A Jeweler’s View of a National Sales Tax

The Fair Tax Act of 2005 (House Resolution 25 and Senate Bill 25) is a national retail sales tax, also called a consumption tax, which would completely abolish the Internal Revenue Service and the entire income tax code and replace them with a simple-to-administer sales tax called the Fair Tax (see ” ‘Pro-Business’ Congress May Consider a National Sales Tax,” JCK, February 2005, p. 112). Other proposals by other names would leave the IRS in place and are not desirable. The Fair Tax would eliminate all of the following taxes: personal, corporate, capital gains, estate, payroll (Social Security and Medicare), alternative minimum, and self employment. And abolish the IRS.

Every year since 1999 the Fair Tax Act has been submitted to, and routinely ignored by, the U.S. Congress. This bill would drastically simplify the tax code and significantly boost the economy. Congress ignores this bill because the current tax code benefits them in several ways: (a) it can be manipulated for the benefit of special interest groups, which ensures them reelection support; (b) the size and complexity allows them to “hide” these benefits for special interests; and (c) it gives government vast powers over our lives that the Constitution wouldn’t allow otherwise. As a retail jeweler and small-business owner for 25 years, I give the Fair Tax my full endorsement

Research on the effects of the implementation of the Fair Tax Act and the resultant elimination of the income tax code shows prices dropping 20 percent to 30 percent on everything in America. Why? Because complying with the tax code costs us $250 billion and 6.5 billion hours a year. These costs, plus corporate and payroll taxes, must be passed on to the consumer in the form of higher prices. Every step in the supply chain—from farmer to processor to flour maker to baker to wholesale distributor to grocery store—adds these unnecessary costs, and they are passed on to the consumer in the form of higher prices. When these embedded taxes are repealed by the Fair Tax, then the price of the loaf of bread will drop by 20 percent or more. We don’t “see” these hidden taxes so we think they aren’t there. The Fair Tax would make these costs visible so that everyone can see the true cost of the federal government. Maybe this is another reason why Congress is ignoring the Fair Tax!

Some analysts imply that business would slow if we added a national sales tax. Under other plans this may be true, but not under the Fair Tax. It is revenue neutral, meaning it will be set at the rate needed to collect the same amount that is being raised by the eight taxes above today. Whatever the Fair Tax rate is, it will be that rate because that is what the IRS is collecting now in the form of hidden taxes. Current figures estimate that rate to be 23 percent (based on the system used to figure income tax). But remember, payroll taxes (7.5 percent from employee and 7.5 percent from employer) and income tax (the rate for incomes ranging from $7,000 to $29,000 per year is 15 percent) will be left in our paycheck so even without prices coming down through competition, people will have the money for the tax. And any money that can be saved or invested will be tax free! Only new retail products and services will be taxed; used products won’t. Education, business-to-business purchases, business profits, or capital gains will not be taxed. Only the final retail end user pays the tax. Necessities are not taxed under the Fair Tax which will insulate the poor from the sales tax.

Small business, like most retail jewelers, is especially hampered by the complexity and cost of the tax code. According to the National Small Business Association, it costs a small business $3.80 (in compliance costs) to send $1.00 in taxes to the IRS. That alone is reason to get rid of it!

Some more benefits of the Fair Tax:

  • No more IRS.

  • No more income tax code—all 50,000 pages—gone.

  • No more filing tax returns again.

  • No more audits of taxpayers.

  • Compliance costs would be returned to the economy—$250 billion (or more) per year.

  • 6.5 billion hours would be saved.

  • Savings would increase (savings would be pretax dollars).

  • Foreign investment and capital would move here, as America becomes a tax haven.

  • Interest rates would come down (because of the two items above).

  • Housing, education, and business expansion would become more affordable.

  • U.S. companies would return factories to the United States.

  • U.S. companies can compete more freely overseas as costs come down.

  • Unfairness of the tax code would be eliminated; loopholes would be closed, as they are no longer needed.

  • Economic distortions caused by tax regulations would be removed.

  • More jobs would be created due to expansion of the economy.

All national retail sales taxes are not equal. It appears that the president will try to use the positive image of the Fair Tax to pass some other national sales tax or a value-added tax (a tax hidden in products at the wholesale level) on to us. Other plans will leave the IRS in place. Only the Fair Tax eliminates the IRS and the tax code, and eventually will repeal the 16th Amendment so that income tax cannot be reinstated. The only national retail sales tax proposal with significant grassroots support is the Fair Tax. Keep this in mind as you follow the tax-reform debate. If it isn’t the Fair Tax, it doesn’t abolish the IRS and the income tax code. And it won’t have all the above benefits. Let your congressmen and senators know that you support only the Fair Tax, and no other, as real tax reform. I am happy to discuss this with my fellow jewelers.

Leo Hamel, Leo Hamel Jewelers, San Diego, (619) 952-4851, www.fairtax.org