Federal tax has been ineffective and there are proposals for replacing it with a fair tax that would place a 23% duty on all sales. In this proposal, export of products and purchase of firm inputs will be free from tax. The fair tax would not suspend any federal taxes from workers’ pay slips. The financing of healthcare and security would be done by funds from sales taxes. The proposals also recommend that taxation be done only once at the moment one purchases new consumption products or services.
Considering rebate, taxation on consumer products would be progressive while taxation on income at higher levels would be regressive. Critics argue that this kind of operation would reduce tax weight levied on higher income earners while exploiting the low income earners. On the other hand, backers to this plan assert that this strategy would broaden the tax base, thus reducing tax burden and efficiently taxing wealth and promoting customer purchasing power.
Tax compliance is bound to increase, as a result of motivated saving and investment by the consumption tax, eventually leading to economic growth. This would be a big business incentive for global firms and would improve the country’s competitiveness in the international market. However such broaden taxation strategy would present a difficulty in collection and may result in persistent evasion of tax payment. A budget deficit may ensure since the proposed sales tax is predicted to collect lesser revenue than the present scheme.