Flat Tax Vs VAT Tax Vs FairTax ~ MiFairTax President Roger Buchholtz
First, let's address the Flat Income Tax. A simple and flat income tax will remain neither for very long. It will just allow all the tax favors to be bought and sold all over again, which will perpetuate today's corruption of our representative form of government to the point that our representatives too often represent special interests rather than their constituents. In addition, the Flat Income Tax will only slightly reduce compliance and efficiency costs (as all records must be maintained and returns filed) and it will continue the practice of hiding taxes in the prices of the goods and services that citizens buy. This practice of imbedding much of our tax burden (22% of the price of all goods and services is taxes imbedded in the retail price) places American labor and business at a ~20% competitive disadvantage with foreign labor and businesses. In essence, a Flat Income Tax will have no long term benefits and will delay true tax reform for a generation.
I am delighted to hear that you would support a consumption tax if it replaced the income tax. Both a VAT and the FairTax are consumption taxes. How about replacing the income tax, Social Security & Medicare taxes, and death and gift taxes with a consumption tax? There is currently a proposal before Congress with almost 70 cosponsors, called the FairTax (HR 25) that does just that.
Actually, a VAT and the FairTax have much in common, but the differences are critical.
Both tax final consumption only once.
They have the exact same tax base, if they both have no exemptions.
Business to business purchases are not taxed.
The full amount of the tax is paid by the consumer.
Both improve U.S. international competitiveness as neither of them tax exports and are border-adjustable.
How are they different?
The FairTax is a replacement for the federal personal income/payroll tax and corporate tax system. The VAT is proposed as a source of new revenue on top of the individual income/payroll taxes and corporate taxes.
The FairTax has a "prebate" so that no individual pays taxes on their personal consumption up to the poverty. This eliminates the regressive nature of a consumption tax.
The FairTax collects the tax at the retail level, which is simple to understand and comply with. Only sellers of goods or services for final consumption (retail businesses) file monthly tax returns. This would reduce tax filers and compliance costs by 85 to 90%.
The VAT, on the other hand, is collected from all businesses at every stage in the production process. Each business has to keep track of what taxes they paid on their purchase of inputs and subtract it from the tax they owe. This is called a credit-invoice system. It is complex record keeping and especially difficult for small businesses who don't have in-house tax experts.
The FairTax is transparent, the amount of the FairTax being clearly stated on the retail receipt. VAT retail receipts may state the rate of tax, but they generally do not state the actual amount of taxes paid. The visibility of the FairTax provides the natural restraint on the size and reach of government intended by our Founding Fathers.
A VAT is regressive. The European countries solve that by creating all kinds of exemptions in attempts to make necessities tax free. This opens the door for more and more exemptions and vendors start gaming the system to qualify for the exemptions. This encourages the buying and selling of tax favors, similar to today's corrupting trade in tax favors occurring in the U.S. under our income tax system. This undercuts our representative form of government as our elected officials too often represent special interests rather than their constituents.
This combination of the FairTax Prebate (monthly payment to every legal household which offsets taxes paid on spending up to the poverty level, similar to today's personal exemption on our income tax return) and taxing ALL consumption at the same rate creates a consumption tax that is transparent, and much simpler and much less costly to comply with. That is the genius of the Prebate.
$23 million in research on the FairTax and its economic and social impact can be viewed at www.fairtax.org. Feel free to contact me with any questions or for additional information.
MI FairTax President (volunteer)