NetworkedBlogs
Who Decides What's "Fair"? Part 2
The sudden, unexpected, and most likely ultimately
meteoric, rise to prominence of former Arkansas Governor Mike Huckabee
in pursuing the Republican Presidential nomination has brought one of
his campaign issues back into the public sphere of debate.
Replacing the federal income tax with a national sales tax is not a particularly new idea, having been proposed in various forms for at least the past 12 years or so. The most popularly-discussed and best-marketed version of a national sales tax plan was developed by a group known as Americans for Fair Taxation, and has been widely promoted by talk show host Neal Boortz. It has been submitted as a bill in Congress several times by Congressman John Linder.
Under the "FairTax", all income, corporate, and payroll taxes would be replaced by a single rate levied on all retail purchases. The rate is marketed as a 23% "embedded" tax, replacing all other current taxes that show up as "embedded" taxes in the price of retail sales items (which the authors claim is approximately 22% of the price of any item). Thus, by doing away with the other tax rates and replacing them with the national sales tax, proponents of the "FairTax" claim that prices would not rise, people would keep more of their money (there would be no withholding taxes levied on paychecks), and the intrusive IRS would be abolished. To remove the inherent regressivity of the tax, each family would be issued "prebate" checks at the beginning of every month to cover a reasonable (as determined by the government, of course) estimate of the sales tax paid on "necessities" (also determined by the government, of course).
Proponents of the national sales tax claim that it would save billions in tax compliance costs (no more tax returns to fill out) and would capture tax money from many who aren't paying taxes now — drug dealers, illegal immigrants, cash-only businesses, etc. Further claims of unshackling the economy and improving American manufacturing competitiveness are made, and at some point proponents seem to be promising better health, happier children, and a chicken in every pot. The sales tax plan is brilliantly marketed, as who could be against a "FairTax"?
As is typical, however, whenever "fair" and "government" are used in conjunction, the devil is in the details. The so-called "FairTax" is no different, with the exorbitant claims falling prey to real world economics, human nature, and the law of unintended consequences upon further inspection.
The first problem with the national sales tax is the most difficult to overcome: a Constitutional amendment would be necessary — not to establish the tax, because it meets Constitutional muster itself. Instead, it would be necessary to amend the Constitution to repeal the 16th Amendment establishing the federal income tax. Failure to do so would result in us ultimately having both; we'd be right back where we started, only worse.
Another problem is with the reported income tax rate. Under current state-imposed sales taxes, the rate reported is what is added on to the price of a taxable good or service; a sales tax of 10% adds on $10 to every $100 purchase. However, with the "FairTax", the reporting is different, as it is reported as an embedded tax. The 23% embedded tax rate becomes a whopping 30% when reported similarly to other sales taxes. Therefore, that $100 item becomes $130 after application of the tax; however, because the tax is embedded, you only see the $130 price tag. Because the tax is $30 on a $130 total price, the tax is said to be only 23%. Reported in the same manner, that $110 purchase in the example above would only represent a 9% rather than a 10%; proponents of the "FairTax" claim that it is an unimportant detail, and that the tax is embedded so it doesn't matter anyway. I would propose that a person buying a $150,000 house that suddenly gets a $45,000 tax bill might disagree; the fact that the price tag becomes $195,000 would probably not go unnoticed. Likewise with that $30,000 car that suddenly has a $39,000 price tag.
Central to the benefits of the "FairTax" is simplicity: the IRS would be abolished, and gone would be costly compliance costs, tax returns, and a government bureaucracy known for its intrusiveness. The advocates of a national sales tax are correct in their diagnosis of the problem: the IRS is probably the most intrusive government agency in the history of the Republic, and our current tax code is hopelessly conplex. Billions of dollars and untold efficiency are sucked from our economy each year by our current tax code. In addition to collecting revenue, the tax code is used by government to dispense favors, engineer certain behaviors, reward supporters, and punish enemies. It is a corrupt boondoggle and should be scrapped.
While the sales taxers offer a correct diagnosis, their prescription is off the mark. There are several million income tax filers each year; however, there are several billion retail sales transactions each year. That means more government intrusion, to ensure that each transaction is taxed properly, to root out the underground economy sure to emerge, and to prevent the inevitable fraud involved with collecting the prebate checks. A check sent out each month is sure to encourage identity theft, lying about household size, and even additional illegal immigration. Of course, on paper no illegal immigrants would be eligible for the payout, but do we really trust the government to police against widespread fraud?
