vs. Flat tax

“Because it would be collected by business enterprises, VAT would be concealed in the total price the consumer paid and hence not perceived as a direct tax burden. That is its advantage to legislators – and its major defect to the taxpayers.” ~ Milton Friedman, 1980

The debate between the FairTax and a flat tax has gone on way too much longer than it should have. Let’s end this right here:

Round 1: Flat Taxers want:

  • A “single flat rate” on taxes. Well, the FairTax gives them that flat rate. 23%; which is much lower than their rate would need to  be in order to be revenue neutral like the FairTax is. See Table 1 below.
  • To “eliminate special preferences“. Well, the FairTax does that. It not only eliminates EVERY loophole in the current tax code, but by taking the powers of lobbying away from those who use them against our INCOME, it prevents any further loopholes from being created.
  • No Double Taxation of Saving and Investment“. Well, the FairTax goes one further and eliminates triple and cascading taxation. The FairTax and the flat tax both remove the income tax bias against savings and investment. The flat tax accomplishes this result with complexities well known to today’s income tax sufferers: Expensing capital costs and exempting the return on savings. The consumption tax accomplishes this same result by only taxing final consumption sales, a simple task common in 45 states.
  • Territorial Taxation“. Well, the FairTax does that too; in two ways: First, it only taxes EVERYONE inside the U.S., including illegal immigrants, tourists, and the underground economy (which BTW, no flat tax plan can ever propose, just because of the income-based nature of the tax). And second, by UNTAXING our exports it increases our capability to compete globally with other countries who do not currently tax their exports.
  • A “Family-Friendly” tax. Well, once again, the FairTax hits the mark with the Prebate. That’s right, the FairTax prebate untaxes necessities up to the National Poverty Level. Meaning that it gives every person (every Family) their taxes back for what they are expected to spend in the following month on items they will need to survive at the lowest possible level.
  • A “Consumption-Based” tax. Well, you can’t get any closer to consumption than actually taxing the consumer at the point of consumption! The Flat Tax Plan actually taxes your income, not your consumption. So what Flat Taxers want is to tax what you CAN spend, while FairTaxers want to tax what you ACTUALLY spend.

Seeing as they both come out equal on many points, but the FairTax excels in many others, it looks to me like the FairTax wins this round, hands down. +1 to the FairTax

Round 2: Flat Taxers claim:

  • Faster Economic Growth. Not faster than the FairTax! According to a broad range of studies, the FairTax has a significant positive effect on economic growth. The flat tax should have some positive effect. Since the FairTax has a better impact on marginal tax rates and an arguably equivalent tax on capital investment, the FairTax has a more positive impact on economic growth. Moreover, because U.S. and foreign producers for overseas markets can produce goods and services tax free under the FairTax, but not under a flat tax, the FairTax has a relatively more positive impact on economic activity in the U.S.
  • Instant Wealth Creation. The question here is: Among which groups? Under the FairTax, the poor and lower-class are helped out of poverty, the middle-class are not hit with excessive taxes, and the rich don’t pay exactly what the poor pay. Under the FairTax, every individual pays what they should pay based on their style of living. If you live a rich, lavish lifestyle, then you will pay for that lifestyle. But if you’re barely able to pay your rent, utilities, and grocery bills then you will find the FairTax will help you make those payments.
  • Simplicity. Although difficult to explain to people, the FairTax is as simple as it gets. The Flat Taxers say “Complexity is a hidden tax amounting to more than $100 billion. This is the cost of tax preparation, lawyers, accountants, and other resources used to comply with the Internal Revenue Code. The Internal Revenue Service even admits that the current tax code requires taxpayers to devote 6.6 billion hours each year to their tax returns.” Yes, they do little to fix it. The FairTax abolishes  the Internal Revenue Service and eliminates the Internal Revenue Code.
  • Fairness. Flat taxers say “A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes“. Yet, they don’t tell you that the RATE which everyone pays is the same across the board. So you and Warren Buffet will pay the exact same rate. However, under the FairTax, if you spend $30,000 or less, your effective tax rate will be no more than 0% (Zero Percent) thanks to the prebate. And the more you spend the more you progressively pay in taxes ($40k = 6%, $50k=9%, $75k=14%, $150k=18%, $250k=20%, $2M=23%). For the pre-prebate tax rates between the FairTax and a flat tax, see Table 2 (below)
  • An End to Micromanaging and Political Favoritism. The flat taxers say “A flat tax gets rid of all deductions, loopholes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy. Not only does this end a major source of political corruption, but it is also pro-growth since companies would no longer squander resources lobbying politicians or making foolish investments just to obtain favorable tax treatment“. But what they refuse to tell you is that the flat tax is still an income tax. That means that the same politicians will be heading up the all new “tax deductions committee” as soon as the flat tax is passed. The FairTax, on the other hand, eliminates those lobbyists permanently by eliminating income taxes altogether. No Income Tax, no reason to lobby for deductions to your income. Sure, there will still be some lobbyists, and they will be needed, but the FairTax purports to eliminate over 1/2 of lobbyists in D.C. – permanently.
  • Increased Civil Liberties. Flat taxers say: “Under current law, people charged with murder are presumed innocent and thus have more rights than taxpayers dealing with the Internal Revenue Service. By contrast, a flat tax would eliminate almost all sources of conflict between taxpayers and the government. Moreover, infringements on freedom and privacy would fall dramatically since the government would no longer need to know the intimate details of each taxpayer’s financial assets“. Under the FairTax, anyone incarcerated for more than 6 months loses their ability to claim the prebate for the remaining time they are in prison. Additionally, the FairTax protects your rights because it is not an intrusive tax, like a flat tax will be – mainly because a flat tax does not eliminate the IRS.
  • Global Competitiveness. No flat tax plan can even come close to the global competitiveness of the FairTax. The FairTax untaxes American Businesses completely. ZERO % tax on business to business transactions in the U.S. and ZERO% FICA taxes. And, the FairTax does not tax exports from any State or from our borders. By removing taxes from our businesses, the FairTax effectively reduces overhead resulting in lowers costs on the global market. With a flat tax on businesses, the businesses are still including those taxes in the goods they export and are not as competitive.

