By Zayida Baker
Some in the tea party want to replace the current, chaotic tax code with the Fair Tax, a national sales tax. Rep. Steve Southerland, R-Fla., refrains from a total embrace of it.
The Fair Tax, H.R. 25, is gaining popularity and attention, yet many are unfamiliar with its details. It consists of a 23-percent national tax on consumption, or sales of new retail goods and services. It would apply only to final products for sale, not goods and services used to make final products. The tax would fully supplant the present system, meaning that, while the federal government would tax real estate, new goods, and such services as education and health care, it would extinguish the income tax, the estate tax, corporate taxes, and taxes on savings and investment. State and local tax schemes, including applicable property, income, corporate, and sales taxes, would remain unaffected.
While most Americans find the full 70,000-plus pages of current tax code inscrutable, the Fair Tax is 131 pages long. It would eliminate the Internal Revenue Service, as well as the yearly filing of federal income tax returns. Most individuals, as consumers, would not file papers with the government; retailers would report their transactions to the government each month and remit 23 percent of the proceeds.
All consumers, regardless of income, also get a “prebate,” or refund of the taxes that would be paid on poverty-level consumption, dispersed in monthly checks. This ensures that poverty-level spending is untaxed. Thus the Fair Tax is progressive in application: the more one spends above the poverty level, the more of one’s consumption is taxed.
Fair Tax proponents argue that it will broaden the tax base, thus enabling a lower general rate, which will in turn spur economic growth. Opponents anticipate that specific sectors, such as the tax preparation and accounting industries, and currently untaxed real estate and education, will suffer disproportionately.
Opponents also claim that the 23-percent rate is misleading. Most sales taxes are tax-exclusive, meaning that the tax amount is calculated by applying the rate to an untaxed base. The Fair Tax, on the other hand, like the income taxes it would replace, is tax-inclusive, meaning that the tax base includes the money that will be taken as taxes. Converted to a tax-exclusive rate, the Fair Tax is actually 30 percent, which may compare more transparently with other sales taxes. FairTax.org demonstrates that each number can serve in a different context.
Some conservatives object to a total poverty exemption. With between 11 and 15 percent of Americans living in poverty each year, the Fair Tax would allow this segment to have no tax liability and no ownership of the government, its spending, or its waste. For instance, presidential candidate Michele Bachmann, R-Minn., believes that “We need to broaden the [tax] base so that everybody pays something, even if it’s a dollar.”
Dr. Karen Walby serves on the Florida Fair Tax Education Association board of directors and is national director of research for FairTax.org. She explains that the prebate “provides a similar function to the standard deduction under the existing tax system” and would cost $489 billion, as compared to $945 billion for current tax loopholes.
Stan Willis, founder of Citizens for Responsible Government/Tallahassee, generally prefers the Fair Tax to the current system but wants everyone to contribute at least a bit, which conflicts with the prebate’s open-ended and total exemption for poverty-level consumers.
He says of Southerland’s stance, “I have spoken to several that have met with him or communicated with him in one way or another about the Fair Tax issue. As I understand it, his main response continues to be that he supports the idea, but needs to research it more. That issue is not new and is the MOST researched piece of legislation there is. I think this ‘research’ thing is bothering some people.”
Janis Paulsen, head of the Tallahassee 9.12 Project, is satisfied overall with Southerland but agrees that “he has more of a wait-and-see attitude than I would like him to have.”
Southerland responds, “As I’ve consistently stated, I support the spirit of the Fair Tax and other tax reform measures, but key questions remain regarding the implementation. We must dig deeper into exactly how this historic overhaul will take place, and gain solid assurances that the 23% rate won’t . . . gradually creep higher and . . . that America’s job creators are adequately compensated . . . for collecting federal revenue.”
Southerland generally likes the Fair Tax as a sales tax with a relatively broad base of taxpayers, but he does not support the Fair Tax in its entirety. He has spoken out against the current practice of exempting 50 percent of taxpayers from the income tax, asking, “How in the world could you ever appreciate anything that you didn’t have anything invested in?” However, he also doubts that the reimbursement contained in the Fair Tax—0.25 percent of proceeds— would cover resulting collection costs.
Southerland also fears that the tax may be enacted before Congress and the states repeal the income tax and its constitutional source, the 16th Amendment. If this happens, Americans might pay a national sales tax in addition to the existing income tax. Advocates counter that the Fair Tax bill eliminates the IRS and federal income tax laws and tax returns. The Fair Tax network is also organizing to repeal the 16th Amendment.
Southerland suspects that the Fair Tax, once in place, could be increased. Fair Tax advocates contend that having a uniform sales tax makes it hard to raise the rate without arousing public anger. However, lawmakers might single out particular classes of luxury goods, in effect leveling a higher consumption tax on the wealthy. Dr. Walby concedes that this scenario is possible, but not uniquely so, under the Fair Tax.
Ironically, Southerland’s half-embrace of the Fair Tax may mirror the tea party’s friendly ambivalence.
Note: this story was updated to reflect Rep. Southerland’s response to a request for comment.
You may wish to contact
Rep. Southerland: (202) 225-5235
Zayida Baker covers Rep. Steve Southerland and Sen. Bill Nelson for Tea Party Patriots’ Government Accountability Project. She can be reached at firstname.lastname@example.org.