Today’s Chairman’s Report is written by Jade Walle. Jade is a partner of a CPA firm and is on the board of Americans For Fair Taxation.
The FAIRtax in a Recession
Merriam-Webster defines the term recession as a period of reduced economic activity. In technical terms, a recession is generally considered to represent two consecutive quarters of economic decline, as reflected by GDP. First quarter 2022 GDP decreased at an annualized rate of 1.5% according to the U.S. Bureau of Economic Analysis. As this report is written, there is a strong possibility that when the second quarter advance GDP estimate is released in late July 2022, that the U.S. will have officially entered into recession territory as inflation and rising interest rates take their anticipated, chemotherapy-like effect on the U.S. economy.How would the FAIRtax work in a recessionary economy?
What effect would replacing the income/payroll tax system with the FAIRtax have on the economy? Would it make a recession worse, or would it work to bring the country back to positive GDP growth?
Let’s examine exactly how the FAIRtax would affect the U.S. economy. First, working men and women would keep their entire paycheck with zero federal, Social Security or Medicare tax withholdings. This equates to more money in your pocket. Second, every legal U.S. household will receive the FAIRtax prebate, meaning no one will pay sales tax on life’s primary necessities. Again, more money in your pocket. Third, the cost of U.S.-made goods and services will significantly decline since embedded income and payroll taxes will be eliminated from the cost build-up of everything you consume. Once more, the result is more money in your pocket. The ancillary benefit here is that our U.S.-made goods and services will now be more economical for export, levelling the playing field relative to international competitors. This will work to increase our U.S. GDP by putting more money in our companies’ collective pockets.
Some question the viability of the FAIRtax during a recession, pointing out that less consumption during a recession could degrade the Treasury’s tax collections to the point that the economy would be in even greater jeopardy. It’s a valid question, but the research which initially surprised me indicates the opposite.
Over many decades, studies show that U.S. personal consumption expenditures (“PCE”) was a steadier and more predictable metric than earned income over the same decades. This means that during a recession when both consumption and incomes fall, that the PCE that FAIRtax collections will be based on, will act as a calming and steadying force relative to our current income tax.
In a recession, Treasury receipts will actually fall more dramatically with the income tax than with the FAIRtax. That means that with the FAIRtax, the government would have more flexibility to stimulate the U.S. economy, should it and its constituents so desire. A primary reason for this unexpected phenomenon is that income only has one source- which is income. Consumption however, comes from multiple sources- those being income, saving, borrowing and in some cases, even theft.
The research shows that people manage to consume at a steadier pace relative to their incomes.
When people understand the FAIRtax’s simplicity, fairness, efficiency and the fact that the FAIRtax will reduce illegal tax evasion by 95%, they intuitively know that the FAIRtax would be a better system than the income tax. But how does that intuition stack up against real-world research? Americans for Fair Taxation has spent millions in grass roots research with some of the country’s most well-known and respected economists. We should corroborate our intuition with what this research had to say on the topic.
One of AFFT’s whitepapers, “The FairTax Boosts Economic Growth and Creates Jobs: Research Summary” looked at three economic indicators and projected the effect that replacing the income tax with the FAIRtax would have on each. They concluded that with the FAIRtax:
- Real GDP would increase 7.9% in the first year, 10.7% in year five, and 10.5% in year twenty following FAIRtax enactment.
- Real wages would be up 10.3% in year one, 10.2% in year five, and 9.0% in year twenty.
- Consumption would be down 0.6% in year one, but increase by 1.8% in year five, and be up 5.9% in year twenty.
The jury is in and we know two things for sure with the FAIRtax during a recession. One, you will have more money in your pocket and two, the economy, along with its GDP, real wages and even consumption, will all fare significantly better with the FAIRtax relative to our outdated and growth-sapping income tax.
I suppose this leads to a third epiphany- the FAIRtax would usher in a system that will be more resistant to a recession and more resilient when recession inevitably does strike from time to time.
WHAT CAN EACH OF US DO?
We can write letters and make calls to our elected representatives demanding that if the government really wants to eliminate the burden of filing income tax returns, they should enact the FAIRtax and do away with tax returns altogether.
The great 18th century Irish statesman Edmund Burke made a statement that applies in many ways,
“Nobody made a greater mistake than he who did nothing because he could do only a little.”
Take back control! Help us PASS THE FAIRTAX!
The IRS will be gone and we will pay our taxes when we make purchases.
WE and not the Ruling Class and their minions in D.C. will decide how much federal tax we pay!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”