I am not a proponent about the fair tax. I am a proponent of the flat tax, but that would likely mean I will pay a lot more in taxes. If there were a fair tax, DH and I would be raking in the dough.
A fair tax system basically occurs where you pay on what you consume. It enables everyone to keep their paychecks, but charges a 23%tax on goods you purchase. Sounds great right? You are sitting thinking if I'm a frugal miser, I'll save a ton. Maybe.
Problem? It will be an unfair tax on the poor. But the poor will get "prebates" to allow them to purchase food and medicine. It will also scale up for family size. Sounding better and better right?
Well wrong. What's wrong? Consider this, a family of four (2 adults, 2 kids) will get a monthly prebate of $537 or $6440/year. But it doesn't account for income. So if you make the median $48k, you get the same as if DH and I make $200k with our 2 children. There is no difference in prebate for people of different incomes but same family size.
Now for those of you who think, well you'll consume more because you make more. Really? Reading this blog, I'm pretty frugal and so are others who blog income non-withstanding. So out of my $200k income, I might consume annually $25k (extrapolating what I spend now) and equivalent to the $48k family. So I will be taxed on 12.5% of my income. But the $48k family will be taxed on 50% of their income if they spend $25k/year. However if they only want to spend 12.5% then have to spend less than $6000/year or $500/month. How realistic is that?
So whose family will come out ahead? Do people who make $200k really spend proportionally more consuming? Or do they spend more $, but a smaller % of their income?
As I've previously calculated someone with 2 kids, making $48k will pay 1.6% in federal income tax (assuming standard deduction and 2 - $1000 child tax credits). Hmm...why would they want to move to a consumption (fair) tax, when they pay literally nothing in federal taxes?
Fair tax supporters, explain to me why someone who pays nothing now should support the fair tax? I don't because it's unfair to the poor and would widen the gap between the rich and poor faster.
But if it were to pass (thank you huckabee), I'd be on the side of the "rich" and getting richer faster because we're savers. DH and I love to save money, we drive our cars for 10 years, and spend less than $500/year on clothes. We also carefully shop for food, and enjoy eating out. But percentage wise it's a smaller portion of our income than others because of our income.
So a fair tax would be awesome for us. Our tax liability would go down substantially. And other people making 6 figure incomes would agree. Suddenly they are able to keep their entire paycheck? And they can still consume at the same level and pay a smaller percentage instead of the current graduated system?
Hence, for real reform we probably need a flat tax. Which will mimic the Alternative Minimum Tax currently in effect, getting rid of deductions and setting a flat tax rate equal for everyone.
But no one likes to hear that it will cost more the fair tax. They like to think they don't consume many goods. But the truth is if we all consume about the same amount. The people with large disposable incomes will be able to save more money and use a smaller percentage of their income for basic life goods.