I had an interesting conversation with someone over the weekend about the FairTax. As I learn more about the FairTax, I find that I still have more to learn. He explained that the biggest problem with the FairTax is how it will affect the housing market.
He has been told that the FairTax will be applied both to new and existing homes. He also explained that the FairTax will eliminate the deductions most people look forward to every year. Because of this the FairTax will unduly depress the investment people make in their homes.
I kind of expected this answer but at the same time, I had to do a little research before answering without knowing the facts. This goes to show why as supporters of the FairTax each of us need to take a little time to know more about it. We need to provide real answers to real concerns. The person I spoke with is very genuine and is very competent.
I cannot, nor can you, assume that our representatives in Congress have the time necessary to investigate the truths behind the FairTax (and I am not exactly sure about all the math that goes into it - I just have to trust the many researchers who have researched the numbers). This is why we need to read the research papers and prepare ourselves to investigate and answer the questions that our elected officials need answered.
The FairTax, for example, will only be applied to new homes. Existing homes will not be taxed upon resell, except for maybe local taxes. This is great for both the new home market and the existing home market.
The existing home market does not have to worry about extra costs associated with taxation. This helps existing home owners as they set the value of their homes. They do not have to worry about inflated values. New home sellers benefit because their home prices will include the FairTax in the final price - the price will not be inflated by embedded taxes. The price is set for the life of the loan and becomes part of the value of the home.
Let me explain. If I understand what I have read in the research papers, here is the difference between the current tax code and the FairTax.
Let's say a home sells for $100,000. Under the current code, a person buying this home will pay the principal and the interest on the home. For our example the purchaser has decided on a 30 year fixed rate loan. The person will pay approximately $227,540 after 30 years (this does not include tax and insurance). The value of the home does not automatically become $227,000 because I pay that much for the home. The value is still at market value (let's say it goes up to $150,000 after 30 years).
Now this looks to be all that person pays for the home, but there are other payments to be considered. To buy a home, you have to earn money. When you earn money, income taxes are taken from your check. To pay for this home, a person will have to pay their income tax for the thirty years of the loan. The government came up with a way for us to pay tax on the home and at the same time get a little back through deductions (Note: you do not get anything back - you just get credit towards your taxes). You will also pay the income taxes of those who earn a living of the interest you are paying (thus you pay a higher interest rate). Read the research papers on housing from FairTax.org because they explain it better than I do.
Under the FairTax, you do not pay income tax so you do not have to apply for deductions. If you buy an existing home - you do not pay taxes on it. So you have your full income to help apply to your payments (of course you'll have to pay your other expenses and services but you get your entire check, and you will not have to wait once a year for a little deduction to be applied towards your taxes).
Your entire investment is secured. The value is based entirely on the market. The only people in the home selling market rebelling against the FairTax are the lawyers on K Street who make millions off Realtors to lobby government officials. They are feeding the lies to our elected officials and the realty market just so they can protect their million dollar pensions.
Of course, we can keep the same tax system and you can be excited about all the wonderful taxes you pay including capital gains taxes, but then again....
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The FairTax Act of 2007 (HR 25/ S 1025) represents a power shift of massive proportions in America. It lays out a practical ideal of voluntary payment of taxes, based on a substantial level of taxpayer choice that the plan affords. Since FairTax untaxes basic necessities (up to socially-accepted poverty-level spending), what is taxed is marginal, and/or desired or preferred, on a broader base of retail products and services. This is to say that the taxpayer may, under the FairTax, choose to purchase used products and avoid paying the tax. And, to the extent desired, the taxpayer may choose to self-perform certain services rather than pay for them. This will stimulate do-it-yourself education, improve citizens' self-reliance; indeed the FairTax represents the possibility of ushering in a new can-do, citizen psychology that would accrue to greater demands for government accountability - truly, a cultural sea change.
Government is the "necessary glue" that enables the social fabric to cohere. It does this by effecting "rules" that ostensibly provide members with equitable access to wealth and resources. It also must provide ostensibly equitable enforcement of those rules in order to mitigate threats to the social fabric. It is unrealistic to believe that the structures of a national government can be supported on donations, thus the need for taxes. Naysayers love to characterize anything purporting to be a "fair tax" as an oxymoron - but it is not true. The idea of fairness has to do with equitable sharing in the cost by all members who depend upon the social fabric for food, shelter, clothing and post-necessity economic enterprise. And, because of the shift of power from politicians and special interests under an enacted FairTax, the elected will find it more difficult to both enlarge government, and implement any dual system of taxation. FairTax strategist, Dennis Calabrese, discusses how the FairTax repeals the income tax, how it does away with the IRS, and how it addresses other aspects of frequent concern to skeptics.
The FairTax has a much greater opportunity for success to operate as a "self-regulating" mechanism because of increased visibility. One finds that the current system, ostensibly regulated by the Internal Revenue Code, is in fact poorly regulated because of continually increasing complexity (the effect of tax favors from politicians, through lobbyists, to favored corporations and other special interests) stemming from the desire by those holding government position to steer public behavior using tax code "carrots." We have seen how 100 years of this type of behavior has eroded the Nation's currency and the purchasing power of working family incomes. "Visionist," Tom Frey believes the current tax system will simply collapse; and economist Laurence Kotlikoff heralds - short of enactment of FairTax (or an otherwise unlikely change in spending habits) - the U.S. will shortly face an irrevocable economic breakdown. (Kotlikoff believes that passage of the FairTax can stave off the economic ruin we're facing, but would be surprised to see it happen.)
Frey and Kotlikoff may be right on both counts, and we may not be able to successfully evoke change; but shall we not try?
(Permission granted to republish, in whole or part. -Ian)
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