Now that Tax Day has come and gone again, and anger is subsiding, let’s spend some time thinking about what a better system might look like.

Have you heard of the “Fair Tax” proposal? I may be late to the knowledge party (Flexo mentioned it briefly in December 2007 when comparing presiential candidates’ ideas), and it’s likely I had disregarded it because I was confusing it with various Flat Tax ideas, which failed miserably in the 1990s. But it’s different; here are the basics:

It’s a Tax on Spending and Nothing Else

Let’s start with the greatest part first: Federal income taxes get repealed. This includes personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes. That’s just about all the big boxes on your 1040. Instead, the Federal government collect revenue from sales of new goods and services (unlike Europe’s VAT idea, used goods are not taxed again).

According to the people who’ve calculated what would be a “fair” tax, a national sales tax of 23% would completely replace the need for all those kinds of income taxes. We’d be collecting the same amount of revenue. In short: because you take home your whole paycheck, the amount you spend or save is entirely up to you. Things in the store would appear to cost more than you’re currently used to, but a $77 item would still cost you $77 (read the complex bit contrasting tax-inclusive and tax-exclusive).

Wealth isn’t Penalized

Under our current progressive income tax system, you’re taxed more when you earn more. Subsequently, wealthy people (for whom I admit I do not yet feel sorry) are likely to complain that they are being “taxed to death”. The most common understandable complaint sounds like this: I don’t benefit x% more from common Government services more than anybody else, why should I pay x% more? And the unsatisfactory answer is always: because nobody else can afford it. (Then the argument goes off onto various tangents, some of which make sense.)

In the Fair Tax proposal, you choose how much you get taxed by choosing how much to spend. One of the assumptions behind the proposal is that if a) you already have plenty of extra money after your budgetary needs are met and b) you’re taking home your whole paycheck, that you’ll buy things that you want. I know I would, and I’m not exactly wealthy.

It’s Meant to be Revenue-Neutral

Replacing Federal income taxes with a 23% Fair Tax is supposed to mean that almost* all common services being paid for will continue as usual.

I ran our household finances through the Fair Tax Calculator and came up with these results:

• 2.40% more spendable income
• $1,984 more purchasing power
• $3,114 less federal taxes

These are fairly modest differences, which makes me feel better, and helps convince me that the idea really is “revenue neutral” and not a scheme to shut down Government services without considering the consequences.

^* Taxes would be much, much simpler, and so the IRS would probably have to lay off some people. CPAs, likewise, would probably need to find other work.

Essential Goods and Services are Not Taxed

Well, sort of. Just like many groceries don’t have sales tax applied now, there are essential staples that none of us can live without that under the Fair Tax plan, you would get reimbursed for. The novel thing is that you’d get a “prebate”: a rebate before it happens. This is different depending on the size of your household, see the full table.

Conclusion

I’m not ready yet to conclude whether this is a better idea. It’s certainly simpler, and on its face it’s very tempting and does indeed seem more fair. I’m going to keep reading all the Pros and Cons I can find (from only reputable news sources, naturally). In the meantime, I’d love to get your opinion.

Start by comparing Fair Tax to Barack Obama’s tax plan and browse the FAQ, where proponents have answered nearly every question I had.

Finally, this isn’t just an idea floating around in the ether. There is a bill proposed in the U.S. House that is up for consideration. If you like the idea, I encourage you to call your congresspeople.

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I started taking a look at the proposals for revision of the income tax code being tossed around by the latest presidential candidates yesterday. The Democrats are in favor of continuing the Bush administration’s tax cuts, but only for certain individuals. They also support a number of tax cuts that I’ll write about in the future.

Meanwhile, here are the Republicans’ thoughts on income tax.

Rudolph Giuliani wants to make the Bush tax cuts permanent and lower tax rates for corporations. He may consider lowering the marginal tax rates for individuals as well.

Mitt Romney, like Rudy, would write the existing tax cuts for individuals in stone and lower corporate taxes. He would like to drop the taxes on interest, dividends and capital gains for taxpayers with an income under $200,000.

John McCain would like to make the Bush tax cuts permanent and further simplify the tax code. McCain is considering removal of the Alternative Minimum Tax, which was originally designed to keep higher income individuals from avoiding a significant portion of what would otherwise be their tax bill. Thanks to inflation, more and more middle class individuals are caught paying the Alternative Minimum.

Fred Thompson would also like to keep the Bush tax cuts on the books and remove the Alternative Minimum Tax. He wants to lower corporate taxes and eliminate the estate tax. Thompson has also suggested giving tax payers a choice between typical tax rates and a somewhat “flat tax.”

Mike Huckabee wants to do away with the income tax and replace the system with a higher sales tax of 30%. Theoretically, the government would send checks to all taxpayers each month to reimburse them for a portion of these taxes to ensure that those who must spend close to their entire income aren’t unfairly burdened.

Your income taxes: What the candidates want [CNN Money]

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