Pros and Cons of FairTax

A Definitive Look at the Pros and Cons of FairTax

FairTax is a radical proposal of the U.S government that could significantly change the country's economics. In this article, we will look at the pros and cons of this tax reform.
Taxes and duties significantly contribute to the revenue of the nation's treasury. The structure always tends be complex, and there is always an impending question, is the current system proper, fair to the people and good enough. These questions, which have been probed generation after generation, have led to an aptitude of dynamic decision-making among public administrators, policy makers, and government officials who are concerned with public finances. The Fair Tax Act of 1999, also referred simply as FairTax, points out to the advantages and disadvantages of the tax reform.


Before we discuss the pros and cons of Fair Tax Act, let us get a quick overview of the basic provisions. Firstly, the tax would be levied at the point of consumption i.e. during the purchase of goods or services, exactly like a single point sales tax. The second provision is that all family households would be paid a rebate, or 'prebate', of the total sum paid as FairTax till it does not exceed poverty level, on a monthly basis. This basically implies that the tax paid below the total poverty level would be refunded and the consumption/expenditure above the poverty level would be taxed. The rate of taxation and assessment, along with the computation of total amount payable would also be modified, with the proposed rate of taxation being 23%. The assessment of the tax payable, however, indicates that it could value up to 30% of the transaction amount. The fact about the assessment is largely debated and computation procedures have not yet been passed as a law from the Fair Tax Bill, which leaves a probability of a better computation and assessment coming into being at a future date.

Pros and Cons

Here are some advantages and concerns of the FairTax proposal. Let's take a look from a general prospective.

The first instant, positive aspect of the proposal is that the taxation system would be based on the principle of pay for what you spend, instead of pay for what you earn. This would significantly change the social fabric of the economy. Firstly, saving habits would be substantially encouraged and a non-materialist approach would be imbibed in the people. Secondly, the paycheck would not have any deductions, so this would prevent tax evasion. The third significant advantage is that, since the FairTax is progressive, it would affect only spend transactions instead of all transactions. This would eventually lead to curbing of all unfair taxes. The tax assessment is such that services such as Social Security and Medicare would not be abolished. Lastly, the costs of production shall come down substantially, as several 'hidden' taxes, which are included in the production process, would be removed.

People have often assumed that the Internal Revenue Service (IRS) would cease to exist, however this would not be the case, as the tax on consumption would require an equally strong and powerful body for governance.

The major drawback of the system is that it would result into loss of revenue for the government as there are several direct taxes that will cease to exist. The second immediate consequence is that even a small price rise in any faction of the economy will inflate the price of all related goods due to taxation. This would affect product sales and sustaining the loss would prove to be difficult for producers. Proponents, however, argue that the retail price levels would not be affected. Changing tax rates and controlling the existent ones would prove to be more difficult. This system could also encourage cash-based, illegal transactions i.e. black-marketing and reduction of credit card purchases. This could impact bank revenues substantially.

Overall, there are several positive aspects of the FairTax system and it is much friendlier towards the common people; however, the big challenge lies in its implementation.