If you hear people discussing the Fair Tax Act but aren’t yet familiar with it, you’ll probably wonder what the fuss is all about. One side says that the act will solve a lot of the United States’ taxation issues, while the other points out that it will bring on a whole new set of problems.
If you’re wondering which side is right, you must first understand what the Fair Tax Act is all about. Basically, it will abolish almost all kinds of federal taxes (including income, estate, and capital gains taxes) and replace them with sales tax. If the act becomes approved, the federal government will earn taxes from retail goods, which will have a 23 percent sales tax. Imported goods, secondhand items, and materials bought by businesses to manufacture their products are exempted from this tax.
Of course, you need to understand the pros and cons of the Fair Tax Act. Some of its advantages and disadvantages are listed below:
List of Pros of the Fair Tax Act
1. It eliminates the hassles of paying tax.
You have to admit it: filing your income tax can be a huge headache. Fortunately, if the Fair Tax Act will be approved, you’ll no longer have to go through the hassles of computing your federal income tax since the government won’t ask for it.
2. It can help reduce government spending.
Since the IRS would no longer be needed, the government won’t have to allot funding for it and it can therefore save more money. However, it’s important to note that an agency would still be needed to tackle several tasks, including enforcing the sales tax and collecting state taxes.
3. It lets people keep all of their income.
People will no longer have to pay income tax, so they’ll get to receive 100 percent of their income. This, as experts assume, will lead to higher consumer spending and help stabilize the economy even when certain federal taxes would be abolished.
List of Cons of the Fair Tax Act
1. It places the burden on the lower and middle classes.
Rich people have the option of buying imported goods which, as mentioned above, won’t be taxable. They can also opt to put most of their income in their investments instead of spending it on retail goods. Because of this, the economy will depend highly on the spending of those in the lower and middle classes, who usually have no choice but to buy food, clothing, and other necessities.
2. It’s unfair to seniors.
Seniors don’t earn an income, which means they won’t really benefit from the “100 percent take-home wages” concept of the Fair Tax Act. They’ll also have to suffer from paying more sales tax, even when they had paid high income taxes when they were younger and thus have already done their part in contributing to the economy.
3. It won’t affect state taxes.
The Fair Tax Act will only affect federal taxes, which means state-level taxes will still exist. As a result, many Americans will still have to pay not just federal sales tax but also state income tax and state sales tax! This can be a big burden especially for those who live in high-income tax states (such as New York) and those who live in states that charge sales tax (some states, like Montana and Delaware, don’t).