The Income Tax Burden: The IRS-Hitman Takes Aim at Helping the Middle Class part 2

IRS-Hitman here, and I'm tackling some of the current issues regarding tax reform put forth by the Presidential Candidates. I keep hearing how the candidates are going to put forth tax reform that will help relieve the tax burden on the middle class. While the current tax code certainly doesn't favor the middle class, do any of these proposals actually provide any relief?

There is a growing movement towards what is called a Fair Tax. The basics of the Fair Tax are that it doesn't tax income, but replaces the current income tax system with a system that relies on sales tax.

Governor Huckabee is a major proponent of the Fair Tax and has been promoting it during his Presidential campaign. He states that the Fair Tax would reward hard work and savings.

Here's how it would work... since the fair tax no longer taxes income, that would mean that your gross pay would also be your take-home pay. You wouldn't have higher taxes taken out for overtime hours worked or bonuses earned. In theory, this would give the average American more buying power.

But how much is this new sales tax going to be? Governor Huckabee claims it would be 23%, which is close to what we pay in income tax now. Opponents of the fair tax state that the rate would be 30%.

What about small businesses? Wouldn't an increased sales tax cause them problems? Well, they would have to pay the sales tax to the government every quarter, much like they do with payroll taxes now. But all the other taxes that small businesses have to pay, such as 1099 and 941 payroll taxes, would be a thing of the past. Also, businesses won't have to keep up with the minutia of deductions and credits.

Another advantage to small businesses, according to Fair Tax advocates, is that business-to-business purchases for the production of goods or services wouldn't be taxed. In theory, this would allow small businesses to have more operating capital.

What about the very wealthy? Do they really buy enough in luxury goods that they would be paying their due taxes? Also under the Fair Tax money from capital gains, dividends and other forms of unearned income wouldn't be taxed.

Under the Fair tax plan, corporate taxes would disappear altogether. The idea is that corporate taxes are bad for consumers, as the corporations pass their tax burden resulting in higher prices and lower wages for workers. Fair tax advocates assume that the corporations would reinvest the extra money into creating new jobs for Americans and lowering the cost of goods and services.

There are some points the IRS-Hitman would like to make regarding these statements.

State income tax wouldn't be abolished, so you would still have to pay that. In addition, states can still have individual sales tax, so you would have to pay a federal sales tax plus a state sales tax.

Next is the assumption that if corporations are taxed less, they'll pass on the savings to the American people. That's a pretty naïve point of view. It's just as likely that the major corporations will continue as they already have been, just now their shareholders are making more that they're not being taxed on.

So taking the dark side of corporations into account, the majority of the tax burden again falls onto the middle class.

The IRS-Hitman will continue to explore income tax reform from the candidates and try to provide you the middle class with the smoking gun you need!