Why is this Topic Important to Wealth Managers? This blogticle discusses a proposal to eliminate the Federal income, estate and gift and employment taxes. This is obviously not great news for wealth managers. However unlikely it may be that the proposed legislation will pass, it is important for those in the industry to be aware of potential legislation that would completely eradicate many uses for financial planning.

The somewhat radical Fair Tax Act of 2011, [1] a Bill introduced in the House earlier this year, intends to repeal the income tax, employment tax, and estate and gift tax.  It would also redesignate the Internal Revenue Code of 1986 as the Internal Revenue Code of 2011.

Since the income tax, under the proposed bill would be eliminated, a new source of tax revenue would have to be raised to support government operations.  Who is going to pay for all that interest after all? The House Bill supporter’s plans…impose a national sales tax.

The proposed legislation would impose a national sales tax on the use or consumption in the United States of taxable property or services. The sales tax rate determined by the drafters has been set at 23% in 2013, with adjustments to the rate in subsequent years. But the tax is only on consumers and the proposed bill would allow exemptions from the tax for property or services purchased for business, export, or investment purposes, and for state government functions.

How do the drafters of the legislation envision the collection process to work?  The states would have the primary authority for the collection of sales tax revenues with the responsibility of remittance of such revenues to the Treasury. The legislation also sets forth administrative provisions relating to: (1) the filing of monthly reports and payments of tax, (2) accounting methods, (3) registration of sellers of goods and services responsible for reporting sales, (4) penalties for noncompliance, and (5) collections, appeals, and taxpayer rights.

The legislation even addresses spending:  it directs the Secretary of the Treasury to allocate sales tax revenues among: (1) the general revenue, (2) the old-age and survivors insurance trust fund, (3) the disability insurance trust fund, (4) the hospital insurance trust fund, and (5) the federal supplementary medical insurance trust fund.

The proposed Bill goes one step further by prohibiting the funding of the Internal Revenue Service (IRS) after FY2015. In its stead the Bill would establish in the Department of the Treasury: (1) an Excise Tax Bureau to administer excise taxes not administered by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), and (2) a Sales Tax Bureau to administer the national sales tax.

Interestingly enough the Bill self terminates the sales tax imposed by the Fair Tax Act if the Sixteenth Amendment to the U.S. Constitution (authorizing an income tax) is not repealed within seven years after the enactment of the proposed Act.

All this thanks to Rep. Rod Woodall from Georgia, the introducer of the proposed Bill. There are a number of arguments why a national sales tax is not the best approach to collect revenues.  The most striking is the underground economy and barter systems that would ensue would negate any real ability to tax consumer goods.

Tomorrow’s blogticles will discuss topics relating to insurance and financial planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Tags: accounting, FairTax, income tax, Internal Revenue Service, Politics, Sales tax, Tax, United States

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This entry was posted on Wednesday, March 16th, 2011 at 9:49 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.