Fair Tax

Right now, the US is in the middle of primary elections, which will decide each party's candidate for President. One of the candidates still in the running for the Republicans is Mike Huckabee. He is in support of changing the current tax system into the Fair Tax system.

The Fair Tax system would get rid of the IRS, tax brackets, income taxes, social security taxes, Medicare taxes, capital gains taxes, and many other things. Instead, taxes will be applied on purchases of new goods and services.

For example, if I made $50k in a year, I would receive $50k in my pocket under Fair Tax, with none of that deducted for taxes. If I made that much in 2007 as a single filer in the current system, I would only receive $39.5k after deducting federal income tax, social security, and Medicare. That does not include deductions for state taxes.

When it comes down to purchases, Fair Tax impose a 30% sales tax, or 23% effective tax. Imagine a $100 jacket in today's prices costing $130 under Fair Tax. You can either look at it as $30 more than $100, which is 30%, or look at it as $30 of $130, which is 23%. Under the current system, I would have to use my $39.5k after-tax dollars to purchase a $100 item, but pay about 8% more for sales tax.

The Fair Tax System would be a change to make taxes progressive. Richer people would have more money to spend, and their spending means more money to tax funds. In the current system, taxes are regressive because effective tax rates are lower for the rich compared to the poor. Social security and Medicare taxes are only imposed on about the first $100k of income reported on a W2. People making less than $100k will be paying the majority of this. Capital gains are currently capped to be taxed at no more than 15%. Rich people can have lots of assets and rely on primarily capital gains instead of defined income from a W2. Therefore they can be exempt from federal tax brackets as high as 35%, not to mention social security and Medicare taxes. Steve Jobs, founder of Apple, has an annual salary of $1 from Apple. He makes all his money from Apple via stock options, which when played right, are only taxes at 15% because of capital gains. None of that will go towards social security or Medicare.

The current system favors other people besides the super wealthy. Under the current tax system, people can claim deductions to offset taxable income such as interest paid on a mortgage. There are many other deductions to claim and are very helpful to those who take advantage of it. There will be no deductions under Fair Tax.

As it stands right now, I'm not ready to switch to Fair Tax. Even though I claim the standard deduction, I plan to have a mortgage sometime in the future to offset my taxable income, and I plan to take advantage of capital gains and hopefully rely on that as income more so than salaried income. I am also contributing the max to my Roth IRA. Since that money was already taxed and any earnings would be tax-free, under Fair Tax I would still have to pay the hiked up sales tax. However, Fair Tax would mean any income from tax-deferred accounts such as 401(k)s or traditional IRAs would be tax deferred indefinitely until spent on new goods or services.

All in all, Fair Tax is something we shouldn't worry about at this moment. John McCain is the leading front runner for the Republican Party with Mike Huckabee far behind. The nation is not willing to have a change so dramatic that even with it's intended benefits, the benefits may not be so easy to understand therefore the cons just stand out.