Is the Time Right for FairTax?
The idea of instituting a national sales tax to replace the federal income tax is one of those issues that has cropped up from time-to-time over the years but never seems to go anywhere.
While a similar approach has been used in Europe, many in the U.S. are concerned that the institution of a national sales tax will have serious negative consequences for consumers on the low-end of the economic ladder as well as businesses in sectors such as retailing.
The current primary campaign has brought the sales versus income tax debate to the spotlight again as Mike Huckabee, the former governor of Arkansas and a candidate for the Republican nomination, has thrown his support behind a national consumption tax that proponents call the FairTax.
A group called Americans for Fair Taxation, The Boston Globe reports, is promoting a 23 percent tax to be added to the cost of all goods sold. The group contends that the revenues generated by this FairTax would replace all the government takes in from the current income-based system.
Mr. Huckabee’s campaign website offers several paragraphs to support the FairTax. The site states: “I’d like you to join me at the best ‘Going Out of Business’ sale I can imagine – one held by the Internal Revenue Service. Am I running for president to shut down the federal government? Not exactly. I am running to completely eliminate all federal income and payroll taxes. And I do mean all – personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment. All our hours filling out forms, all our payments for help with those forms, all our shopping bags filled with disorganized receipts, all our headaches and heartburn from tax stress will vanish. Instead we will have the FairTax, a simple tax based on wealth. When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness.”
Gerald Prante, a senior economist at the Tax Foundation, a nonpartisan research organization, told The Globe, “They’re overly optimistic on many things, such as the administration of the tax and the elimination of the [Internal Revenue Service]. It’s a public relations thing because everyone wants to get rid of the IRS.”
The reality is a consumption tax wouldn’t eliminate the need for an IRS-like collection agency, according to Mr. Prante. Instead, 50 different state agencies would have to be put in place to cover many of the tasks now handled by the federal entity.
Discussion Question: Does a national consumption tax make sense for the retailing industry?
I can’t think of anything less fair than the oxymoronically named FairTax.
This article is the first I’ve heard of the idea–I guess I’ve missed some economic news of late–and at first blush it would seem to raise the top bracket on the very highest earners from their current 15% (because the vast majority of private-equity managers’ income is taxed as capital gains and not income). But the very highest earners spend very little of that income on goods and services, so most of it wouldn’t be taxed at all, and the revenue would be lost forever.
Now, whatever we might think of the government’s role in social services–health care and education, not to mention Social Security and Medicare–the fact is that we all depend on government for our infrastructure–roads, bridges and waterways. We also depend on government funds for our national defense, however well or poorly our armed forces and contractors do the job in practice. And the very people who cry the loudest about taxes are often the people whose fortunes come directly from government contracts.
Even if we run deficits forever, at some point, there has to be money in the treasury in amounts that bear some relationship to what we owe foreign banks and governments, or they will eventually stop lending to us. And cutting revenues by another 50-90 percent, by shielding even more of the income from the top 1%, which earns about half of all the income of the country and thus needs to supply at least half of the revenue, is not a good way to build the trust of our creditors.
And it’s not a shortfall we can make up on the backs of the rest of the population–the numbers just don’t work.
As it is, the payroll tax means we tax our lowest-income workers as heavily as the private-equity crowd and use their contributions to fund the Social Security checks of the rich, along with everyone else, and I’d prefer that we had some way of exempting the poor from that level of regression. But not at the cost of scrapping the programs entirely, because they do keep all our seniors out of poverty.
But I can’t see raising their exposure to 23% (because the cost of living dictates that they spend all of their income) and have them disproportionately financing a government whose services, in the absence of meaningful social spending, would mostly benefit people who are already better off than they are. (Yes, I am assuming that any Congress that can pass a national sales tax would also be capable of eliminating Social Security and Medicare.)
In the most benign cases, that would mean a minimum-wage stocker at Wal-Mart, who is already contributing to our (and by that I mean the RetailWire community, us, personally, with our various professional practices and degrees) parents’ Social Security checks, would now be paying 23% of his/her income for the highways you and I drive on and the federal research grants our college-age kids get to use to study with professors at universities, while an investment banker spends maybe 20% of total income and pays 23% of that.
In a more extreme case, that stocker is contributing to a multibillion-dollar, no-bid government contract that pays the salary of the investment banker.
How is that a fair tax?
A 23% national sales tax might be a great gift to mom and pop retailers. Their cash revenues are less likely to be reported accurately (than chain stores), so many of the sales tax dollars will go directly into their pockets. In South Korea, the government incentivizes everyone to avoid cash transactions, so tax evasion is harder. In the USA, maybe the sales tax should be doubled for all cash transactions. It’s one way to reduce sales and income tax cheating.
