America may be moving closer to a dramatic overhaul of its tax system.
One of the most potentially far-reaching legislative items is currently before the House of Representatives’ Ways and Means Committee. It would affect every taxpayer throughout the U.S. Introduced earlier this year, the continuing budgetary crisis is giving the bill an additional boost.
The Pew Research Center notes that “The public sees the nation’s tax system as deeply flawed: 59% say “there is so much wrong with the federal tax system that Congress should completely change it.” Just 38% think the system “works pretty well” and requires “only minor changes.” These opinions have changed little since 2011.”
There are numerous views of why the system is flawed, ranging across the political spectrum, but there is widespread dissatisfaction with the current process.
One important concept has been introduced by Rep. Rob Woodal (R-Ga.) H.R. 25, , “the Fair Tax Act of 2015” would replace the income tax with a national sales tax. ,
According to the Congressional Research Service, H.R. 25 would replace the current tax system with a national sales tax on the use or consumption in the United States of taxable property or services. This would be in lieu of the current income and corporate income tax, employment and self-employment taxes, and estate and gift taxes. The rate of the sales tax under the proposal would be 23% in 2017, with adjustments to the rate in subsequent years. There are exemptions from the tax for used and intangible property, for property or services purchased for business, export, or investment purposes, and for state government functions.
Under the bill, family members who are lawful U.S. residents receive a monthly sales tax rebate (Family Consumption Allowance) based upon criteria related to family size and poverty guidelines.
The states would have the responsibility for administering, collecting, and remitting the sales tax to the Treasury. The measure abolishes the IRS by 2019. To insure that it doesn’t become an additional tax instead of a total substitute for the income tax, the legislation would self-terminate if the income tax authorization amendment to the U.S. Constitution (the 16th amendment) is not repealed within seven years of passage.
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According to fairtax.org, which advocates for the concept,
“Under the FairTax, all Americans consume what they see as their necessities of life free of tax. While permitting no exemptions, the FairTax (HR25 / S155) provides a monthly, universal prebate to ensure that each family unit can consume tax-free up to the poverty level, with the overall effect of making the FairTax progressive in application. This is not an entitlement, but a rebate (in advance) of taxes paid – thus the term prebate. Everyone pays taxes at the cash register.”
Some have questioned whether the idea could work. Forbes Magazine the challenge:
“The rate is too high for it to work as a simple sales tax: there will just be too much dodging of it. It would certainly be possible to make a consumption tax work. It’s certainly possible to have a value added tax, or VAT, at that 25% or so rate. There are other ways of constructing consumption taxes as well: although they would require the filing of tax returns and that’s one of the things the Fair Tax is trying to do away with.
“The basic and simple problem is that trying to charge 25% or so in one single step at that point of final retail sale is too high a tax rate for it to be regularly achievable. You would almost immediately have a spate of long firm frauds. Plus a general move towards a grey, cash based, economy which simply ignored the existence of the tax. This is precisely why those countries which do have a high consumption tax rate do it as a VAT, not as a sales tax.”
(Investopedia defines a VAT as “A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale… The amount of value-added tax that the user pays is the cost of the product, less any of the costs of materials used in in the product that have already been taxed.)
Both the Fair Tax and the VAT concepts are closer to the Constitutional model of the relationship between the federal government and private citizens than the current income tax system.