The info above was partially take from here: http://www.heritage.org/research/reports/2005/07/a-brief-guide-to-the-flat-tax

Round 2 goes to the FairTax

Freeing Up the FairTax

  • The FairTax is a “flat tax” on consumption. A flat 23% at the register to everyone; including illegal aliens, drug dealers/distributors, tourists, and the underground economy. Effectively taxing those groups of individuals has not been accomplished here in the U.S. and can only be found in the FairTax Act (HR 25).
  • The FairTax effectively untaxes those living at or below the poverty line; otherwise known as “the poor”. This is something the flat tax does not propose and cannot accomplish because of its income tax nature of “taxing everyone at the same flat rate”. For the vast majority of Americans, living anywhere near the poverty line isn’t an option. But for those who don’t have the option the FairTax is there to assist them, temporarily, until they can afford to spend more money.
  • The FairTax completely eliminates the need for any U.S. citizen to ever file another “tax return” – ever. And yes, a flat tax would only require a “post card” sized return, but the fact remains that you still have to deal with the IRS when you make a mistake on that form – or when they THINK you made a mistake on that form.
  • The FairTax is not a VAT; whereas the flat tax is. Since the FairTax is ONLY collected at the retail level there are no upstream or intermediate taxes imposed on goods sold between businesses; effectively removing the consumer’s tax burden.

There are approximately 24 Countries who have implemented a flat tax. The following table is a list of the Countries who have implemented a flat tax AND a National Sales Tax. (NOTE: The FairTax prevents this sort of thing from happening to the U.S.)

Country Flat tax rate Nat’l sales tax rate
Estonia 22% 9-20% (type of goods)
Latvia 25 22
Lithuania 27 21
Russia 13 0-18
Serbia 14 0-18
Slovakia 19 20
Ukraine 15 17
Iceland 35.7 !! 0-25.5
Romania 16 4-24
Georgia 12 18

So, where else can the two plans compete?

How about:

  • Grassroots Support
  • Reducing Marginal Tax Rates
  • Eliminating Work Disincentives for low-income Americans
  • The ability to convert back to an income tax
  • No annual tax return (or filing)
  • Compliance Costs
  • Reducing Tax Evasion
  • The ease of understanding the code thoroughly.
  • The Transparency of the System
  • Transitioning from the current tax system

Read about all that and more in FairTax vs. flat tax – Real Reform (PDF)

Table 1. A Comparison of the 2007 Tax Rates and Bases
Tax System Current Law FairTax Flat Tax BTT
Net Tax Base (billions) $7,033 $9,355 $7,533 $9,099
Tax-Exclusive Rate 48.25% 31.27% 42.21% 32.43%
Tax-Inclusive Rate 32.55% 23.82% 29.68% 24.49%

The revenue-neutral, tax-inclusive rates are FairTax (23.82%), current law (26.51%), the flat tax (26.76%), and the business transfer tax (24.49%). For comparative purposes, these rates assume that each of these tax reform plans replaces all federal income & payroll taxes ($2.228 trillion) and provides an equivalent standard deduction/prebate.

As you can see, in the table above, the FairTax Base is much larger than that of the flat tax plan, and the reason the Tax Rate (inclusive and exclusive) of the FairTax is much lower than the rest is because the base is so much larger.

Table 2. Comparative Marginal Tax Rates
Type of person Flat tax FairTax Difference
Poor 15.3% 0% -15.3%
Middle-Class 32.3% 23% -12.3%
Affluent (capital) 17% 23% +3%
Affluent (salary) 19.9% 23% +0.1%

More Resources

Some other great resources to learn about the FairTax vs. flat tax include:

4 comments on “vs. Flat tax
  1. Ed Pickard says:

    Excellent presentaton. We need this NOW!

  2. More great FairTax vs. Flat Tax information can be found here: https://fairtaxer.files.wordpress.com/2015/03/gradingthetaxreformplans_10-16-2011.pdf

    It’s too long to post in its entirety, but here are the sections and questions that are asked & answered:

    I. So What is the True Meaning of “Reform”?
    II. Brief Description of the FairTax and the Flat Tax.
    III. How well do these plans meet the criteria?
    — To What Degree are They Neutral between Consumption and Savings?
    — To what degree do they lower or raise marginal tax rates?
    — To what degree do they continue to hurt American producers?
    — To what degree are they neutral between different types of productive activity?
    — To what degree are they neutral as between human and physical capital?
    — To what degree do they reduce the compliance burden on the public?
    — To what degree do they exempt the poor?
    — How fairly do they treat taxpayers?
    — Do they play favorites?
    — How transparent and comprehensible is the plan?
    — How politically stable is the plan?
    — To what degree are there transition problems?
    — How do the plans impact small businesses and farms?
    IV. Conclusion

  3. FairTaxer says:

    Of course it doesn’t say anything about “retirees”, Henry. This page is about the flat tax. You can view the information about seniors/retirees here: https://fairtaxer.wordpress.com/fairtax/fairtax-seniors-retirees/

    Thank you!

  4. FairTaxer says:

    A Graphic Comparison of the FairTax Versus the New Flat Income Tax – CHART 1:
    Comparison of FairTax & flat tax - Chart 1

    A Graphic Comparison of the FairTax Versus the New Flat Income Tax – CHART 2:
    Comparison of FairTax & flat tax - Chart 2

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