As a country we have reached the end of the line. The revenue generated by our current tax system, according to most experts, is no longer sufficient to meet the voracious need of politicians who spend our hard earned money. If we do nothing, the U.S. will fail financially. Some pessimistic financial experts put that end sometime around 2020, about the time Medicare is expected to fail. Others put it at around 2040, about the time Social Security is expected to fail. Realistically, none of the financial pundits really knows when the U.S. will fail. But my point is this; they all agree the U.S. is going to fail financially at some point. They use euphemistic-speak for our ultimate doom by saying the U.S. "cannot sustain the present course". When you hear "cannot sustain the present course" talk just remember they are really saying the U.S. will go bankrupt.
Everyone talks about the dreaded income tax system, but not the payroll tax system. The average American does not seem to understand that the payroll tax punishes the poor and middle class the most. The payroll tax represents the Social Security and Medicare tax withholding that all Americans must have taken out of their gross pay. Each paycheck we lose 7.65% in payroll taxes to Uncle Sam. The payroll tax generates more tax revenue than the oft-dreaded income tax.
Politicians have prostituted the income tax system, a system that started out as a flat tax, so much so that it now encompasses 57,917 pages encapsulated in our Internal Revenue Code and accompanying regulations. Not to mention thousands of rules set forth in precedents established by numerous tax court cases (and other non-tax court cases). The evolution of this mess began the first day a lobbyist walked into a politician's office and sought some tax benefit. Once the word got around that these lobbyists were sending other politicians on very nice, expensive trips, the rest of the politicians jumped on the lobbyist bandwagon and bent over to accommodate the lobbyists tax demands. Congress and spending are a contradictory relationship. On the one hand Congress has a fiduciary duty to carefully spend our tax dollars. They actually have a fiduciary responsibility not to spend more than the government takes in. On the other hand, they are measured by their constituents (the voters in their districts) by how much money they are able to get from the government for use in their districts. So there's a contradiction inherent in their desire to control government spending and in their desire to get elected. So guess which desire gets pushed to the side. You got it. The control spending one. Thus our deficit.
Our deficit has gotten so big and out of control that, China, the largest borrowing of U.S. government obligations, is now expressing serious concern over the U.S.'s ability to actually make good on all this debt. In other words, China believes the U.S. might go bankrupt and leave them with trillions in worthless U.S. debt obligations.
We owe it to our children to no longer permit our politicians to continue kicking the can down the road to the next generation, in an effort to get elected. So what do we do? We need to end our current income tax system and payroll tax system. There is a proposed House bill (H.R. 25) and a proposed Senate bill (S. 1025) which offer a solution. What's embodied in these two bills is an alternate system of taxation, known as the Fair Tax. No matter what you may have heard that is bad about the Fair Tax, understand this: the opponents to this are primarily politicians and big lobby groups. The Fair Tax represents the largest transfer of power from a federal government to its citizens, the likes of which has not been seen since the American Revolution. The politicians and the lobby groups are frightened for their lives. The Fair Tax threatens the power base these two groups have fought so hard to enjoy. Let's go over some of the key points on the Fair Tax.
Fair Tax Overview:
1. Eliminates the current income tax, payroll tax, estate tax and gift tax systems. This means no more withholdings from gross pay, no more IRS, no more IRS audits, no more IRS inquiries, no more income tax lobby groups, no more tax returns to be filed, no more tax return preparer fees to be paid, no more tax loopholes for favored taxpayers, no more estate tax, no more capital gains tax, no more self-employment tax, no more corporate tax, no more gift tax and no more alternative minimum tax.
2. Replaces our current system of taxation with a national sales tax with a rate of 23%. You pay tax only on what you spend. Thus you become a truly voluntary taxpayer. Something called a rebate (aka "prebate") will be paid by the federal government. This rebate represents the 23% Fair Tax amount paid on all household spend up to a certain level of spend (up to poverty level). Everyone who currently receives a paycheck will receive 100% of their paycheck, not the current 65%. You may think the 23% is very high, but keep in mind that in every product or service you buy, is an embedded income/payroll tax of 22%.
Imagine for a moment if you could bank 100% of your paycheck. Think about that for a moment. How would that improve your life? Imagine for a moment if you had total control over how much tax you pay. Sounds a lot like freedom to me. Freedom is an American ideal. We like freedom. Fair Tax provides us with more freedom over our lives, less intrusion by the federal government and more money to save for a house, college and retirement.
If you want to learn more about the Fair Tax go on to their web site fairtaxdotorg. Don't buy in to the objections that are out there. Politicians and lobby groups are doing their best to make the Fair Tax proposal sound flawed. Their objections are unfounded and each one is easily dismissed by the Fair Tax experts. Remember the author of this blog is a CPA. I make money preparing tax returns and consulting on tax matters. I have nothing to gain in pushing the Fair Tax initiative.
Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of "Rich Habits".
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