The FairTax benefits low-wage workers

Image courtesy Don Anderson

KTVA’s recent column by Kate McPherson titled “Low-wage workers could be hit hardest by national sales tax” contains so many incorrect statements that correction is imperative. Anyone watching her report or reading her column would remain ignorant of the most important replacement for the income and payroll taxes yet developed. I have considerable sympathy for Ms. McPherson since she must write and report on a vast number of items, with little time to investigate each.

To start–the title is dead wrong. The FairTax eliminates the payroll tax. That tax is the most significant tax on low-wage workers. It also eliminates corporate taxes that we all pay indirectly on the items we buy.

Since the FairTax act abolishes the individual and corporate income taxes, the payroll taxes, the estate tax, and gift taxes, the cost of bringing goods to market is significantly reduced. These embedded taxes are a major component buried in the prices of all products. These embedded costs vary from 16% to 26% with an average of about 22%. The actual amount by which the price of a product will be reduced will depend on the portion added to the workers wages versus thatpassed on to the customer. It is, however, expected that the price reduction will make the increase in cost of a product after the addition of the FairTax very modest.  All the savings in embedded cost are passed on to the consumer.

The FairTax also contains a rebate to all families (called a prebate) that has the effect of making the FairTax the most smoothly progressive tax yet designed.

For example. A single lady with two children and wages of only $20,000 a year would most likely take home $21,530 since her employer would no longer have to pay the $1,530 “employer contribution” to Social Security – Medicare. She also would get the full $21,530 (less any state taxes) rather than the $18,470 (less any state taxes) she got under the current tax regime (after the “employee contribution” to Social security – Medicare was deducted). If she spent more than $19,780 on new retail goods (like food and rent) and the remaining $1750 on used goods or clothing, her prebate would cover all her sales taxes. Rather than being the “hardest hit” by the new FairTax, she would see an immediate 16.5% gain in spendable income.

To see how the FairTax would affect you, try the calculator at: http://fairtaxcalculator.org/

Low wage workers, along with as much as 95% of our citizens, would also benefit as we eliminate the onerous compliance costs of the individual and corporate income taxes.

Not everybody benefits. K-street lobbyists would need to find other employment since doling out campaign cash for corporate income tax favors would no longer be possible. Incumbent politicians might find contribution streams thinner. Tax accountants would have to concentrate on the business accounting side of their profession. Drug dealers, black market operators, and the general underground economy would finally have to pay some taxes.

The first sentence of McPherson’s column states that the Republicans in the US House and Senate that back the FairTax bill will have a tough sale. That assumes voters are kept in ignorance of the bill’s provisions. Test polls have shown that after people gain even a modest familiarity with the FairTax that 80% of them support it. (I personally favored the Flat Tax until I carefully examined the FairTax about 15 years ago).

Another beneficial aspect of the FairTax is its effect on our economy. It is easy to see the current drain of major corporate headquarters to foreign domicile would be strongly reversed when our corporate tax rate goes from the highest rate in the world to the lowest rate in the world. Economic modelers have shown strongly beneficial effects on real investment (and hence jobs), much stronger exports, and even a decline in real (not Fed manufactured) interest rates.

Two of McPherson’s commentators, Kyle Hampton and Zack Fields need to become familiar with the FairTax so they do not continue to make statements that are misleading or embarrassingly ignorant.

Mead Treadwell is apparently the only informed commentator on the FairTax that McPherson found to include. Considering the great economic benefit of changing from the income tax and payroll taxes to the FairTax, it seems he has a real interest in the welfare of ordinary US citizens. (Joe Miller also favors abolishing the income tax).

For those with limited time, but who are interested in the contrast between the income tax and the FairTax, I suggest a short 17 minute slide show on my website at: http://don.snalaska.net. Chose the FairTax topic and click on swf on The Fair Tax slide show line to start the presentation.