Monday, December 19, 2005



Last time I was in America I bought a book, The FairTax Book by Neal Boortz and Congressman John Linder.

The fairtax is a fascinating concept although I am sceptical about much of what the book says. I hope to return to this tax in a later posting.

For the moment it is the concept I want to mention. The fairtax is a turnover tax but chargeable only by retailers. The idea is that it would replace all other Federal taxes including income tax, social security, estate and gift tax and corporate tax. A retailer would simply add a fairtax charge to his prices in the same way that we add VAT in the UK.

The concept is that it would be a universal tax. There will be no exemptions – other than apparently a special exemption for AOL and other internet service providers. The reason why internet access should be exempt but food, children’s clothing, medical services and other necessities of life should attract the tax is not readily apparent. It may be that AOL lobbyists have been far more successful at lobbying Congressman Linder than anyone else!

The fascinating thing about the fairtax is that the authors believe (and say that they have had their figures checked by leading economists) that the rate of fairtax need only be 23%. If find that fascinating. US income tax rates are not significantly different to those in the UK. Joe Average in America pays 25% income tax plus 7.65% social security, a total of 32.65%. In the UK the average Joe pays 25% income tax plus 11% National Insurance.

At least that’s what the average Joe thinks he pays. The effect of allowances reduces the effective tax rate. Nevertheless that is also proposed for the fairtax. The suggestion is that the US could raise exactly the same amount of revenue if they charged a fairtax at 23% but paid each head of household what the authors call a prebate. This is a monthly repayment in advance of the fairtax that the authors believe would be payable on the basic necessities of life.

If the authors are right with their 23% (and I do not myself think that they are right) this suggests two huge lessons which are equally applicable to the UK as to the US namely:

1 The current tax system is very inefficient in raising government revenue, and

2 Hardly anybody understands how much tax they actually pay – or bear, in the context that the price of everything you buy has to reflect the underlying taxes paid by the vendor.

For anybody who is interested in looking further at the fairtax I imagine that they can buy the book from Amazon. The publisher is Regan Books. There is also a fairtax website . I have not yet had a look at this, but hope to do so over Christmas and come back to the fairtax in the New Year.

Robert W Maas


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