut and New York. Additionally, Arkansas has different tax schedules for different income classes, such that people with higher incomes still face a graduated rate schedule, but a different schedule than one that a middle- or low-income filer would face. Under the federal income tax, and the income tax rate schedules as they exist in all other states, rates are imposed on marginal income, with no recapture provision.

A marriage penalty exists whenever two earners owe more tax filing jointly than they would if they filed separately. The penalty can emerge when any part of the tax code—brackets, deductions, or exemptions—does not increase for joint filers, but bracket widths under a graduated-rate income tax are particularly important.

Many states double their bracket widths for married couples to avoid the penalty, but the Illinois proposal envisions brackets for joint filers that differ only slightly from those that apply to single filers.

They would face a marriage penalty, small in their case, but much larger as earners get into higher brackets. One might be tempted to say that we need not be concerned about a modest marriage penalty on dual-income professionals, or a higher penalty on wealthier taxpayers, but bad policy like this is not easily reversed, and there is no guarantee that the rate structure will remain the same forever.

If a marriage penalty is accepted from the outset, it may hit far more families down the road, the next time Illinois faces a revenue shortfall. Under the rate structure set forth in S. The rate structure set forth in Public Act is only a starting point.

If voters grant approval for a graduated-rate income tax, nothing prevents the legislature from adopting higher taxes than those proposed now, or a future legislature from raising rates. Even under a single-rate tax, rates have risen twice in the past decade from 3 percent to the current 4. The governor implicitly acknowledged this when he dismissed the alternative of a 5.

The ability to single out select taxpayers for higher rates—which will also fall on many small businesses—would make future tax increases easier in a state where lawmakers have already demonstrated a willingness to countenance unusually high rates. Even higher taxes as high as Such rates would be unthinkable in a single-rate system but could easily reemerge if the single-rate requirement is repealed. Pritzker presented the tax increase as the alternative to significant cuts for that tax year, even though it was set to end—and since has—before any new taxes could go into effect.

That is not an argument for doing nothing, but it does mean that other steps would have to be taken as well, and it also means that all of the new revenue—and then some—would presumably pay for existing government programs. The governor campaigned on increasing school funding, improving infrastructure, expanding social services, and reducing pension debt, and none of those things would be covered by the proposed tax increases. That may be a compelling reason to believe that these rates, as high as they are, will not be the last increases should voters approve a graduated-rate income tax.

If that is the case, however, eventually rates will have to rise on middle class families, as there is only so much additional revenue at the top. The rate schedule in S. High taxes on income are generally among the least desirable taxes because they discourage wealth creation.

A comprehensive review of international econometric tax studies found that individual income taxes are among the most detrimental to economic growth, outstripped only by corporate income taxes.

The literature on graduated-rate income taxes is particularly unfavorable, with substantial evidence that higher marginal tax rates reduce gross state product growth even after adjusting for overall state tax burdens. Plenty of states with graduated-rate income taxes have better tax codes than Illinois overall, but Illinois policymakers have shown little ability to keep taxes or spending in check, and tax burdens are high throughout the rest of the system. Absent the existing constitutional constraints, Illinoisans have every reason to fear that their income tax burdens will continue to rise.

Every year, the Tax Foundation publishes an updated edition of the State Business Tax Climate Index , a measure of state tax structure.

Illinois ranks 36th overall on the forthcoming edition, with its competitive income tax balancing out poor tax structure elsewhere. Were the proposed graduated-rate income tax adopted, Illinois would trail its peers in just about every aspect of its tax code. If businesses and individuals are leaving the state now, these policies can only make the problem worse.

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Since the tax is only on the value added and not the entire sale the incentive to evade with the associated risk of getting caught would limit evasion. Since a sales tax is collected by the retailer you must police them as there is no check and balance on them.

Next time you go to a small family owned restaurant watch the transaction at the cash register closely to see if what is rung up corresponds to what you have been charged. This is particularly a problem with struggling family restaurants which is not doing well or are just getting started. Get the picture!! Europeans have got the VAT down to an art form. No other country has a national sales tax as the only source of revenue. The key to a VAT is to be sure you kill off the income tax otherwise it becomes a vehicle for government to spend without the transparency of an income tax.

No European country which has employed a VAT has also killed off their income tax system. The other major problem with a VAT is it does too good of a job at raising taxes without the electorate knowing spending is getting out of control.

So either pass a constitutional amendment reversing the authorization of an income tax or be very vigilant of your politicians. This is where the transparency of the sales tax is such a huge advantage. The most important strength of a market system is associating costs with actions. Income tax totally fails to do this resulting in no effective constraint on government spending.

Morgan, your point about the transparency of the sales tax is one that I try to build on in my next essay. The economic impact would be far reaching. Therefore, prices would HAVE to drop on new goods to be competitive. The concept of efficiency would hit hard. It would kickstart a more realistic valuation of everything. If you wanted to save money, you would buy something used. I think there would be a massive ripple effect of efficiency. The extremely wealthy would still pay for everything new all the time.

You might think this would put the strangle on corporations, for example the consumer tech industry and the constant upgrading. Personally I would fear corner-cutting to lower production costs, and less innovation. I wonder how that would pan out… I think certain industries would be screwed, like credit card companies, whereas the ebays of the world would thrive even more.

The whole concept of tax reduction would be tied into the engine of sales and product distribution — that would be alot more capitalistic in a way, because the most efficient companies would be rewarded alot more.

First, if a national sales tax was enacted, the economy would fall into a recession, most likely, a depression. It will be quite the sticker shock. Yes, they will have more money in their paychecks, because no tax is taken out, but then will realize they must pay taxes all time when money is spent. How about food, insurance, utilities, mortgage interest, or just about anything else you spend your money on? Again, yes, you receive pre-tax wages, but that benefit quickly dissipates when you are required to purchase items.

