Fair Tax

The Fair Tax is a proposal to replace federal taxes (corporate, income, payroll, and the estate taxes) with a single 23 percent tax rate on the retail sale of all goods and services. Like a consumption tax, the Fair Tax would only tax on what people spend instead of what they earn. Since it taxes consumption, at the same rate, it imparts no incentive to consume now as opposed to later and no disincentive to save. This type of tax encourages savings which can lead to increased investment and growth.

If the Fair Tax is accepted, it will replace the corporate income tax that has caused serious efficiency problems. First, it penalizes corporate organizations because income is taxed first at the corporate level and then again when paid to stockholders as dividends. The second major flaw in the corporate income tax is the deductibility of interest payments that favors established companies over start-ups, because the former can more easily issue debt securities. (Norton) Debt securities are taxable to the start up company which causes investors to stay away from start-up companies due to unknown security risks. It therefore makes the corporate income tax a tax on entrepreneurship. This eventually forces some firms to leave the market which has reduced the demand for labor, wages, and the supply of goods produced by corporations. With the supply of goods reduced, prices rise. Thus, part of the corporate income tax is paid by shareholders, part by workers through lower wages and fewer jobs, and part by consumers through higher prices. The Fair Tax repeals all this giving businesses equal chances to thrive without the burden of heavy taxes.

Although many small businesses are not subject to the corporate income tax, it’s the individual income tax that affects most businesses in the United States. This is because business earnings are often paid through the individual income tax when passed through to business owners. However, the Fair Tax will reduce compliance costs, tax...