Ask the Piggy Pank: Fair Tax v. Flat Tax
I recently received the following from a reader: What is the difference between fair tax and flat tax?
With tax season coming up, and with presidential candidates talking about tax plans (Mike Huckabee is especially vocal about fair tax), this is an exceptionally timely and relevant question. Here are the basic differences:
Fair Tax
This is a term that indicates an end to all taxes collected by the government, save a national sales tax of sorts. This national sales tax would be collected on every new purchase made. As of now, there are “prebates” offered to those with less money, since sales tax often means that those with less spend more. Additionally, there is no separate rate for grocery food items (something I would like to see).
Mother Jones offers an interesting look at the fair tax.
Flat Tax
A flat tax is one in which the same income tax rate is set for everyone, usually expressed as a percentage of income, such as 10% or 15%. Or higher. The idea is that it would “fairer” if everyone paid the same percentage of their income. Of course, it doesn’t address the problem that 10% of $20,000 is still a bigger hit to someone’s ability to live than 10% of $200,000 is to someone else’s…
Wikipedia offers an article on the flat tax, and Taxgirl has an interesting look at Fred Thompson’s flat tax plan, along with a guide for plan interpretation among other candidates.
Do you like one or the other better? Do you have a tax code solution?
31 opinions for Ask the Piggy Pank: Fair Tax v. Flat Tax
Kelly
Jan 17, 2008 at 3:10 pm
This is a terrific topic! I am linking to you - and interested to see what folks have to say!
miranda
Jan 17, 2008 at 3:38 pm
Thanks :0) I hope we get a lot of input!
What’s the difference between the fair tax and the flat tax?
Jan 17, 2008 at 3:59 pm
[...] what’s the difference, really? Miranda, over at Yielding Wealth, tackles the difference and asks for your opinion. Pop over and leave your opinion… I’m curious to see what folks are [...]
Ren Garcia
Jan 17, 2008 at 8:39 pm
It might be a good idea to see what a relatively poor country like the Philippines does with regard to income taxes.
Ih the Philippines, citizens earning below a certain threshold (PhP 60,000 per year) are not taxed.
The lowest income bracket is taxed 5% (after tax exemptions for dependent children & parents).
The highest income bracket is taxed 32% (also after exemptions for dependent children & parents).
The exemption from income tax for families earning below a certain threshold (i.e., PhP 60,000 per year) might be a good idea, except that it takes a family of 5 (the average family size in the Philippines) PhP 120,000 per year to keep body & soul together.
miranda
Jan 18, 2008 at 12:16 pm
I really like this idea. It’s sort of in line with my “progressive flat tax” that I think would be good. A flat tax rate that is lower for lower incomes, and higher rate for those who make more. It would simplify the system, yet take into account different needs at difference income levels.
Sheila
May 21, 2008 at 4:03 am
I watched a TV program once about flat tax. It was explained that a 23% federal tax on purchases would eliminate federal income tax. Questions were asked about buying homes with a 23% tax; people complained that homes would be way out of reach of everyday people. The commenters explained the tax would be paid by the builder!!!!!!!!
Now, first off, I am a retired, disabled veteran. My disability was from chemicals I was exposed to in the military. My disability is removed from my retired pay and is not taxed. Now the government wants 23% of my disability.
They also want 23% of teenagers babysitting money, your grandparents social security and kids allowance.
Medicine is not exempt from this 23% tax. This tax is also not superceding state taxes.
In other words in Indiana 29% tax would be paid on everything. Indiana has a 6% sales tax.
And my first comment about homebuyers; ask your local accountant. If you own a business, any purchases you make that are intended for resale are not taxed. Lumber for building a home is not taxed if that home is to be sold. This is why Home Depot has 2 different credit cards. One for everyday DIY folks and one for contractors.
So buying a new home the taxes WOULD fall to the buyer to pay.
Think about it. Add 23% to every item you buy. An item from McDonalds dollar menu would cost: $1.23. Doesn’t seem like a lot, but when you average $50.00 at Walmart once a week your total would be $61.50, add Indiana 6% it would be $64.50, vice $53.00.
