The prebate makes the FairTax progressive not regressive. Lets look at three families of four. One family earns $30,000 per year; one earns $50,000 per year and the other earns $75,000. To keep it simple, lets assume all three spend their entire earnings on new goods and services. When you add the annual prebate of $6702, the family with an annual income of $30,000 would have spendable income of $36,702 giving them a tax after prebate of $1739 for a tax rate of 4.74%. For the family earning $50,000 the tax after prebate would be $6339 for a tax rate of 11.18%. For the family earning $75,000 the tax after prebate would be $12,089 for a tax rate of 14.80%. Of course each family could reduce this percentage through savings and used purchases, but that is one of the beauties of the FairTax; you have more control of amount of tax you pay through your buying and saving practices.
One other thing to keep in mind, even if you earned $12-Million per year someone, someday will spend the entire $12-Million. It may not be your children or your childrens' children, but someone down the line will end up spending it all. Up until that time, it will more than likely be invested in the US rather than offshore. Since investment returns will not be taxed until spent, what would be the advantage of investing offshore? The more investing done in the US, the more jobs created, the stronger our economy becomes.
Agreed, fantastic post. I absolutely love the FairTax as it does several things. First, it takes all tax burdens off the very poor, those at or below the federal poverty level - no payroll taxes! Everything new is taxed, but the prebate means people at or below the federal poverty level (for their household size) pay no federal taxes whatsoever. Everyone gets the same prebate, based only on household size.
Second, the FairTax forces everyone to see the actual effective tax rate. Even if the government sends you that 23%, you still hold it in your hand before you spend it. Hopefully this will calm cries for new entitlements, by far the biggest threat to our republic.
Third, the FairTax encourages savings. Anything not spent is tax free, which means we have more capital for lending AND the individual has savings of his own, not some amorphous government promise.
Fourth, American companies' products are taxed at exactly the same rate as those of foreign competitors, which will make American companies much more competitive. Even if a country subsidizes a company completely, charging it no taxes, it is still taxed in America at the same rate. Right now imports are effectively untaxed by the USA, which means American-based companies pay all corporate taxes. Since all corporate taxes must be passed to either customers or stockholders, this makes American-made products more competitive and American-based stocks more profitable. And imported goods will contribute to the federal tax coffers.
Fifth, the FairTax encourages recycling and reusing used products, since they may be sold without federal tax consequences. Thus our landfill requirements are reduced and our importation is reduced.
Sixth, the FairTax moves tax collection and verification responsibilities back to the states, who almost all have sales taxes now and therefore have these mechanisms in place. This includes the black market issue, as the states have this concern already.
Seventh, the FairTax moves welfare programs such as Earned Income Tax Credit back to the states where they belong. The cost of living in rural Tennessee or Mississippi has virtually nothing in common with the cost of living in New Jersey or New York or California, yet the federal government must treat working poor in the same way.
Eighth, the FairTax greatly simplifies our tax code and reduces our compliance costs. Right now a big portion of our national labor goes into tax code compliance. An awful lot of smart, well-educated people spend some or all of their time in tax preparation, advice, and paperwork. A VAT is similarly expensive; a flat tax is even less expensive, but is unfair on the poorest Americans, making it not even worth their while to work. The FairTax is probably the lowest overhead federal tax plan with a chance of passing or providing a moral, fair tax collection method. Also, the FairTax would free up lots of valuable time of accountants and lawyers for other, more productive purposes.
Ninth, the FairTax removes the federal government's intrusiveness into your life, as well as the threat of the IRS, and replaces it with something the federal government should be concerned with anyway - counting people. It's easy to misunderstand a particular tax code requirement and incur big penalties and the threat of prison time; it's quite a bit harder to miscount the number of people living in your home. And counting people is necessary anyway for providing the proper representation and public services and accommodations.
Tenth, the FairTax punishes people who are here illegally or who earn their livings through illegal activities. On the run from the law? No prebate for you. Illegal alien? You're missing a check every month by being illegal. Drug dealer or gun runner gang banger? You still pay taxes.
Eleventh, the FairTax largely removes the government's ability to set one group against another, because everyone pays the same base rate and everyone gets the prebates which are based only on head count and the federal poverty rate. Everything new gets taxed, so they can't pay off one industry by making it tax exempt. Congress could still game the system to a degree by raising the poverty rate, or adding surcharges on luxury goods, or adding sin taxes, but adding tax exemptions for a favored company or industry would be eliminated. Promises to take more money away from other people and give it to you would be largely meaningless as well.
Twelfth, it would make America a haven for investment. Move a company here and pay no tax on profits unless and until those profits are moved out of the country.
I don't see Congress ever voting away its greatest power, the ability to reward and punish via the tax code. But I'd love to see the FairTax implemented.