by Cameron Chapman

Created on: May 06, 2009

Why Consumption Based Tax is Better Than Income Tax

Income tax has been the primary taxation scheme in the United States for nearly 100 years. During that time, the tax code has become more and more complex, to the point where it is now almost impossible for the average person to even begin to comprehend all the requirements and loopholes it contains.

A consumption-based tax, on the other hand, is infinitely simpler. The current proposal for a consumption-based tax, HR 25, otherwise known as the Fair Tax, means that purchases of new goods would be taxed at a roughly 30% exclusive rate (23% inclusive). This tax would replace ALL income-based taxes, including social security, medicare/medicaid, capital gains, self-employment taxes, estate taxes, gift taxes, and taxes on interest and dividends.

The immediate effect of this would be that ever American would effectively get a pay raise. There would be no more withholding from workers' paychecks. Retirees would no longer have to make tax payments on their pensions and social security incomes.

Many have argued that this kind of tax scheme would unfairly tax the poor. After all, don't people in lower income brackets spend more of their income on purchasing things, while the rich spend less? But a provision has already been made for this. Under the Fair Tax bill, every American, regardless of income, would receive a prebate (likely on a monthly basis) to offset taxes spent on necessities. This would be based on the poverty level and family size. For example, if it is determined that a family of four needs $24,000 per year to cover necessities, they would receive a prebate of $5,520 per year ($460/month). This offset means that, in effect, that family would have a yearly income of $29,520 per year.

Others argue that the Fair Tax would mean goods would become much more expensive. This isn't necessarily true, though. First of all, there would be significant savings for companies. Currently, employers pay half of the taxes for employee social security and medicare (7.5% of the worker's wages). This cost would be eliminated. In addition, companies spend huge amounts of money on tax compliance each year, both for payroll and their own corporate income taxes. These costs would also be eliminated. It also means it would be much, much more difficult for companies to find loopholes in the tax code. They would pay their suppliers the same tax that consumers pay for new goods. While the cost of consumer goods would likely go up some,

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