No, it does not make sense. Our economy is a global economy and a “fair tax” is anything but that to the retail community. Also a tax of 23% is high enough to create an entire sub-culture of tax avoidance practices which would be far greater than we see today with the income tax code. Finally, the ability to implement a “fair tax” is quite low due to the way the US economy has been built around the current tax code system. The pressure for exemptions, etc, would be too high to make a 23% rate work.
Simply put, FairTax would place true total buying power back into the pocket of the American consumer. Given the pre-bate allowance to help purchase staple food items, it’s an impressive solution for people of all income brackets and retailers surely would benefit from the change in terms of increased consumer spending and decreased compliance cost.
Does anyone seriously believe that the Congress would let any kind of tax simplification plan go through unedited? The tax code is the product of decades of carefully manipulated and well paid for fine tuning. Tax reform makes good campaign rhetoric but for all that talk few things ever change.
No more corporate income taxes? This would be a great way to promote the USA in attracting companies to locate here. It’s worked very well in certain states. If this passes, buy stock in eBay. I don’t think I’ve ever had to pay sales tax on something I bought on eBay.
I would be curious if a FairTax would have a positive environmental impact…would we be less disposable in terms of what we purchase (disposable cameras, plates, cups, printers, phones) because we can get those items cheaply now, so upgrading or disposing is an easy choice? Or would we buy more wisely if there was a considerable tax associated with the purchase?
While 23% might make me think a bit more about what I am buying, I think for many at the lower end of the economic spectrum, it would make a significant difference in how they purchase.
As someone in a tax heavy state (income and property, with no sales tax) I think it would have to be considered that states would need to look at their tax structure as well. A 23% tax here with no relief of property or income tax would be oppressive.
I’ve loved this idea since the first time I heard it proposed (by Frank Zappa while he was running for President in the 80s). What people seem to miss about the whole concept is the part about eliminating the Fed tax…this alone would increase expendable income for all strata and although the very bottom of the bell curve might suffer slightly, the real suffering would happen at the other end, where our incredibly complex system allows the top 5% to pay a much lower rate than average, if at anything at all. Also, fundamentally, it is wrong to tax earnings vs. spending; it is a backward message.
In the end, with more expendable income, it would balance out for retailers, although the initial push would be rough going while consumers figure that out.
With this whole topic, I’m reminded of one of my favorite quotes by Charles Mingus…”Making the simple complicated is commonplace, but making the complicated simple–awesomely simple–that’s creativity.”
It might reduce the need for the IRS, but imagine the level of inspection required in the Postal Service! You can buy anything via the ‘Net now, and companies located overseas will figure out how to cost-effectively deliver goods to U.S. customers without paying the sales tax, I’m sure. That alone shouldn’t stop us from considering the proposal, but let’s not kid ourselves.
From a retailer perspective, it would seem to shift a rather large burden off individuals and the government onto retailers. Once Congress got finished adding exemptions and special cases, and thresholds and credits, I would expect retailers would have to hire analysts just to figure out what and who they should charge and how much they owe.
The article was OK but was not deep enough to give a good picture of how the FairTax would work.
The idea is more than just adding 23% onto the present cost of goods and services. The important thing is to remember that the embedded cost of tax in every retail item “goes away.” And when I say goes away I mean that the cost of the average retail item will fall by about 22%. The free market will dictate this. So prices with the tax included effectively stay the same as they were before. Paychecks will not have any federal deductions taken out and employers will not have any matching costs. The paycheck earner will have a bigger check, thus more money to spend. I know this sounds simple but sometimes we tend to make more of the simple than we should. We don’t need to do that.
Most states have a sales tax in place already and it’s just a matter of adjusting the cash register to make the change. Also think of the 20 million illegals in this country who are spending money and using services but not contributing to the present system. I am not saying that all of them are not contributing but as far as income taxes go, there is certainly some disparity. They would now be paying in at the retail level and would not be receiving the PreBate unless they had a valid SS number.
Again the article was pretty good but a little shallow. The best info on this legislation (70 co-sponsors) is at www.fairtax.org. I highly recommend The FairTax Book by Congressman John Linder and talk show host Neil Boortz.
Is the time right for the FairTax ? It’s overdue!
The first thing people need to understand is that the 23% FairTax IS NOT added on top of a product’s price. It simply replaces the current embedded taxes included in prices that are caused by the current system and are eliminated through the FairTax. Therefore prices remain about the same, and we have our entire paycheck to buy them.
One only needs to log onto www.fairtax.org to get the true story. Here you’ll find clear information. Not a bunch of false information put out by people who have a vested interest in the current system. The FairTax was put together by leading economists over an 11 year span and an expenditure of $22 million in research, along with input from a cross section of our society. NOT by politicians.