It is human nature to try to avoid paying taxes, and we've become rather ingenious at doing so. There is some debate whether or not services would be taxed, such as doctor's visits and such. But assume that they aren't, there would suddenly be a big rise in "free" stuff included with services. Get your oil changed at Jiffy Lube, and they'll throw in the filter and the oil for free, just part of the service... get your hair done at Sport Clips and get "free" shampoo ... get your car repaired for labor only, parts are included as part of the service, etc. Suddenly, the government has to expand the bureaucracy and/or make the code more intrusive to prevent these "loopholes".
Now consider the impact of a national retail sales tax on the economy. It seems self evident that if new home, auto, and other item sales are heavily taxed (30% add-on to the price) yet used item sales are not taxed at all, then the market would drop out of new item sales and the used item market would boom. People would move towards buying used houses or renting. People would lease or rent vehicles, with new rental-type arrangements probably springing up to take advantage of the tax laws, and used cars would become much more prominent. With construction and manufacturing tanking, likewise would ancillary industries — plastics, steel, mining, etc. — can anyone say "recession"? With a drop in sales would come a drop in revenue, leading the government, as governments always do, to raise the tax. The economic impact would be disastrous.
Finally, government doesn't like to give up power. Currently, as mentioned above, the tax code is used to encourage (or discourage) all sorts of behavior, whether its buying a home (mortgage interest deduction), higher state taxes (state tax deduction), or buying hybrid cars. Soon, the national sales tax would be used similarly as complaints began to roll in. Certain businesses would lobby Congress for favorable sales tax treatment (for example: the automobile industry, once new car sales plummet); other special interests would lobby for tax incentives for "good" behavior (buying hybrid cars) or tax disincentives for "bad" behavior (buying unhealthy junk food). Advocates of the poor would decry the sales tax on food (despite the "prebates"), and the class warfare types would complain that "the rich" get a prebate check just as big as "the disadvantaged". Because the tax would be embedded rather than a separate line item, nobody would know how much tax they were actually paying, and retail businesses would be stuck with sorting out the various byzantine laws. Yes, this is an extreme scenario, but can anyone who has watched government in action declare that it wouldn't happen?
Our current tax code stinks, there's no debate on that. But a national sales tax is not the way to go. No major industrialized countries have a retail sales tax, and the reasons are many. We should focus on tax reform that limits government intrusion and promotes economic growth and prosperity, and the "FairTax" is not the answer.
Replacing the federal income tax with a national sales tax is not a particularly new idea, having been proposed in various forms for at least the past 12 years or so. The most popularly-discussed and best-marketed version of a national sales tax plan was developed by a group known as Americans for Fair Taxation, and has been widely promoted by talk show host Neal Boortz. It has been submitted as a bill in Congress several times by Congressman John Linder.
Under the "FairTax", all income, corporate, and payroll taxes would be replaced by a single rate levied on all retail purchases. The rate is marketed as a 23% "embedded" tax, replacing all other current taxes that show up as "embedded" taxes in the price of retail sales items (which the authors claim is approximately 22% of the price of any item). Thus, by doing away with the other tax rates and replacing them with the national sales tax, proponents of the "FairTax" claim that prices would not rise, people would keep more of their money (there would be no withholding taxes levied on paychecks), and the intrusive IRS would be abolished. To remove the inherent regressivity of the tax, each family would be issued "prebate" checks at the beginning of every month to cover a reasonable (as determined by the government, of course) estimate of the sales tax paid on "necessities" (also determined by the government, of course).
Proponents of the national sales tax claim that it would save billions in tax compliance costs (no more tax returns to fill out) and would capture tax money from many who aren't paying taxes now — drug dealers, illegal immigrants, cash-only businesses, etc. Further claims of unshackling the economy and improving American manufacturing competitiveness are made, and at some point proponents seem to be promising better health, happier children, and a chicken in every pot. The sales tax plan is brilliantly marketed, as who could be against a "FairTax"?
As is typical, however, whenever "fair" and "government" are used in conjunction, the devil is in the details. The so-called "FairTax" is no different, with the exorbitant claims falling prey to real world economics, human nature, and the law of unintended consequences upon further inspection.
The first problem with the national sales tax is the most difficult to overcome: a Constitutional amendment would be necessary — not to establish the tax, because it meets Constitutional muster itself. Instead, it would be necessary to amend the Constitution to repeal the 16th Amendment establishing the federal income tax. Failure to do so would result in us ultimately having both; we'd be right back where we started, only worse.