Now this wouldn’t be so bad if medical, dental, medicine, college and any other life requirements and advancements were free, like in Denmark. These “extras” are paid for by the government. I wouldn’t complain, but I don’t see it happening here. The money would be wasted.
Plus I would guess since congress voted to get a designated raise every year without having to vote (it was brought up that congress could not vote on a raise during election years). They would also vote to have a card to exempt themselves from having to pay such a tax.
I believe a flat tax would destroy businesses. We would seriously be a no frills economy.
The flat tax is actually aimed at illegal immigrants that pay no federal taxes and don’t file. The government wants their money so we all pay the tax.
So am I against this flat tax? You betcha’, unless it was like 1% that would be ok with me.
miranda
May 21, 2008 at 8:04 am
You make some good points. It would be nice if our taxes weren’t so much wasted money. I feel similarly. Wouldn’t it be nice if our taxes were used to fund universal healthcare and improve education, rather than going to an endless war, subsidies for successful corporations with record profits and pork barrel projects?
Doug
May 22, 2008 at 3:57 pm
Sheila apparently doesn’t understand much about the FairTax. Her assumption is that the end cost of everything will go up bu the amount of the FairTax.
What she does not consider is that the price of everything she buy now has a “built in” tax of at least 22%. This is the money that the suppliers of what she is buying are paying in income tax now. When the income tax goes away, so does this cost, and competition for market share in a free market will drive the cost down by that amount.
So, when she adds back in the FairTax, the check she has to write for whatever she buys in essentially the same.
There is a really good book out called “FairTax: The Truth” that addresses objections such as the one Sheila makes. It’s a paperback, so it doesn’t cost much, and it’s a pretty good read.
Doug
May 22, 2008 at 4:08 pm
Buy the way, Sheila has also confused the FairTax with a flat tax. The flat tax is nothing more that a single rate income tax, and we all know how long the “single rate” would last.
The FairTax allows you to keep your entire paycheck, no Social Security, no Medicare, no income tax deductions. If you make $2000 a month, you get a check for $2000 every month, and the cost of what you buy stays the same. Sounds like a plan I can get behind.
Doug
May 22, 2008 at 4:11 pm
One more thing about Shiela’s post. Higher education expenses are considered an investment, and as such are not subject to the FairTax.
miranda
May 22, 2008 at 4:56 pm
You are, of course, right about the confusion over Fair Tax and Flat Tax as addressed by Sheila.
However, I’m not sure that prices would go down with a Fair Tax. After all, when have companies decreased their prices just because costs go down? They’ll most likely point out that taxes have gone up, so their prices have to as well.
I disagree about the free market. We haven’t had a truly free market in this country for decades, and it is unlikely that even the businesses would want to move away from our special brand of socialized capitalism.
This book you mention sounds interesting; I will probably read it — and maybe I’ll change my mind about my opposition to Fair Tax.
Doug
May 22, 2008 at 5:41 pm
Sure prices would go down.
Remember a couple of years ago when some tax on airline flights expired? All the airlines held the price line for a couple of days, then one of them decided to make a play for market share. It was less than 48 hours later that all the majors had followed suit.
All it takes is one business to start the ball rolling, and the rest will follow.
They can’t very well point out that taxes have gone up, since only the end (retail) user pays the FairTax. Business expenses are not taxed, just like they aren’t subject to sales and use tax here in Texas.
To tax something every time it changes hands in the marketing chain is a value added tax, and you can see how well that works in the European economy. The FairTax is levied only at the retail level, and goods are only taxed once. Used goods are not taxed at all, so when you buy a used house or car, you don’t pay the FairTax.
miranda
May 22, 2008 at 5:47 pm
Hmmm….interesting thoughts that bear consideration…I somehow doubt, however, that such rules would be followed in implementing the tax. I’m sure there would be all sorts of things introduced that would muck up something that seems somewhat simple…
Doug
Jun 2, 2008 at 2:17 pm
Kinda like the income tax we have now?
miranda
Jun 2, 2008 at 4:01 pm
No kidding ;)
A simplified flat tax that has everyone paying at a lower rate, but still progressive by income (and no returns, aka “wealth redistribution”), is something I am a little more interested in.
