The Fair Tax Act of 2005, Part II
Today we look at Title I –
TITLE I–REPEAL OF THE INCOME TAX, PAYROLL TAXES, AND ESTATE AND GIFT TAXES
SEC. 101. INCOME TAXES REPEALED.
Subtitle A of the Internal Revenue Code of 1986 (relating to income taxes and self-employment taxes) is repealed.
SEC. 102. PAYROLL TAXES REPEALED.
(a) In General- Subtitle C of the Internal Revenue Code of 1986 (relating to payroll taxes and withholding of income taxes) is repealed.
(b) Funding of Social Security- For funding of the Social Security Trust Funds from general revenue, see section 201 of the Social Security Act (42 U.S.C. 401).
SEC. 103. ESTATE AND GIFT TAXES REPEALED.
Subtitle B of the Internal Revenue Code of 1986 (relating to estate and gift taxes) is repealed.
These first three sections are pretty straightforward, repealing rather huge chunks of existing law. Income taxes are repealed, payroll taxes are repealed, withholding of income taxes is repealed and earmarking withheld taxes for Social Security is repealed. Estate and gift taxes are repealed as well.
A quick note on section 102, part b: The Social Security Act has lots of rules for how taxes are to pay for Social Security, but also has supplemental rules on funding Social Security from General Revenue. The bill relies on these supplemental rules to pay for Social Security, since it repealed all the other taxes mentioned in the rules. One might imagine a follow-up bill to ‘clean up’ the Social Security Act in light of these changes, but it wouldn’t be strictly necessary.
Now for a bit of alphabetical shuffling:
SEC. 104. CONFORMING AMENDMENTS; EFFECTIVE DATE.
(a) Conforming Amendments- The Internal Revenue Code of 1986 is amended–
(1) by striking subtitle H (relating to financing of Presidential election campaigns), and
(2) by redesignating–
(A) subtitle D (relating to miscellaneous excise taxes) as subtitle B,
(B) subtitle E (relating to alcohol, tobacco, and certain other excise taxes) as subtitle C,
(C) subtitle F (relating to procedure and administration) as subtitle D,
(D) subtitle G (relating to the Joint Committee on Taxation) as subtitle E,
(E) subtitle I (relating to the Trust Fund Code) as subtitle F,
(F) subtitle J (relating to coal industry health benefits) as subtitle G, and
(G) subtitle K (relating to group health plan portability, access, and renewability requirements) as subtitle H.
(b) Redesignation of 1986 Code-
(1) IN GENERAL- The Internal Revenue Code of 1986 enacted on October 22, 1986, as heretofore, hereby, or hereafter amended, may be cited as the `Internal Revenue Code of 2005′.
(2) REFERENCES IN LAWS, ETC- Except when inappropriate, any reference in any law, Executive order, or other document–
(A) to the Internal Revenue Code of 1986 shall include a reference to the Internal Revenue Code of 2005, and
(B) to the Internal Revenue Code of 2005 shall include a reference to the provisions of law formerly known as the Internal Revenue Code of 1986.
(c) Additional Amendments- For additional conforming amendments, see section 202 of this Act.
(d) Effective Date- Except as otherwise provided in this Act, the amendments made by this Act shall take effect on January 1, 2007.
So the bill re-orders the remnants of the tax code, leaving in excise taxes, procedural rules, the Joint Committee on Taxation, etc. The new sales tax stuff will be the new subtitle A of the Internal Revenue Code. That happens in the next section.
It also re-names the tax code to reflect the year of the change.
The next section is far more interesting!!
A short comment here:
By paying for Social Security out of general revenue funded by a sales tax, there might very well be an increase in funding for Social Security.
Today’s Social Security program is paid for with payroll taxes, which has a cap on how much income an individual can be taxed on. Earnings above the cap of $90,000 aren’t taxed for Social Security. This is not a very big salary in relative terms, though it would generally be held by someone in a relatively well-to-do occupation.
With funding coming from general revenue, there is essentially no cap on the amount an individual can contribute to Social Security revenues. People have proposed removing the cap in the existing revenue code previously, but it has been met with resistance.
With the FairTax, most folks will be paying lower rates due to the larger tax base, so having no cap on contributions to SS will not effectively harm any one group of citizens.
There has to be a catch . . . Will someone making $90,000 or less per year with a married household of 4 REALLY have more spendable money? Or will it cost us more? I read about the “monthly rebates” to be “paid in advance” from info my 11th grader brought home. Is that for real? Who will decide if this goes through? Will American citizens get to vote on this? Is this just another way to save the “really rich” money . . .? Thanks in advance for clarifying this topic which is VERY new to me. PS Why isn’t this on the news?
How would this effect small businesses for doing taxes & taking deductions? As it is, we got every dime we pd in 2005 back because of the small business we operate. How will we get refunds or will the IRS even need to exist is this plan goes into effect? thanks!
Lianne,
Thanks for your interest! The FairTax is a piece of legislation designed to replace the income tax system for the United States. It repeals the personal and corporate income tax, self-employment tax, the alternative minimum tax, medicare and social security taxes, and capital gains taxes. It replaces these varied and disprate tax systems with a simple sales tax on all new goods and services. Unlike a VAT, the FairTax is applied ONLY once on a purchase. Once an item or service has been taxed one time, no further tax is due. The tax rate is currently 23 cents out of every dollar, or 30% in traditional sales tax terms (30% of 77 cents equals 23 cents).
Businesses are not taxed at all under the FairTax legislation, and in fact are allowed to make business purchases tax-free from other registered businesses. Your small business would likely be cheaper to operate from this fact alone. Your business would remit the sales tax from its own sales to the Federal government (through your state’s treasury) every month, similarly to how you probably handle state sales taxes now. The forms will be very similar. No yearly returns will be needed. So you should not even have to wait for a refund with the FairTax!
As a small business owner, you can see that your retail prices could likely come down and will offset the rate of the FairTax significantly. Large retailers like Wal-Mart might be able to keep prices very close to today’s levels even including the FairTax due to there being no corporate income tax. Actually, if you might provide an off-the-cuff estimate of your savings under such a bill, many of us would be interested in what you have to say. Not enough business owners post in this blog.
If you have any questions, you are in the right place. We are in the process of reviewing the bill section by section.
Stay Tuned!