The goal of the FAIR Tax is to transition America from an income tax to a consumption tax. The FAIR Tax replaces the income tax with a federal sales tax which will be collected by our nation's businesses at the point of sale.
This tax will be devastating to small businesses which are not equipped to serve as tax collectors. Transitioning from an income tax to a sales tax will cause substantial disruption.
There is a better way to accomplish the transition from an income tax to a sales tax.
The tax I favor is called the "Object Tax." The object tax is based on the design principles used in Object Oriented Programming.
Rather than taxing income or consumption, the program taxes an abstract object between income and consumption. In most cases the object is a bank account.
The tax works as follows. Bank accounts will have a tax attribute. The attribute has the values "pre-taxed" or "taxed." You pay a tax to switch the attribute.
The basic flow of this tax is as follows:
Your entire paycheck will be deposited into a Pre-Tax account. If your salary is $1000.00, you will have the full one thousand dollars deposited into a Pre-Tax account. (We eliminate payroll with-holdings).
To withdraw the money from spending, you will have to pay a tax. The tax rate will be progressive. Let's say your tax rate is 20%. When you withdraw the money, you will pay $200.00 in taxes and get $800.00.
You might decide to withdraw only $500. You would pay $100 in tax, get $400 for spending. The other $500 would be in the bank accumulating interest until you spend it.
The object tax eliminates the payroll with-holding system. This removes the burden of tax collection from employers. The taxes are collected automatically at the bank.
The program can replicate the current tax code with all of its complex deductions and tax exempt purchases. One could replicate the charitable deduction by allowing tax free transfers to charity. If you wanted to pay $100 to a charity, you could transfer money directly to the charity's accounts without paying a tax.
One can replicate the standard deduction by allowing people to withdraw a set amount without paying a tax.
Taxing an object between income and consumption allows us to create a system that combines the best of a progressive income tax with a consumption tax.
Object technology is the design technique behind most modern computer systems such as the iPhone and many industrial systems.
Using this technique would allow us to reconstruct, modify and extend the current tax system with a minimal amount of disruption.