Although I am liking the Fair Tax a VERY little more as I look at it…
Doug
Jun 2, 2008 at 4:32 pm
Please do not confuse the FairTax with a flat tax (as Sheila has). What is refered to as a flat tax is nothing more than creating one income tax rate from the existing tiered income tax, and we all know how long that will last. That approach leaves all the evils inherent in an income tax, and deliveres none of the benifits of the FairTax.
If you haven’t already done so, I STRONGLY encourage you to visit FairTax.org and spend some time there. I believe the more you investigate the FairTax, the more you will come to like it. I know I did.
BTW, it’s a pleasure communicating with you. Judging from your posts, I am led to believe you are an intelligent, savvy person.
miranda
Jun 2, 2008 at 5:01 pm
I am not confusing Fair Tax and flat tax. I am expressing that right now I favor a flat tax that is lower than the current tax, and one that has progressive levels of payment (capping at 18% for the wealthiest), no loopholes and no returns.
I am reconsidering my stance on Fair Tax after looking into it more.
I would like to reconsider our national priorities, and cut pork barrel spending and subsidies for corporations and other countries’ militaries so that a lower tax would be workable, AND benefit more of our people here at home.
Thanks for the compliment ;)
Doug
Jun 2, 2008 at 5:58 pm
If it has progressive levels of payment, by definition, it is not a “flat tax”. A flat tax has one single “flat” rate for everyone.
I’m liking you more every time I read your latest message. Being the Libertarian that I am, I work to see the Federal Gov’t. limited to it’s Constitutional duties. I do believe that the BEST thing the government can do to benefit the people here at home is to get off our backs and out of the way so that we can do what we do best: ACHIEVE!
miranda
Jun 2, 2008 at 6:27 pm
Hee hee. That’s why I think of it as a “progressive” flat tax. It’s a flat tax, but it also applies to different levels. Also, in my twisted scheme, EVERYONE pays it. It may seem silly, but when you get your welfare check, something low (like 2%) comes out for “taxes.”
I suppose if we had a federal consumption tax (but not on grocery food) I’d be okay with that. But it would have to workable in terms of either eliminating the income tax or at least severely reducing it. It would force us to re-evaluate our priorities as individuals, and force to consider what we are spending our money on. (You know, do you really *need* a huge TV as opposed to something smaller?)
Doug
Jun 2, 2008 at 7:17 pm
So far, the Fair Tax passes your test. While it does tax grocery food, at the beginning of every month, every household gets a “prebate” in the amount of the FairTax on the “poverty level” for that size family, so the tax you will pay on the essentials is given to you at the beginning of every month.
As far as eliminating the income tax as well, there is a provision in the FairTax bill (HR 25 and S 25) that says the FairTax will be implemented on Janurary 1 following the repeal of the 16 Ammendment (the one that authorizes the income tax).
Looking even better now?
miranda
Jun 2, 2008 at 7:38 pm
It is looking better. I just wish we’d get rid of this “prebate” nonsense. Plenty of states are able to charge less on grocery (or none at all) in terms of sales tax, so it should be doable on the federal level.
But where would the states get money? Would it be on top of what the government charges? That would start to get crazy, since many states would increase property taxes if they could no longer collect sales tax because a federal tax bumped it up…
Doug
Jun 2, 2008 at 8:19 pm
The prebate was included because if you start exempting things, then you give Washington something to fiddle with. If you start with one expemtion, then others are sure to follow, and then the whole thing starts to fall apart again. The prebate is a simple, uncomplicated way to ensure no one pays taxes on the amount of money it takes to provide those things necessary to maintain a minimum standard of living.
Also, if you exempt something like milk, then the people that have the money get to take their milk baths tax-free. Give ‘em that first couple of gallons without tax, but make ‘em pay taxes to fill up the tub.