When a massive amount of people think it is a good idea to not spend and save money in a country built on massive spending, the USA is going to have a big problem. Prices will have to drop to intice people to spend, but wait, what about the stock market? The selloff of stock will be huge, and cause a crippling crash to the stock market.

It would take years for the market to be an attractive investment again. This could bring the country to its knees, economically. So, when the sales tax is enacted, people will stop spending as much money, retailers will have to drop their prices, which means lower revenues for public coporations, which means lower expectations for profit and revenue, which will lead to a massive sell off of stock.

This will all happen in the first year if the sales tax is enacted, and the economy will have almost crumbled before our eyes.

Second, massive tax evasion. There are plenty of small businesses who evade sales tax in states that have them. And since the IRS would be abolished under the plan, who is going to make sure the business owners are reporting correct sales and paying the correct tax? The states? What incentive do they have to give full attention to this issue? Abolshing the IRS is like giving badges and guns to citizens and getting rid of law enforcement.

Please comply. You can just imagine how that will turn out. People need authority to keep things orderly, whether it be for policing society or collecting taxes.

Do you think the government will allow people to run wild with their tax money? Never in a million years. So, under the FairTax, they say they will abolish the IRS, yet they will quickly have to create a new agency to do what the IRS already does, collect tax money and ensure proper compliance! And they are going to spend millions and millions of your tax dollars to get rid of the IRS and implement another agency to do the same exact thing!! What sense does that make?

These are just a couple of points about enacting a national sales tax in this nation. Maybe this could work for a new country just starting out, but not for this country. I am elderly and living on savings which I accumulated when I was working.

I paid all the required taxes. To now tax me on consumption is an unfair double taxation. This is nonsense. Apparently, you have never met a payroll. Payroll taxes are a huge percentage. If that were suddenly gone, it would have the following simultaneous effects: dramatically increasing profits, increasing dividend income, reducing retail price pressure, increasing the amount companies are willing to pay employees, dramatically increasing business ideas that are now profitable.

The logic error in your statement is extreme. In reality, the cost of an employee is the employee net pay plus the payroll taxes for that employee.

As has been shown, they are. The effect is also reduced by the fact that state economies are not isolated from each other. Even more importantly, the federal income tax burden is much greater, so the effect would be far more dramatic.

Actually, the lack of a federal income tax would draw many bright wealth producers to the US. The subsequent brain drain from the ROW would be huge. This is a good point. There probably should be an additional income tax rebate that is proportional to the amount of total income tax paid.

The most important aspect of replacing the income tax with a national sales tax is moral, not dollars and cents. To answer this more specifically, there are 3 possible responses to a removal of all income taxes:.

Both 2 and 3 result in a dramatic reduction in business costs. However, even if 1 were the result, it would mean that employees would have far more cash flow, and therefore, they would easily be able to pay the new sales tax. The situation would normalize as new employees come into the system, and prices started coming down. Poor people are lucky if they have extra cash, their own home especially nowadays with the sub-prime mess ,health insurance,dental insurance,retirement,or savings. They are lucky if they have a car and are able to pay for thier gas.

Poor people usually spend all the money they make on bills or food. If they have children then it makes it doubly hard on them daycare,diapers,healthcare. It can make it impossible to save any money,or even treat yourself to something nice that we take for granted.

Sounds like we would still need the IRS. Would you fill out a tax form,would you be legally bound to collect a reciept,would the business be obligated to collect your personal information,would some shady businessess start giving fake reciepts. Would these problems make it easier to cheat the government. I could go on and on. Now it would take more than the IRS,and a much more complicated and ensnarled system to handle and police each exchange.

On another note,the errant theory that government and taxes are the root of the problem is comparable to blaming a vehicle for a DUI death, or blaming a gun for a shooting death. The reason why our government is in bad shape. These are numbers that I got from 6 to 7 republican web sites. I am a NPA non-partisan affiliate voter. Our federal government agencies regulatory ones like the FDA,GAO have been gutted of inspectors,accountants and auditors.

Will this corrupted and liing republican administration ever end, Bush will bankrupt our economy and morals. The prebate is calculated objectively based on the amount of necessities associated with the agreed upon poverty line. No, the rich consume far, far more than poor people. A second 10 million dollar home would yield 2. Kimberly Amadeo is an expert on U. She is the President of the economic website World Money Watch.

As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. The Fair Tax Plan is a sales tax proposal that would replace the current U. It abolishes all federal personal and corporate income taxes, as well as the alternative minimum tax.

It ends taxes on gifts, estates, capital gains, Social Security, Medicare, and self-employment. The most obvious advantage of the plan is the elimination of the annual income tax headache and the cost of hiring tax preparers.

Government spending would also be reduced by eliminating the IRS, and some advocates argue that increased consumer spending would lead to an increase in gross domestic product, jobs, productivity, and wages. The Fair Tax is unfair to those who aren't earning an income, such as seniors. It would be especially unfair to the first generation of seniors because they paid income taxes all their lives and would have to start paying higher sales taxes in addition to the taxes they've already contributed over decades.

Although the IRS would be eliminated, another agency would take its place. This agency would have to send out prebate checks, settle disputes, and collect taxes from the states. It would also have to enforce the tax and go after cheaters. For example, business expenses that are used to create the final product wouldn't be taxed. Small business owners could therefore declare that a purchase was a business expense to avoid the sales tax.

Compliance could become very expensive to monitor and enforce. The study also used a model showing a GDP increase of 7. Domestic investments are projected to be Consumption drops slightly in the first two years 0. The spending is fueled by an average 1.