How the Fair Tax is not Regressive

Herman Cain, now a candidate for the Republican nominee for President, is proposing a 999 tax plan that would put a 9 percent tax on income, 9 percent tax on business, and a 9 percent sales tax as a tax system that would replace the entire tax code. This plan is not permanent and eventually becomes the "Fair Tax". The Fair Tax would replace the entire tax code that we currently have and replace it with a simple 23% sales tax. The number is not official but it would be around that amount.

The purpose of this blog entry will be to explain how the number one argument against this tax system, its regressiveness, is false. Regressive meaning it will penalize the poor and middle class more so than the rich. Our current tax system in progressive in that it taxes rich people more as you make more money. That is absolute truth contrary to what you see in the media and by some on the left who try to mischaracterize the truth.

The reason Cain's "Fair Tax" is NOT regressive is because of a number of reasons:

First: The elimination of the Payroll tax. All workers who work legally and are paid legally pay two taxes on Medicare and Social Security even if they end up paying no other Federal Income Tax (FICA). That tax is roughly 7%. In reality it is 14% because your employer must match that tax with what is termed their "payroll tax". Now businesses are not stupid. When they hired you they took into consideration what it costs to hire you and adjust your pay accordingly. In other words, you would be paid slightly more if not for this payroll tax. Well now this tax is eliminated. Thus not only do you not pay that tax, but your employer will likely pay you more since they no longer have to match your contribution as well.

Second: You get a Pre-bate check for all products up to the poverty level. In other words, whatever the government statistic is for what it would cost to raise a family and pay for food to feed that family and other necessities, you would receive a check to cover that part of the tax. In other words, the "Fair Tax" will only be a sales tax on items you buy that are above the necessity level. Thus the poorest among us will continue to not pay taxes on those items. If your income is only at the level in which you can only afford the basic necessities of life, you will still not be paying taxes to the federal government on those necessary items.

Third: With businesses no longer paying taxes, it will now be easier to get a job and wage rates are likely to rise as well. this helps the poor and the working class, as well as the middle class more than anyone. That is not regressive that is amazing!

Fourth: this tax will not cause the price to change that much. Some are confused because you were just told that the tax would be a new sales tax of roughly 23%. That is true. But currently due to our tax structure where all businesses pay taxes, and often in large amounts, those taxes are passed down already into the price of goods. You just don't see it. When a business provides the raw materials for a good, that business is taxed on its profits. The business that transports the goods to the company that makes it into a saleable item also pays taxes. The marketing firm that is paid to advertise the product is also paying taxes. And finally the store and company that you buy from as a consumer, also pays taxes. Those taxes are passed down to you as the customer. Why? Because the money companies use to pay those taxes are obviously from their constomers. So when all those taxes are eliminated, as they would be under the Fair Tax, prices would drop. Many economist believe roughly as much as 20-22%. Thus when the Fair tax is then placed on that good, the price will only go back up to where it was originally and maybe just slightly more. But hey remember earlier, you are making more money now and you are not paying income taxes, so you have more money to spend anyways.

Lastly: The tax is only on new items bought not old or used items. Thus since most working class people buy "Durable" items that are most often used, such as a house or car, they will not be paying taxes on it. It is the more wealthy that buy new things, they will pay the "Fair Tax".

This tax system is not regressive. It will help the poor in fact. There are concerns that I have for it. But those concerns are not NEAR the concerns I have with the current tax structure. Thus I can fully support this new tax structure. I would also support the Flat tax as well. But the current tax system, is a failure and is outdated... and quite frankly, should never have been started to begin with.