Wealthy Tax Secrets

There are conflicting reports over exactly how long the US Tax Code is, but estimates range from 16,500 to 2,500,000 pages long. Even on the conservative end of 16,500 pages, that’s a whole lot of pages on taxes. It is virtually impossible for any one person to know all of it and I would be exceedingly wary of anyone who claims to know it ALL.

This is one of the reasons that many on both sides of the political aisle have said we need to simplify the tax code. My favorite idea is the nonpartisan legislation known as the FairTax. The FairTax Act is a mere 132 pages and would replace our current tax laws.

The FairTax Act, as proposed, would eliminate the IRS, AMT (alternative minimum tax), federal income taxes, corporate taxes, capital gains taxes, payroll taxes, Social Security, Medicare, self-employment taxes, estate taxes, and gift taxes with a national sales tax. The national sales tax as defined in the Act would be 23% (tax-inclusive) or 30% (tax-exclusive), depending on how you define it.

Tax-inclusive, the tax rate would be 23%. Simply put, if you purchase a good for $100, $23 dollars would go to the government. Hence, the tax is included in the price. Tax-exclusive, the tax rate would be 30%. This means that if you buy the same good for $77, you would be accessed a 30% tax, which would make your total $100. In either case, you spend $100 for the same good.

The tax would only be applied once on new goods and services used for personal consumption. Anything purchased used or secondhand would not be subject to the tax. In addition, the tax would not be levied on intermediate business purchases.

The Act also calls for a monthly “prebate” to be issued to every family for purchases up to the poverty level. This means that every month, every household would receive a rebate check for purchases that household will make on necessary goods up to the poverty level.

Under our current system illegal immigrants don’t pay taxes, yet receive benefits, benefits being paid by legal taxpayers. Under the FairTax Act the monthly prebate would not be given to illegal immigrants, but illegal immigrants would still be paying the sales tax, which provides additional revenue to the government that is currently unaccounted for.

The FairTax would provide increased government transparency, but at the loss of tax deductions. However, even with tax deductions becoming meaningless, business owners and corporations still have much more to gain. For instance, businesses would not be required to pay corporate, self-employment, payroll, or capital gains. Businesses would keep more of their money and only be taxed on new goods or services purchased. In most cases, this would mean an increase in your business’s bottom line.

We all know that having more money in your pocket will lead to either increased spending or increased saving/investing. Increased spending would mean more tax revenue for the government at the time of purchase. If you save/invest, then your savings/investment will be able to grow tax-deferred until you spend it at which point you’ll pay taxes on it. The end result is that all income will be taxed, but the question is when. The primary benefit to you as a business owner or as an individual is that you determine WHEN and HOW you pay.

For more information check out the Official FairTax Site as well as the FairTax wikipedia article.