Low income people cannot escape payroll tax, half of which they know they pay, the other half of which isn't actually paid by the employer, but represents just another cost passed on to the consumer and the employee in the form of higher prices and lower wages. Low income people will not pay sales tax under the FairTax on necessities up to the poverty level. And buying used lifts more of their burden. Under income tax, a low income person pays a higher percentage in the form of payroll tax because that tax stops at a level of about $80,000.
There are no business expense tax dodges with the FairTax. Only those things that are not end use are untaxed. If an item is part of something a business is making, it is not taxed. Anything that is a new, complete, finished product is taxed. Mr. Zippy might be able to take home a ream of paper from his copy business, but how much of that would it take to bring down the government?
Right now there is 40% noncompliance, and many more individuals to police than under the FairTax. I do not share your opinion that a noticeable amount of foreign purchasing will take place. Many tax dodgers do so because the income tax is punitive of our hard work and initiative. Under FairTax, we can work harder and get more of a reward than a higher marginal tax level. In working and purchasing, Americans will have more power over their personal finances and their future.
This is the reason Americans for Fair Taxation had this concept researched by a variety of individuals in different disciplines. Some of the effects may not be measurable in strict economic terms.
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One of the biggest arguments for the FairTax is that prices will somehow become a great deal lower when income taxes are removed from the United States. I don't see how that's going to happen at all. I understand the argument: if an employee makes $45,000 in income, he might only get to take home $30,000. If income taxes are removed, the company can just pay him $30,000, the employee is now just as well off, but the company has saved $15,000 in costs that they can pass along to the consumers. But how realistic is it to expect people to take a pay cut when they have to pay a 35% tax-exclusive rate tax on purchases?
Secondly, given the experiences in Japan, I don't see how a proposal which would cause deflation is particularly desirable.
Thanks for your letter,
Mike
Be sure to continue to page 3 for the next letter.
