Ok, so two nights ago I wrote a little bit about the history of the income tax, and what it has exploded into today. Least to say, our tax code is an absolute disaster of around 50,000 pages worth of confusion. So, what is the FairTax and why should we be giving this idea consideration? Simply put, the FairTax is a way to redefine our country’s income taxes. The federal income tax, social security tax, medicare tax, estate tax, corporate tax, and the alternative minimum tax would all be eliminated entirely. They would be replaced by a 23 % national sales tax on all consumer goods at the retail level.

The FairTax has had its fair share of enemies and false accusations. This is one of the biggest quoted accusations and it comes from MSN:

How much must pretax prices go down before you’re comfortable paying an additional 30% on your home purchase, kid’s tuition and doctor appointments? Increasing the cost of buying a home by 30% would not stimulate the housing market. On a house currently selling for $200,000, a 30% tax means you have to borrow $60,000 more just to get in the door. That doesn’t make a lot of sense.

This is an extremely deceitful accusation. This accusation claims that the cost of buying a home would increase by 30%. Simply not true. What goes in to the current cost of a product? A company prices a product based on the margin of income it will receive from selling that product. Taxes eat away at your margins. If all income taxes – including that dreadful alternative minimum tax – were to be completely eliminated, the price of all goods will immediately drop. The net increase in the final price AFTER taxes would be small. Now, bear in mind, you will have 100% of your paycheck due to zero income taxes. In today’s current system, if you are make $100,000 a year, you might be able to actually take home about $70,000 after income taxes (and that is just for the federal income tax). Imagine if you get to take home 100% of your actual paycheck. Even those who might be on salary for say…$35,000 still have taxes deducted from their paycheck. After their deductions, they might only take home around $27,000. Now, for someone only making $35,000 has no business buying a home in the first place. That actually makes a lot of sense.

One of the key elements of the FairTax is the prebate program. Now, I am still just a little skeptical of how this would be able to be implemented efficiently, but none the less, it is easy to understand. The prebate program is basically a tax refund on household necessities that are purchased during the year. The way that Neal Boortz and John Linder made this fair is that the prebate is not based on the amount of money you make. Instead, it is based on the size of your household. This completely eliminates any chance of class warfare. Boortz explains that this would be implemented through government estimates on what someone on the poverty line would spend on basic necessities per year. Each month, those families would receive a check to help balance out the taxes paid on basic living necessities. No, cable is not included.

Boortz and Linder make another excellent observation. There is a lot of money (estimated in the trillions) stored overseas or in other tax havens strictly due to our income tax structure. What do you think would happen to that money if it was not threatened? That money is still being taxed wherever it sits, but at a much lower level than the current US tax code. If the tax threat is eliminated entirely, that money will make its way back to the States. Not only that, but businesses will be flocking here. Why? Well, their tax liability would be zero. This would give global companies a huge advantage on their competition outside of the US. No taxes, higher margins, cheaper products to get the business. It is as simple as pie.

Now, how on earth will the government be able to fund itself on one sales tax? Well, a big cut will be from the elimination of the IRS. According to the Government Accountability Office, the IRS’s budget for fiscal year 2009 was $11.4 Billion. The majority of that money is spent for IRS agents to enforce income tax laws. There would be no need for such a thing with the FairTax. The only federal tax is a sales tax that you pay at the counter. Obama’s budget for 2011 is an absurd $3.8 Trillion – the largest ever and by a long shot. Now to simplify numbers, there are roughly 350 million people living in the United States. That would mean each person would need to only pay roughly $1,000 each in taxes from the FairTax. Remember – consumption only. You can bet your bottom dollar that sales at the retail level would explode if everyone was allowed to keep 100% of their income. One thing is for certain though. We cannot afford to continually increase our budget like Obama is doing with the debt levels being as high as they are. Government spending must be cut.

Now, is this a perfect system? I don’t really know if anything can be called perfect when it comes to government and taxes. One thing that we can assume however, is that our private-sector economy would take off. Hong Kong, Singapore, Australia, and New Zealand have the 4 freest economies in the world according to the Wall Street Journal and the Heritage Foundation. Their economies are holding very steady in this world-wide economic mess. If we are able to implement a system, like the FairTax, which would be the ultimate incentive for businesses around the world to move here, I would be hard pressed to see this country entering any type of depression-like situation that we are currently in again.