FairTax

The dismal science Economics

Economic systems

$  Free market   €  Social democracy   ☭ Socialist economy

Major concepts

American Recovery and Reinvestment Act of 2009 Path to Prosperity Michael Snyder Carbon offset Medicare

The worldly philosophers

John Stuart Mill John Kenneth Galbraith Bjørn Lomborg John Lott v - t - e

The FairTax is a proposed soaking of the poor to give to the rich sweeping reform of the United States federal tax process. It would repeal the 16th Amendment to the U.S. Constitution, eliminate the federal income tax and all other payroll taxes, disband the IRS, and install a national 30% sales tax. It would also deliver "advance rebates" on the tax to households for the purchase of living essentials up to the poverty level. It could be thought of as a flat tax, but based on consumption instead of income.

FairTax advocates claim that implementing the plan would greatly simplify the tax code, result in comparable or better revenue for the government than the current tax system, and reduce the lifetime tax burden for most 'murcans.

Criticisms

23%?! More like 30%!

The 23% sales tax would not operate like traditional sales taxes, in which only the register price is taxed. Instead, the percentage would operate like the current income tax does; the 23% means 23% of the register price and tax. So, while a $100 purchase would cost the consumer $123 under a "traditional" 23% sales tax, it would cost about $130 under the FairTax (23% of $130 is $30). Thus, the "23% sales tax" is actually closer to what popular understanding would consider a 30% sales tax.

That's not really an argument against the tax per se, but saying 23% when most people would say 30% raises "They're being weaselly just to get this passed" questions.

Enforcement

Critics claim that lumping all of the government revenue into one tax, thereby putting all the eggs in one basket (so to speak), would make tax evasion more tempting and easier to pull off. Currently, even if one manages to illegally dodge one kind of federal tax, one still typically gets hit with others. But if you can dodge the FairTax (tempting to do if you wind up paying 23 cents on the dollar), you may be able avoid taxation altogether, depending on how many goods you can acquire this way.

Black market explosion

A high sales tax would naturally encourage "off the record" sales to avoid it, and a fear is that a significant black market economy, as well as other criminal activity associated with it, would arise. On the bright side, if a black market sprang up that siphoned off tax, then the theory behind the Laffer Curve may just work, so there would be a legitimate excuse to lower taxes to increase tax revenue!

Letting the rich off the hook?

The FairTax is in part based on the idea that the rich buy the most stuff, so they would pay more taxes. But critics argue that the tax is regressive on income (while it is not mathematically regressive against its base, i.e. sales, this is nonetheless a valid statement in terms of the common understanding of the term regressive, i.e. harsher on those with low incomes), so that the rich effectively get a sizable tax break while taxes actually increase for the middle class.

One way to think of this is to ask what percentage of income people use to purchase goods. Poor and middle class individuals use almost all of their income, but richer people (though purchasing more) use a far smaller percentage of their income. With the current tax system a person's whole income is taxed but with the FairTax rich people essentially get the majority of their income tax-free, while poor and middle class individuals receive no break.

Even worse off are the people who saved up post-tax dollars through their career and intended to use those savings to retire and live off the declining balance of their savings would be completely hosed, as the purchasing power of a saved dollar would immediately fall by 30%. Enjoy that, seniors!

Who likes it?

The FairTax movement could probably be described as largely conservative and populist. Unsurprisingly, rich people who have given up on the flat tax can find a way to support it. However, as one of the few viable proposals for significant tax reform, it also draws support from people who don't normally favor the rich conservative cause, but are frustrated with the current tax system.

Mike Huckabee is a fan.

John McCain spoke against the Fair Tax in the 2008 Republican debates.

The Church of Scientology has been cited as the originator of the idea of replacing the federal income tax with a national sales tax back in the early 1990s and the Scientology-affiliated Citizens for an Alternative Tax System was founded in 1990. According to Americans for Fair Taxation, the main conservative group promoting it (itself founded in 1994), their efforts are unrelated to earlier work by the Church of Scientology, and they date the idea to "the mid-1990s." However, right-wing populist talk radio hosts were already floating the idea as early as 1992.

External links

• Why the FairTax Won't Work, Bruce Bartlett