FLAT TAX vs FAIR TAX

Flat Tax Versus FairTax

Two Tax Reform Ideas That Can Help the United States Economy

With TEA parties growing across the nation, it is likely that the income tax system may be completely reformed with the coming generation of voters.

The Flat Tax and FairTax are thought of by many civic-minded people. The Flat Tax will tax all income above $25,000 for singles and $30,000 for families of four or more at a rate of 15%. This rate would also apply to corporations.
The FairTax has a flat rate as well, but it does not apply to income. The FairTax proposes to levy a 23% inclusive tax on all goods and services, meaning that a cart of groceries today costing $77 before tax will cost $100 with the FairTax. Corporations would pay the same taxes as everyone else, just as the rich would.
With both of these tax plans appearing to have so many similarities, it is important to note some differences.

The Flat Tax Taxes Income While the FairTax Taxes Consumption

To clarify the biggest difference between these two plans, it is important to understand why it matters where taxes are levied.
When the government withholds taxes from one's income, the person who earned it does not always receive the correct amount. Typically, they have more money withheld, resulting in a tax return. This means that the government receives the funds, spends them, and pays back anything they should not have had minus any interest. This is similar to a Ponzi Scheme, except Ponzi Schemes promise large gains and involvement is voluntary.
When income is not taxed, the person who worked for the money retains all of it initially. Since taxes are necessary for schools, roads, police and firemen, they need to be collected somewhere.
If taxes are levied during the buying of retail goods and services, and there is no income tax, the sales tax would have to be higher, but the idea is that higher rate would be paid for by people with more money, allowing them to decide when and where they pay taxes, and how much to the extent beyond their necessary living.

The FairTax Provides up to the Poverty Level While the Flat Tax Exempts Low Income Earners

To further assist taxpayers, the FairTax allows for a monthly consumption allowance, or "prebate," based on the size of a household. This allowance covers the tax obligation up to the poverty level, meaning that if a single person was to buy goods and services up to the poverty level, she would spend a maximum of $10,400 a year. Under the FairTax, she would need $199 a month to cover these taxes, and would receive it at the beginning of each month.
A married couple with two children would be expected to provide for their family at no less than $28,000, bringing their yearly tax assistance under the FairTax to $6,440, or $537 a month. A family of nine would receive $882 every month.
The Flat Tax also assists all tax payers. While taxing income at 15%, a single person will not be taxed on the first $25,000 of his income. Families of four or more will not be taxed on the first $30,000.
To clarify, these amounts are post-deduction. So, if a family of five has two parents earning $50,000 a year, they would have had $7,500 withheld from their paychecks over 12 months. When they file their very simple 10-line income tax form, it will look something like this:

1. Income- $50,000
2. Deduction- 3 children*
3. Deduction- $7,000 in mortgage interest
4. Deduction- $3,000 in medical and dental costs
5. Deduction- $5,000 in charitable giving
6. Taxable Income- $32,000
7. 15% of Taxable Income- $300
8. Taxes Withheld- $7,500
9. Money Owed to Government- $0
10. Money Government Owes Family- $7,200

*$1,000 was deducted per child as it is the current amount for 2010.

Both Plans Bring More to the Economy, but the FairTax has Higher Revenue Potential

With both of these plans, the economy is sure to rise due to the tax haven that the US will become to foreign and domestic businesses. The Flat Tax will collect 15% of corporate profits while the FairTax does not tax profit at all, only spending at 23% (the inclusive rate is used because income is currently taxed in this manner). The current system taxes profits, spending, property ownership, and payroll, among other things.
The US would attract businesses from Mexico and Canada whose current rates are 28% and 19.5% respectively.
While more workers are in the US, the tax base will increase under both plans. 15% of more income under the Flat Tax will be a larger stream of revenue for the government to operate with. However, the FairTax only taxes spending, meaning that anyone buying anything in the US will pay taxes to the US government. This will include the influx of people coming over to work from Mexico and Canada as well as those who claim no income, such as drug dealers and illegal immigrants.
This one point steers the favor into the corner of the FairTax. While the Flat Tax is very favorable compared to the current system, the FairTax has the potential to create more income for the nation while expanding its economy and offering a corporate tax rate that no other country can match.

Sources

Mitchell, Daniel J. "A Brief Guide to the Flat Tax". Heritage.org
Linder, J. Boortz, N. The FairTax Book. William Morrow.
Ellis, Frank. "2009, 2010 Child Tax Credit Information & Calculator". hubpages.com

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