The FairTax

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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.