Ply the Silent Planet

2 days have passed since April 15th, but I’m still thinking about taxes. I am poor. I don’t pay jack in taxes. As a matter of fact, I received a letter in the mail from the IRS last summer telling me they wanted to send me more money… I am totally serious. Apparently, I was eligible for the Earned Income Credit- a system by which the government actually gives a person more money than they paid in taxes that year. It’s like spending a dollar for a 50 cent hot dog, and getting $2 back in change. The government doesn’t have money- it gets all of its money from citizens, so that means this extra money is coming directly out of the pockets of people who worked hard enough to earn more- which means the EIC is nothing more than a mechanism for the redistribution of wealth. It’s socialism by definition. That’s not really meant to be a pejorative, it’s just a descriptor. It’s interesting that people don’t seem to like being called socialist, or even liberal nowadays- they prefer progressive. I have a newsflash for those people, though:

There is absolutely nothing progressive about taking more money from people who work the hardest.

I believe I have some credibility on this. I come from the definition of a lower to middling middle-class family. Neither parents went to college. I am only aware of 2 relatives who attended college: an aunt who went back in her 40s, and a cousin who now drives a truck. My stepmother’s family is slightly more educated, but it would be hard to describe any part of my family as having ever had anything other than a modest income. There are no trust funds, no significant investments, no nest eggs.

So it should carry at least a little weight when I say to the federal government: we don’t want other people’s damn money. Now I am not stupid, and as I said a few months ago I do not consider it inconsistent to go ahead and take whatever I am offered, from whatever source it may come- government education grants included. There is a difference between the way principles are applied in the micro and macro, and in the micro if I am offered extra money, I am going to take it because there is very little I can do in the macro to make the government give money back to whom it belongs.

I wonder how many people reading this haven’t yet heard of the Fair Tax. It’s a terrible name- it ought to simply be called the Consumption Tax or Income Tax Replacement system or something more descriptive. It’s probably the most important economic idea out there right now, with more potential to revolutionize the United States economy than anything in history. Here’s a rundown of the idea:

1. Repeal the 16th amendment to the Constitution.

   This is the amendment which makes is legal for Congess to tax income. After it is repealed, there will be no constitutional basis on which Congress could enact both and income tax AND sales tax (something which they could do now if they wanted!).

2. Abolish the IRS.

   The IRS costs billions of dollars a year to operate. It would have to be replaced of course, but the replacement would be much cheaper and slimmer. The IRS monitors something in the 100 millions range of tax paying entities (individuals AND businesses)- the replacement bureau would only exists to send people their rebate checks, and to collect the sales tax from businesses when it’s charged at the register- something businesses currently do just fine in all the states with state sales tax anyway. So no big deal. Also, there is something like $3 billion spent each year by people just to DO their taxes- this money would be put to more productive means, such as investing for the future or running a business, or just buying groceries.

3. End all federal payroll taxes.

   Income tax, FICA, social security, medicare and all other federal taxes will not be taken out of paychecks, and instead funded by the consumption tax. Your take home income instantly increases by 30-60%, depending on how much you currently earn. Just have a look at your check and figure up what it would be with federal taxes put back in. And by the way, your employer has to pay 7.5% of your check out of his pocket, too- which really means it comes out of your pocket. So you will actually see an even GREATER increase.

4. End all taxes on businesses, investments, or any other income determined taxes.

   This is probably the most important principle to understand in the proposal, but also the hardest to get a grasp on. I’ll make it very simple. Let’s say you start a hot dog business. People love your hot dogs, and you sold 50,000 last year for $2 a piece- not bad! Now, 25 cents of each hot dog goes to buying from your supplier, 50 cents to pay your workers, and 25 cents to pay for your little stand. Which leaves you a $1 per hot dog- or $50,000- profit. Being the first time you’ve ever run a business, you didn’t think about paying the taxes on your business until April comes around… oops. You realize the government is going to demand around 20% of your profit, which leaves you with only $40,000 left. Darn. Well, you really liked making $50,000, and you think people would pay more for your wonderful hot dogs, so what are you going to do next year? That’s right- you’re going to raise your hot dog prices to generate an extra $10,000- so you are now going to charge $2.20 per hot dog, and make your customers pay the taxes for you. This is not because you are an evil person- it is because you are a smart person. This is what businesses do every day- when you buy anything from tires to earrings, YOU are paying the taxes, not them. If their taxes disappear, the prices you pay for goods will drop. So not only will your income increase, the prices you pay for goods will decrease.

   One more point about this- if you own a business in Italy where you are paying taxes on your business, and you could conceivably run this business in the US, and the US repealed all taxes on businesses, wouldn’t you move your business from Italy to the US? Of course. And that’s what 80% of overseas corporations said they would do in a formal survey given to them a couple years ago. This alone would bring in hundreds of billions of new dollars into the American economy- not to mention new jobs, more competition and innovation, and therefore lower prices.

5. Replace these taxes with a 23% sales tax on all goods and services.

   According to numerous studies done by economists, this 23% rate will generate the same amount of money the government currently takes in- it is neither a tax increase nor a decrease. The only thing that changes is the mechanism. You’ll hear elsewhere on the internet or the news that the 23% tax rate is a lie and that it’s actually 30%. The truth is, both are correct- it’s just a difference in how it is calculated. I’d walk through the calculations but it’s more important just to realize that no one is trying to be misleading here- if you are in the 30% income tax bracket now, the number to compare the tax rate to under the consumption tax would be 23% and not 30%. Another important aspect of this to note is that, currently, there are millions of cheaters in the underground cash economy that do not pay income taxes, such as drug dealers, prostitutes, illegal immigrants etc. All of these people buy things, and this underground economy- which is estimated to be at least $2 TRILLION a year of untaxed income- would be a source of new revenue for the government. In the previous point, I asserted prices will drop because businesses are not paying taxes. The sales tax added on to these lower prices would cause the total you pay for, say, a new car to be relatively close to what you are now paying. But remember, you have an increase in purchasing power due to taxes not being taken out of your check, and receiving a monthly rebate check- my next point.

6. Everyone receives a monthly rebate check on taxes paid for necessities.

   This check will be in the neighborhood of $200-500 per person (rough figures there- doing the math off the top of my head). This means that people who only spend money on necessities do not pay any federal taxes, which is the same as the current system. For example, I did not end up paying any taxes this year or last year because my income was too low- everything taken out of my paycheck was sent back to me as a tax refund. Instead of a tax refund, everyone would receive a monthly rebate check in addition to keeping your entire check. If you spent more in taxes than what you receive back in the rebate check, that is your net paid tax. Naturally, rich people spend much more money, and will therefore pay much more in taxes. If you spend even less on taxes than your rebate check, than you are getting the equivalent of an Earned Income Credit, like I received last year. So that should keep the socialists happy.

But probably the most important point about the Fair Tax: it would transform April 15th into just a normal, beautiful spring day. However, if I had my way, it would become known as Freedom Day- commemorating our liberation from an archaic tax system that penalizes productivity and rewards laziness.

That’s it. Any questions?