Another problem is with the reported income tax rate. Under current state-imposed sales taxes, the rate reported is what is added on to the price of a taxable good or service; a sales tax of 10% adds on $10 to every $100 purchase. However, with the "FairTax", the reporting is different, as it is reported as an embedded tax. The 23% embedded tax rate becomes a whopping 30% when reported similarly to other sales taxes. Therefore, that $100 item becomes $130 after application of the tax; however, because the tax is embedded, you only see the $130 price tag. Because the tax is $30 on a $130 total price, the tax is said to be only 23%. Reported in the same manner, that $110 purchase in the example above would only represent a 9% rather than a 10%; proponents of the "FairTax" claim that it is an unimportant detail, and that the tax is embedded so it doesn't matter anyway. I would propose that a person buying a $150,000 house that suddenly gets a $45,000 tax bill might disagree; the fact that the price tag becomes $195,000 would probably not go unnoticed. Likewise with that $30,000 car that suddenly has a $39,000 price tag.
Central to the benefits of the "FairTax" is simplicity: the IRS would be abolished, and gone would be costly compliance costs, tax returns, and a government bureaucracy known for its intrusiveness. The advocates of a national sales tax are correct in their diagnosis of the problem: the IRS is probably the most intrusive government agency in the history of the Republic, and our current tax code is hopelessly conplex. Billions of dollars and untold efficiency are sucked from our economy each year by our current tax code. In addition to collecting revenue, the tax code is used by government to dispense favors, engineer certain behaviors, reward supporters, and punish enemies. It is a corrupt boondoggle and should be scrapped.
While the sales taxers offer a correct diagnosis, their prescription is off the mark. There are several million income tax filers each year; however, there are several billion retail sales transactions each year. That means more government intrusion, to ensure that each transaction is taxed properly, to root out the underground economy sure to emerge, and to prevent the inevitable fraud involved with collecting the prebate checks. A check sent out each month is sure to encourage identity theft, lying about household size, and even additional illegal immigration. Of course, on paper no illegal immigrants would be eligible for the payout, but do we really trust the government to police against widespread fraud?
It is human nature to try to avoid paying taxes, and we've become rather ingenious at doing so. There is some debate whether or not services would be taxed, such as doctor's visits and such. But assume that they aren't, there would suddenly be a big rise in "free" stuff included with services. Get your oil changed at Jiffy Lube, and they'll throw in the filter and the oil for free, just part of the service... get your hair done at Sport Clips and get "free" shampoo ... get your car repaired for labor only, parts are included as part of the service, etc. Suddenly, the government has to expand the bureaucracy and/or make the code more intrusive to prevent these "loopholes".
Now consider the impact of a national retail sales tax on the economy. It seems self evident that if new home, auto, and other item sales are heavily taxed (30% add-on to the price) yet used item sales are not taxed at all, then the market would drop out of new item sales and the used item market would boom. People would move towards buying used houses or renting. People would lease or rent vehicles, with new rental-type arrangements probably springing up to take advantage of the tax laws, and used cars would become much more prominent. With construction and manufacturing tanking, likewise would ancillary industries — plastics, steel, mining, etc. — can anyone say "recession"? With a drop in sales would come a drop in revenue, leading the government, as governments always do, to raise the tax. The economic impact would be disastrous.
Finally, government doesn't like to give up power. Currently, as mentioned above, the tax code is used to encourage (or discourage) all sorts of behavior, whether its buying a home (mortgage interest deduction), higher state taxes (state tax deduction), or buying hybrid cars. Soon, the national sales tax would be used similarly as complaints began to roll in. Certain businesses would lobby Congress for favorable sales tax treatment (for example: the automobile industry, once new car sales plummet); other special interests would lobby for tax incentives for "good" behavior (buying hybrid cars) or tax disincentives for "bad" behavior (buying unhealthy junk food). Advocates of the poor would decry the sales tax on food (despite the "prebates"), and the class warfare types would complain that "the rich" get a prebate check just as big as "the disadvantaged". Because the tax would be embedded rather than a separate line item, nobody would know how much tax they were actually paying, and retail businesses would be stuck with sorting out the various byzantine laws. Yes, this is an extreme scenario, but can anyone who has watched government in action declare that it wouldn't happen?
Our current tax code stinks, there's no debate on that. But a national sales tax is not the way to go. No major industrialized countries have a retail sales tax, and the reasons are many. We should focus on tax reform that limits government intrusion and promotes economic growth and prosperity, and the "FairTax" is not the answer.
Comments