By Richard Colman
Terrifying is a good way to describe the American tax system.
But there is good news: The tax system can be fixed.
A system called the Fair Tax can be adopted if Congress and the president are willing to act.
The Fair Tax would have only one type of tax.
The Fair Tax would only tax consumption. The Fair Tax would only apply only at the final point of sale. Sometimes, the Fair Tax is called the Consumption Tax.
If the Fair Tax were 30 percent, a bottle of wine with a wholesale price of $10, would sell for $13. (Thirty percent of $10 is $3, bringing the final price to $13. Three dollars would go to the federal government.)
The Fair Tax would eliminate the Internal Revenue Service (IRS).
The Fair Tax would apply to every purchase, whether a good (like a chair) or a service (like a haircut).
The Fair Tax is different from the Value Added Tax (VAT). The VAT imposes a tax at every stage of production.
To illustrate the VAT, think of a pencil. A tax is assessed when a lumberjack cuts down a tree and sells the wood to a pencil manufacturer. Another tax is assessed when graphite (sometime called pencil lead) is also sold to the manufacturer. And VAT applies to the sale of paint that ultimately is put on a pencil. The VAT would also tax the rubber used to make an eraser. When a customer buys a pencil, the VAT would be added to the wholesale price.
In Canada, the VAT is called the Goods and Services Tax (GST).
The advantage of the Fair Tax is that it would eliminate the personal income tax, the corporate income tax, capital gains taxes, and taxes owed on interest and dividend income.
The Fair Tax would also eliminate the payroll tax, which now supports Social Security and Medicare. The Fair Tax would also get rid of estate and gift taxes.
Under the Fair Tax, there would be no tax deductions or exemptions. Expenses for property taxes, charitable contributions, health care, and home mortgages would be prohibited.
With the Fair Tax, there would be no need to collect forms -- sometimes dozens of forms -- showing annual income from wages and other sources of income.
Every April 15, millions of Americans are baffled by the personal income tax. A taxpayer has to have receipts for mortgage interest, property taxes, charitable contributions, expenses related to health care, and more. Then, hours of time have to be spent filling out government tax forms. Alternatively, one could hire a tax-preparer, but doing so could be expensive.
No one is quite sure how much revenue the Fair Tax would bring in. The current federal budget is about $4 trillion a year. Studies would be necessary to determine if a 30 percent Fair Tax would bring in $4 trillion.
The income the government receives from the Fair Tax could be used to fund Social Security, Medicare, national defense, the courts, law enforcement, and interest on the national debt. Currently, the national debt is $20 trillion.
One of the criticisms of the Fair Tax is that the taxation burden would fall most heavily on low-income people, who spend more on consumption than higher-income people, who might have extra funds for investment purposes. However, to assist low-income people, the federal government could send them checks. The checks could help low-income individuals meet such obligations as food and rent.
Of course, Congress would have the power to raise (or lower) the Fair Tax. But that power exists under the current system of taxation.
Under the Fair Tax, could there be cheating? The answer is yes. A merchant selling liquor could ask a customer to pay cash in exchange for a lower price. But cheating occurs now. Think about people going into a store and paying cash for something and receiving a lower price.
If the Fair Tax cannot be applied on the federal level, then the State of California, acting as a laboratory for the rest of the nation, can enact the Fair Tax.
The Fair Tax is not perfect. But a Fair Tax system would be able to replace the tens of thousands of pages of tax law and the enormous complications involved filling out current personal and business tax returns.
In fact, the Fair Tax could be written in one sentence: "Each act of consumption will be taxed at a rate of 30 percent."
Richard Colman is founder and President of Concord-based Biomed, Inc.