The FairTax

I began to take a closer look at the FairTax proposal because Mike Huckabee (currently the most visible supporter of the FairTax) is rising quickly in the polls and also because I have had some co-workers ask my opinion on the proposal. My immediate answer was, “I want more details.” I read two articles on the same day, one for and one against the FairTax, that helped me to clarify my position.

From Responding to still more absurd attacks on the FairTax I gathered the following:

Lambro is right in asserting that some people actually spend all of their earnings just buying the basic necessities of life. What Lambro obviously doesn’t understand is that under the FairTax every single legal household in this country would receive a check (probably in the form of a credit to a charge account or a debit card) every month equal to the amount of the FairTax which that family would be expected to pay on those necessities during the ensuing month. By way of example, using current poverty statistics the “prebate” for a household of four people would be $506.00 per month. Add that $506.00 to the fact that no household will see anything deducted from their checks for income taxes or for Social Security or Medicare taxes … and you see a substantial rise in real income for the very families that Donald Lambro was so concerned about; the poor and middle income. The president’s own tax reform commission stated that the FairTax was the only tax reform plan out there that would completely untax the poor (at the federal level). How does that square with Lambro’s dire warnings on the effect of the FairTax?

That is what immediately sounds appealing about the FairTax. There would be no taxing people and then giving money back (vouchers, credits, or deductions) based on activities we decide to subsidize. I’m not sure how it works out that, “You don’t pay any more for your toilet paper and milk than you do now,” if the government is still taking the same amount of money and we are getting more in our paycheck. I guess they expect that your toilet paper and milk type necessities will only cost as much in taxes as the prebate you receive each month.
Huck’s Daft Tax Plan made these points:

To avoid the risk of getting both a national sales tax and an income tax, FairTaxers would have to repeal the 16th Amendment. Good luck. Huckabee’s magic wand will come in handy.

Then, there’s the rate of the sales tax. FairTaxers say that a 23 percent rate would be enough to replace current revenues. What they really are talking about is a tax of 30 cents on every dollar — what most people would consider a 30 percent rate. The government would pay the tax on all its purchases, a gimmick “done solely to make revenues under the FairTax seem larger than they really are,” writes economist Bruce Bartlett. Budget trickery aside, the congressional Joint Committee on Taxation has estimated that the rate would have to go as high as 57 percent.

The tax would apply to everything, even medical expenses, so it would amount to an incredibly regressive tax on even the most necessary purchases of low- and middle-income taxpayers. The home mortgage deduction would be gone, and instead buyers would pay a 30 percent (at least) tax on their homes. To make up for this burden, the government would send monthly “prebate” checks to all Americans based on income. (And you thought our current tax scheme was complex?)

The addition of a sales tax and an income tax would be unwanted and I agree that repealing the 16th Amendment would not be easy, but if people were willing to pass the FairTax they would probably do so by setting income tax rates to 0% across the board. If the plan were successful for a few years I would think it would be easy to convince people to repeal the 16th Amendment.

The funny think about whatever rate the taxes would be set at is that the amount of money is not changing. If we are talking about replacing current revenues with the same level of revenue then whatever rate they establish is the same rate we are paying now, either by ourselves, or through increased costs for the goods we purchase. The only difference is who pays and when. The same holds true for the mortgage argument. If I am taxed at 30% on the interest of my mortgage payment that sounds bad, but right now I get taxed on my savings instead of my debt. The current system encourages debt. It appears that the FairTax would encourage savings (which would not be taxed). That seems to be a better system to me.

I like the idea of the FairTax, but I am under no illusions that it will make me wealthy overnight.

About David

David is the father of 8 extremely organized children (4 girls / 4 boys) who is constantly seeking answers to tough questions related to parenting, education and politics while moonlighting for 40 hours each week as a technology professional. He also enjoys cooking, gardening, and sports.
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Comments

4 Responses to The FairTax

  1. Reach Upward says:

    In the real world, we are not going to the Fair Tax anytime soon. Such a radical change could only happen politically if there was broad consensus that we are in a serious crisis. Nobody likes our current screwed up income tax system, but very few seriously believe that we are in crisis mode.