The Federal government already sends money to millions of people. It would be a very simple matter to set every household up with direct deposit to either a debit card, or a bank account.
As to the state funds, the FairTax replaces only federal taxes, and does not impact state taxes at all. Since the final price of goods does not change due to the elimination of embedded taxes, the price at the register does not change. What used to have $1.00 in state sales tax, still has $1.00 in state sales tax.
It takes a little study (very little, really) to get your head around how the FairTax works, but once you do, you’ll wonder why more people don’t scream for it.
Read the book. It’s a short and easy read, even for a guy like me.
miranda
Jun 2, 2008 at 8:24 pm
Hmmm…I’ll give Fair Tax another look…
Doug
Jun 3, 2008 at 5:26 pm
What could be better than having zero taxes withheld from your check, and getting an additional monthly check to pay the taxes on things like food and basic health care costs?
It’s even better than getting a big fat raise, because you don’t have to pay income tax on ANY of it.
miranda
Jun 3, 2008 at 5:49 pm
Almost thou persuadest me…
Doug
Jun 3, 2008 at 6:09 pm
How about this…
Since US corporations no longer pay income tax, they don’t have to pass that expense on to their customers, thus eliminating the disadvantage they have been operating under against overseas competitors. US exports go up and the trade deficit goes down.
Since there is no longer an income tax to pay, many corporations that located overseas to avoid the expense, relocate to the US to take advantage of the more capable employee base, creating more jobs, and the unemployment rate drops drastically.
Likewise, foriegn corporations that found a slight advantage overseas now see those tables turned. Companies like Daimler-Chrysler decide that it is now advantageous to locate here, and closes the German offices (located in Germany because of the repressive tax structure imposed by the IRS). Even more jobs and lower unemployment.
All those people that sent their fortunes overseas to avoid paying taxes on their earnings and estates bring that money back to the US and invest it in US companies.
Still need more?
miranda
Jun 3, 2008 at 6:44 pm
LOL. You don’t stop trying. I’m not sure it work out QUITE so nicely in terms of “passing on the savings.” But I bet that some companies would come back here. Others, though, would stay put regardless — due to lower wages they can pay in some countries.
Besides, a lot of the large corporations get subsidies and special tax breaks anyway. They don’t really need further tax incentives. I can see how such a structure would help small and medium sized businesses, though.
Doug
Jun 3, 2008 at 9:32 pm
Well, even if the picture is not quite as rosy as I paint it (a point I will not concede), it’s got to be better that what we have now.
miranda
Jun 4, 2008 at 7:22 am
In that, we probably agree :) There are very few things that would actually be worse than what we have now.
And I am reading more on Fair Tax.
Doug
Jun 4, 2008 at 11:52 am
Great!
Do yourself a favor, and do the research on the net, and read what the nay-sayers have to say. Then get the new book “Fair Tax: The Truth” by Boortz and Linder.
From what I’ve seen, most of the people that argue against the FairTax fall into one or more of the following categories;
1.) They have an agenda that would be compromised by implementation of the FairTax. These are mostly people (career politicians, lobbiests, etc.) that want to maintain the locus of power in Washington. By eliminating the existing tax code with all it’s exemtions and penalties for “undesired” financial behaviors, it returns economic power to the folks that earn the money. That threatens a lot of people.
2.) People that benefit from the current tax situation. This would include people, that for whatever reason, aren’t paying Federal taxes (those in the underground economy, those that use exemtions in the tax code to avoid paying Federal taxes, people with their money overseas that live here, etc.)
Most of the arguments presented by those in the above categories rely on changing the FairTax to something else like a VAT or a flat tax, of which it is neither.
3.) People that haven’t studied the FairTax and are just repeating information they get from those in the above categories.
“FairTax: The Truth” examines the fallacies that opponents use to attack the plan, and shows the flaws in each of them. I believe you will find your research humurous , enjoyable, and rewarding.
miranda
Jun 4, 2008 at 12:21 pm
I’ll take a look at it. Thanks for all of your insights.
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