(H.R. 25) at the federal level with more than $21 million of grass roots research behind it that would replace the IRS and our current income (individual, corporate and business), payroll, self-employment, estate, gift, capital gains and AMT with a single rate consumption tax on all new goods and retail services, at a rate that is revenue neutral to the treasury. To keep the FairTax from being regressive in nature and hitting the poor the hardest, which sales taxes are generally believed to do, it incorporates a family consumption allowance, commonly referred to as the “prebate,” where all FairTax paid for expenditures for the basic necessities of life (e.g., medicine, diapers, milk, shelter, etc.) are refunded at the beginning of each month based on annually determined U.S. DHHS poverty levels, in the vain of the current standard deduction. When the math is examined, the
prebate actually makes the FairTax more progressive than the current U.S. income and payroll tax system, due in large part to the regressive payroll withholding tax’s elimination, which accounts for more than 40% of U.S. Treasury receipts, and hits the working poor especially hard. Coupled with keeping our entire paycheck given no payroll withholding taxes, the working poor benefit greatly in a FairTax system relative to an income and payroll tax system. Rather than keeping track of our income, expenditures or various products we consume and whether or not they are a necessity or a product politicians deem essential, etc., the prebate is a simple mechanism where every legal resident has the FairTax refunded that they will inevitably spend on life’s necessities at the beginning of each month, without a cadre of lobbyists attempting to influence legislation to differentiate between which mustard brand should or should not be free of tax at the register (e.g., Grey Poupon gourmet mustard is taxed but
French’s mustard is not, etc.). You might have surmised, and it is in fact true, that when we purchase used items, (e.g., used car, clothing, etc.), a resident can legally avoid paying taxes since the FairTax is a tax once and only once, on all new goods and services. Imagine the boon to the recycling industry, waste reduction and energy and environmental conservation! Further, business to business sales transactions are not taxed, as the FairTax is only imposed on the final retail sale to the consumer (e.g., new shirt at Walmart or haircut at Supercuts), which means the build-up of embedded taxes in the cost of everything we consume is eliminated, which lowers the ultimate retail cost of goods and services. What a straightforward, efficient, fair, convenient and simple idea. Were these aspects of a tax system that the AICPA touted above? At this point, Alabama is the state
furthest along in their journey to embrace tax reform at the state level, having introduced in their current 2020 session state bill HB4, the Alabama Economic Freedom Act. Upon examination of Alabama’s HB4, it eliminates the state’s personal and corporate income, estate, inheritance, sales and use taxes with a single rate consumption tax (8.03% in Alabama’s case) on the purchase of all new goods and services, at the register so to speak, with no FairTax charged as businesses sell to other businesses. Based upon Alabama’s particularly needed jurisdictional allocations, HB4 outlines that 80% of the tax collected at the point of sale will go to the state’s treasury apportioned amongst the state’s Education Trust Fund, State General Fund and other allocations. Te remaining 20% collected is apportioned 40% to each state county, prorated by population, and 60% to each state municipality. Occam’s Razor dictates that a theory should provide the simplest possible
viable explanation for a phenomenon. Others suggest that good theory exhibits an aesthetic quality, that a good theory is beautiful or natural. As it relates to taxation, the fact that we need articles to outline how to make the current tax system less cumbersome and intrusive in our daily lives points to the fact that the current system is anything but efficient, convenient or fair. Te FairTax on the other hand naturally promotes economic expansion, convenience, freedom (from intrusion, tax forms, tax returns, record keeping, audits, civil-asset forfeiture, etc.), and is proven to reduce illegal tax evasion relative to an income tax, since it takes two to tango, so to speak, to evade a sales tax. Te FairTax is naturally efficient, even as it relates to the exponentially increasing problem of illegal income tax evasion. An Oklahoma FairTax system would need only minimal analysis for the particulars of Oklahoma, given the fact that the FairTax is the most researched piece of potential legislation in U.S. history. Te research, including studies from the former head of Harvard’s Economic Department, indicates an economic powerhouse would be unleashed by becoming a 0% individual and corporate income tax state. An Oklahoma FairTax system could in fact be one of the key ingredients in accomplishing Governor Stitt’s desire to improve Oklahoma’s tax laws and become a Top Ten state, if not even a top five state. As it relates to our vision for true tax reform, as opposed to rearranging the deck chairs on the Titanic, an Oklahoma FairTax system would fundamentally reform the state’s tax system, be fair to the poor due to the prebate and eliminate arguably one of the most freedom-stripping tax systems of all, the income tax, in addition to the seldom complied-with use tax.
July/August 2020
CPAFOCUS
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