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Fair Tax

02/25/2013

"Fair" Tax Controversy

It’s tax preparation season for Americans, and it’s only natural for us to be questioning the need for income taxes, how income taxes are spent, and income tax rates. Hand holding money

For the past few years, the debate to end income taxes altogether in favor of consumption taxes has gained momentum.  A positive spin labels the taxation method “fair” taxes as only consumers who can afford to buy products and services would pay the tax that would then fund government programs that benefit everyone.  However, many experts say sales taxes cannot be relied upon to work that way.

As a review, the idea is to eliminate federal income taxes and replace them with sales and use taxes on everything a consumer buys.   Proponents say it would replace the following federal income taxes:

  • personal
  • estate
  • gift
  • capital gains
  • alternative minimum
  • Social Security
  • Medicare
  • self-employment
  • corporate taxes

Arguments against a federal consumption tax say it would have to be so high to replace income tax revenues it would affect consumer spending and product demand.

They also worry how it will affect the availability and price of products and services which are already subject to excise taxes before they hit the marketplace.

While much of the attention has been focused on a nationwide federal sales tax, state-by-state lawmakers are also considering a variety of income tax changes that could add to the mix.   

For example in Missouri, House Joint Resolution 25 proposes a constitutional amendment that “phases out state individual income tax and replaces the current state sales and use tax with a state sales tax on retail sales of new tangible personal property and taxable services.”

Another bill, HB 422, would authorize Missouri to enter into a “multistate Streamlined Sales and Use Tax Agreement” and phases in a flat income tax rate, eliminates all state tax credits and increases the sales and use tax.”

Those who oppose consumption taxes question how consumers will behave if they have to pay both federal and state sales taxes on every purchase they make. 

Some estimate that a federal sales tax would have to range between 15% and 20%.  State sales taxes ranging from 3% to 12% could be added to that.  Additional regional sales taxes for things like highway construction, schools, special projects and more also have rates that may add another 1% to 5% to the total.

What would happen if all purchases of products and services would be subject to an average 25% to 35% sales tax or higher?  The debate on the effects of switching tax rates and taxing methods has spread nationally and has gained momentum as lawmakers search for ways to boost sagging economies.  For more on the ups and downs of the sales tax debate, watch this edition of McRuer Money Minutes.