Sunday, July 8, 2007

The Indiana FairTax Proposal

(this article edited on 7-12-07 to reconcile with "as proposed" to the Governor's staff)

The recent property tax disaster has opened the door for an idea thats time has come. Replacing the multi-tiered (income, property, sales) tax system in Indiana with a single-rate sales/consumption tax on NEW goods and services.

There is a Federal proposal in Washington D.C. that currently has 60 co-sponsors in Congress, and Michigan and Georgia have also been looking at a similar plan for their states; but, there is now a tremendous opportunity for Indiana to lead the nation in tax reform and make itself an economic powerhouse at the same time.

Before getting into the details we have to get a few basic truths and principals out of the way.

  1. Only people pay taxes. Corporations only pay taxes to the extent that they have collected them from the people who buy their products.
  2. Property taxes are woefully regressive and create an environment where a person can never truly own their property because they have to "rent" it from their government each year. As in item 1 above, a landlord paying more in property taxes must pass that cost onto his tenants so even renters end up paying property taxes indirectly.
  3. That encouraging people to save money and not spend it all is a good idea.
  4. That all people, regardless of immigration status or "legality of vocation" (ie: whether or not what you do for a living is legal) should pay their share.
  5. That something needs to change and "tinkering around the edges" isn't enough.

If we can agree on those items, or at least three out of five than there is no reason not to support the Indiana State FairTax proposal (or even the national version). If we can't agree on these things, please read "Economics in one Lesson by Hazlitt" and "Federalist #21 by Alexander Hamilton" and then see if you've been persuaded.

So we start by eliminating property taxes, this alone would save an average of 3% of most family's entire income that is current paid in taxes. Then we get rid of the 3.4% State Income. So, right off the top we've eliminated 6.4% of what people EARN. Most likely, local taxes would get rolled into this kind of program with a "local option" sales tax component.

We then increase the State Sales Tax to what would most likely be something in the 9.5% to 10% range (instead of the current 6%) on what people SPEND for NEW goods and services. One option that might be evaluated is a "PREBATE" version, similar to the national bill, but the current proposal does not include that element. This is the simplist implementation so that the politicians have fewer things to tinker with and fewer favors to offer "friends".

The effects of this would be as follows:

  • One tax system, easy to understand and easily visible on every receipt.
  • Taxed only once on NEW products and services (used goods not taxed).
  • Money is no longer "withheld" before you ever see it.
  • Prebate provides equal tax relief to all families and zero-tax liability for the poor.
  • Only people at the higher end of the spending/consumption curve pay the full rate.
  • Education would be tax-free if adopted with a no tax on tuition policy.
  • Broadens the tax base to ensure illegal immigrants and "underground economy" pay.
  • No need to file a tax return. It is no longer the states business how much you made.
  • Tax is now optional. You choose to pay taxes when you buy something.
  • Savings can be done with pre-tax dollars. Save money faster.
  • Interest and dividends would no longer be taxed. Save for retirement faster!
  • Decreases the tax burden on real property, increasing values.
  • Eliminates uncertaintly in planning for a persons tax burden.
  • Makes Indiana an IDEAL place for savings, investment and job creation.
  • Businesses would have an incentive to move operations here and create jobs.
  • No more "special tax deals" needed to lure those businesses here.
  • Reduces cost of compliance for individuals and employers.
  • Reduce size of State government by leveraging existing Sales Tax enforcement.

Now, of course, there will be people who dislike this idea because they don't like some aspect of it. What about all of the aspects of the current system we all dislike? We should never let perfect get in the way of better.

For more information go to:

For informtion on the national version visit: or


Debbie said...

I see you have a link to on this blog. I found this article there on the fair tax and thought it brought up a lot of interesting points. I also saw that the fair tax people had articles and such where they countered other criticisms but I counldn't find anything that seemed to be directed at a lot of things mentioned in this article.

Can you point me to anything that counters the huge amount of problems this article points out in the fair tax idea?


Sean Shepard said...

Debbie - The article you reference seems centered around some of the hyperbole that one of its most well known supporters, Neal Boortz, engages in and is patently negative and biased. To be completely open, I have "issues" with The FairTax; however, I'm not going to let "perfect" get in the way of "better".

To address a couple of points directly:

Voluntary tax. To the extent that someone can close their wallet and not purchase anything but the necessities of life; which, with the prebate would be tax-free a person could indeed severely restrict their tax liability.

The rate. For comparison purposes, the rate is generally quoted as "inclusive".
The current tax tables are "inclusive" rates for income taxes. If you make $100, and your rate is 25% you pay $25.00 for every $100. The FairTax Inclusive rate is 23%, meaning that for every $100 SPENT, $23 would be taxes (this equates to a 30% tax rate). While this may sound like a lot, it just represents the whole enchilada of out-of-control Federal spending in one figure.

The "Problem #1" (hidden tax) listed is not accurate. It would not be "hidden" in the price, it would be on the receipt.

Problem #2 (progressiveness) - yep, that could be considered a problem but this is where the realities of politics set in.

Problem #3 (redistribution - we have this currently. This is just one existing problem that The Fairtax can't address (due to Problem #2)

Problem #4 (new collectors) - Every business is already a tax collector either out of the salaries of its employees, for income tax purposes, property taxes or others. This just simplifies things to one tax.

Problem #5 (new taxed items) - Yep.

Problem #6 (new taxed entities) - if these entities are set up as businesses, and there are no business-to-business taxes this is largely not a legitimate gripe.

Problem #7 (easy to increase) - no easier than the current system. Only if they raise the rate too high, you can close your wallet. [Federalist #21 - Hamilton]

I'll try and address some more later. #12 does cause me pause; but at the end of the day we have many of the same problems in the current system. They just take the money from us before we ever see it.