Today, Carolina Journal Radio’s Mitch Kokai discusses a proposed tax system that has been dubbed the “Fair Tax” with Larry Hull, a North Carolina resident who spent 25 years in the financial services industry. (Go to http://www.carolinajournal.com/cjradio/ to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: So, Larry, what is this tax system idea all about?
Hull: The Fair Tax, as we like to call it, is a national retail sales tax. And we think it would be a much better system as compared to the way we currently fund our federal government through income taxes because the income tax system, right now, discourages people from saving and investing because dollars put into those types of accounts are going to be taxed. And so, in fact, it kind of encourages people to consume, whereas with a national retail sales tax — the Fair Tax — everyone would keep their entire paycheck. There would be no deduction for federal taxes. Of course there would be the smaller amount for state taxes, but no deduction for federal income tax, no deduction for Social Security or Medicare taxes.
As a result, people would have more disposable income. And, with all those additional dollars out there in the marketplace, interest rates would be something on the order of 25 percent less than what they currently are. And with this approach, it would actually result in fewer tax dollars because businesses would be collecting those tax dollars and passing them on to the federal government, as opposed to all of those individual families out there, as well as single individuals, who would be filing their tax returns.
Kokai: There may be some people who say, “Wow, that sounds like a great idea, but how could it work?” What is the evidence you have that something like this would be a good system that would work?
Hull: I’m really glad you asked that question, because this is something that has been studied extensively by economists at various major universities here in the United States for quite some time. The Americans for Fair Taxation — and you can look up www.fairtax.org — that is an organization that has been around since 1995, and literally millions of dollars have been spent to research this. And, as a result of their findings — they were not focused strictly on a national retail sales tax — but they did determine that that is the best way to go as far as efficiency, in terms of collecting those dollars. It also results in less fraud. There are less dollars that are just left in the underground economy, because, you think about it, anybody who is, say, participating in some sort of illegal activity, they are going to be taxed through the national retail sales tax, the Fair Tax, every time they buy something.
So, we envision that through this, the economy would grow at a much greater rate — two to three, maybe even four times the current rate. As I said, interest rates would be about 25 percent less. The stock market would be soaring. We are talking about a tremendous gain in the stock market. People would be saving upwards of 76 percent more than what they are currently saving, and there is some 10 trillion dollars that left this country to avoid taxation. A lot of that would come back. We would attract other capital from other countries around the world because it would be a much more favorable business environment.
Kokai: Larry, some of the folks who support at least some version of the current system that we have say, “Well, you need a progressive income tax because, that way, the rich end up paying a fairer share and the middle class doesn’t get socked with the entire burden.” Why is the Fair Tax, as you’ve described it, more fair than that sort of system — the progressive income tax?
Hull: I like that question because that is something that we get on a regular basis. Under the current system, yes, the higher-income individuals do pay a greater percentage. Right now, something on the order of 97 percent of all federal taxes are paid by the top 50 percent [of] income earners in this country. Whereas, the bottom 50 percent pay a little bit more than 3 percent of all federal income taxes. Now, with the Bush tax cuts of a few years back, it did favor everybody pretty much across the board, but a lot of people griped about the fact that the lower-income individuals still had to pay the payroll tax.
Well, under this system, there is no payroll tax. Everybody keeps their entire check that they receive from their employer. There is no deduction for federal — or rather for FICA — that is of course the Social Security aspect, or the Medicare portion. And with that in mind, they also, as a result of that, have more income to spend. But they also — everybody gets a “pre-bate” at the beginning of each month, everyone would be entitled to something on the order of $100 — [that] is what we anticipate right now, at the beginning of each month. So, a family of four — that is something on the order of $400, and actually maybe more on the order of $500 per month that they would receive — which is actually greater than what is structured under the current system, the earned income tax credit. So they would get a greater dollar amount added to their checking account, electronically, at the beginning of each month. And what that does is, it offsets the tax that they would pay on the necessities of life.
So, essentially, this system, the Fair Tax system, would un-tax the poor in this country. And then, anything that they decide to spend above the poverty level, which is a little bit less than $20,000 each year, as far as buying things over and above the necessities of life, then of course they are going to incur a positive amount that they would have to basically be submitting to the government by way of retailers, in terms of a national retail sales tax. But the higher-income individuals, you think about it: They are buying the new cars, the big cars, the Porsches, Mercedes, whatever. They are going to be spending a much greater portion of their income, in terms of funding the federal government through this national retail sales tax, than the lower-income individuals who might be buying more economical vehicles, smaller, maybe used vehicles and such.
Kokai: Another idea that has been floated as a possible alternative to the current tax system is what is called a “flat tax.” Compare the Fair Tax to the flat tax, if you will, and then tell us why you think the Fair Tax is a better option.
Hull: Okay. The difference between the two — a couple key points — with the flat tax, there is still the payroll tax, so you don’t un-tax the poor in that regard. And then because it is an income tax, there is no provision — unlike the Fair Tax, which does away with the 16th Amendment, which allows for the federal income tax — so there is no disolution of the IRS per se by the flat tax. And instead, with that flat tax, there could be, some time down the road, an increase in the rate that would be charged — that would be levied on individuals. Not so with the Fair Tax, and that’s basically why we think it’s a much more superior vehicle for raising revenue. It’s much fairer than going the route of a flat tax.