    It’s not the American people you have to convince to repeal the 16th Amendment. If it were put to a referrendum, it might be tight, but I’m guessing you could get 2/3rds of Americans to vote to repeal it. But instead of just the public, you have to get 2/3rds of both chambers of Congress PLUS 3/4ths of all state legislatures to vote to repeal it. Many of these people are highly incentivized to keep our current tax system. There is a huge lobbying industry that gets members of Congress to tweak the current tax system. Imagine all of that power suddenly disappearing. It just isn’t going to happen. Similarly, state legislatures have little incentive to change the current tax system. They’d rather have the devil they know rather than some unknown quantity.

    Your scenario of a 0% income tax while waiting for the repeal of the the 16th Amendment is pure fantasy. Let’s look at how politics really works. If the Fair Tax were to somehow gain substantial traction in Congress, there would be a lot of compromise. The most likely scenario is that we’d end up with a bizarre mixture of the current mess along with some kind of consumption tax. There are significant elements that are deeply committed to a progressive tax system. They’re not going to give up on that.

    The Fair Tax purports to resolve many problems. And it actually may. However, every country that has tried a similar consumption tax has quickly reverted to some kind of value added tax. The system sounds great on paper, but doesn’t work well in practice. Even if it could work the way it is claimed, it would not produce all of the pie-in-the-sky advantages that promoters suggest. Some of the promoter’s claims are fairy tales.

    A truly objective look at the Fair Tax will reveal that it has both positives and negatives. It will also reveal that there is no evidence to suggest that this set of positives and negatives is substantially superior to those of our current lousy system. The only thing that can be guaranteed is that it would be different. It would shift the political power differential. Any politician that perceives that it would result in a loss of power will fight tooth and nail to make sure the Fair Tax as it is designed never becomes law. A hideous charicature of it might become law, but you’ll never see it in its pure form.

    I’m sure this may seem overly pessimistic, but I do believe it is an accurate assessment of how our political system functions in reality. I’m not sticking up for our current system. I worked for the IRS for over a decade and I know how nasty the system is.

  2. David says:

    I am under no illusion that this would be simple, or even likely-with-a-large-effort. I wish that you were wrong about the enormity of the hurdles that this faces, but I have to agree with you that the FairTax in its pure form is virtually impossible and even a hideous caricature is not very likely anytime soon.

    It is almost galling that something as straightforward as a moratorium on income tax while testing a FairTax system is outside the realm of practicality in our current system. I think that is a natural failing of our large government and entrenched interests that simple answers are impossible and compromises always end up looking like the status quo.

    I’m not surprised that few think we are in crisis mode – I would be wary of saying we are, but I do wonder where the crisis started for the frog sitting in the pot of previously lukewarm water.

  3. Mark says:

    I dont see how the Fair tax can possibly work. In fact, it could be an absurd farce if we passed it.

    Still — Im all for passing it. I think we need to do it, just to learn how economics works.

    Nursing home patients would get a huge surprise the first month of this tax. Nursing home patients could easily get Tax bills of up to 4,000 a month, and the average will be 2100 a month.

    Cancer patients are another group — their chemo and surgery will be taxed. A cancer patient could easiy get a tax bill of 40,000 dollars in their struggle to stay alive – or to keep a child of theirs alive.

    Renters are another stunned group. I bet there arent 10 renters in America who know the Fairtax group is working very hard to tax them on their biggest expense. A renter could easily pay 4,000 in taxes a year, just on rent.

    There will be a huge outcry — and congress will give these and other groups exemptions in about thirty seconds.

    But no other part of FT is quite so puzzling, as the notion, as Boortz said “the government itself becomes a major taxpayer” because of Fairtax.

    Major taxpayer? WHAT?? Thats like paying yourself 50,000 dollars to cut your own grass. Sure you can write the check — maybe even deposit the check in that same account. But you arent going to make 50,000.

    Fairtax actually counts the money it supposedly “collects” from government as part of the Treasury proceeds.

    This is a patently absurd notion.

    Fairtax would have to 60-80% — because many things would have exemptions – new houses, government spending, health care, cars, food, medicine.

  4. David says:

    Mark,

    I’ve heard these arguments before. I definitely agree that the idea that the government being a major taxpayer is laughable – it makes me wonder if they hired some old Enron accountants to make the numbers look better.

    While you complain about how much renters and others may pay in taxes ($4000 being your number) you should also consider the off-setting effect of the prebate checks (which would be over $6000 according to the article I cited).

    I won’t insult you by claiming to have all the answers on this, but I have to ask – is it really the idea that this scheme is a farce which makes you ridicule it or is it that you’d rather stick with they system you know? If you think about it our current tax structure/system is also a pretty good farce.

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