I’ll be teaching some financial literacy lessons in the coming weeks. There are always some students who are shocked to learn that they will not keep every dime of the salaries they earn, nor will the cost of an item they purchase at a store be based only on the listed price. When we calculate payroll taxes, sales taxes and income taxes they begin to realize how their earnings will slowly decrease from what they thought they might be. They quickly learn that purchasing a twenty dollar item will require more money than a single twenty dollar bill.
The mere mention of taxes in polite conversation often elicits groans and even anger or dread. Taxes without fair representation in Parliament led to a very famous revolution in the British colonies that would one day become the United States of America. The art of supporting a government with taxes of one sort or another has never quite been mastered to the satisfaction of either the citizens or the politicians. Much of the disagreement among the American people centers on how to most fairly create taxing structures that will provide adequate funding without placing undue burden on a particular group of taxpayers. Sadly our country has yet to find a system that seems to work for everyone, so ideas for change pop up regularly.
We Americans pay a variety of federal, state and local taxes. On the national level income mostly determines how much each individual will pay. Of course there are a variety of tax laws that allow deductions and rebates. Often the wealthiest among us have so many legal ways of eluding taxes that they pay very little or none at all while the middle class seems to bear the brunt of funding through taxation.
The dreaded tax season drains the earnings of the average taxpayer on a yearly basis. In places like Texas where I live there are also sales taxes that add to the cost of non food or prescription items as well as property taxes that pay the local bills. We tend not to notice how much sales taxes pull from our coffers until we purchase a high dollar item, but if we were to save all of our receipts and calculate the total sales taxes we paid for a year we might be shocked at the additional drain on our incomes.
So how should we pay for all of the services provided by our federal, state and local governments? Which kind of taxes provide the most funding? Which taxes are the most fair? Who should be getting breaks on their taxes, only the poorest among us or everyone? Should the wealthy be paying less than the middle class? These are questions that we all pose and consider and even study. Somehow there seem to be problems with every type of taxation that we try, but we wonder if one way is better for all than another.
In his bid for leading his Republican party Speaker of the House Kevin McCarthy agreed to bring a bill called the Fair Tax to the floor for a vote in the House of Representatives. Essentially the idea behind this bill is to eliminate income taxes and substitute a national thirty percent sales tax as the mechanism for revenue. The IRS as we have known it would no longer exist. Yearly payments of income taxes would be gone. Citizens would pay the thirty percent tax as they purchased items including food and prescriptions all year long. If an item was listed for one hundred dollars they would pay an additional thirty dollars in taxes. Sounds simple, but maybe it’s not.
Those who tout this idea insist that it would place the onus of how much each person pays to the government each year on their individual spending habits. They insist that each citizen would have more control over their incomes by deciding how much they are willing to purchase thus determining how much tax they pay. Unfortunately those with lesser funds would be disproportionately affected by such a regressive tax and the richest would still have shelters for their businesses that would likely result in tremendously lower proportion of taxes for them. Even with rebates for the poor this kind of tax would actually make it more expensive for all but the richest to buy their most basic needs. This kind of tax would no doubt have the worst impact on the elderly whose incomes are generally fixed. I even wonder if such a tax would create a black market for goods and services unlike any we have ever before seen.
There is little chance that this bill will take effect because it would also have to be approved by the Senate, which is unlikely, and it is certain the President Biden has already insisted that he will veto this bill if it were to pass. Still, even the symbolic passing of such a bill in one branch of the government is a wakeup call for all of us. We may need some changes to our taxing systems but this plan is a non-starter for so many reasons. The Brookings Institution and other reputable financial researchers have all balked at the idea that such a plan will either provide the needed funding to run the government or the fairness that it portends to seek for the American taxpayer. We all need to be vigilant when such plans are proposed and note who is backing them when we vote in elections. It’s important that we contact our representatives to voice our opinions on issues that will hit us in the pocketbook. If we allow a small group of radicals to determine our financial fate, then we are once again victims of taxation without representation.
I hate paying taxes as much as anyone. Like our Founding Fathers I balk at unfairness in the way that tax laws are sometimes written. Nonetheless, I shudder at the thought of allowing a hair brained idea like the so called Fair Tax bill to even be considered. Let your voice be heard. Make sure you are being represented. Our ancestors died for our rights. We should always protect them.