by Linda Beale
Link Worth Noting: the Wall St. Journal’s anti-FAIR Tax editorial, and Ed’s comment at TaxProf
crossposted with Ataxingmatter
I’ve often commented on the so-called “FAIR Tax” on this blog–a proposal for a consumption tax that tends to be supported by GOP politicians and right-wing propaganda tanks and is often blatantly misrepresented in discussions. See, e.g., Bruce Bartlett on Fair Tax Proposal ; FAIR Tax: Huckabee’s win in Iowa requires more discussion of his tax proposals. Caron on TaxProf notes today the Wall Street Journal’s editorial on the issue and commenter Ed D notes a number of the problems with the FAIR tax that I’ve pointed out before.
The so-called “FAIR Tax” is in fact terribly unfair. It is an extraordinarily regressive tax, since it is a tax on consumption rather than income and at least the bottom half of the income distribution tend to spend all of their income. It is often represented as a 23% tax, but that figure is misleading, since it is calculated based on a tax-inclusive sales price rather than a tax-exclusive one as most sales taxes are (so a 23% tax is really considerably higher than 23 dollars on a 100 dollar purchase price). Further, the rate would have to be much higher than that to be revenue neutral– at least 30% and realistically even around 50%. The Fair Tax proposal includes a tax paid by the government to the government and other unlikely sources of income, assumes no losses due to compliance problems, calls for “simple” enforcement due to elimination of the income tax, and assumes away transition problems (if our income tax were abolished in favor of this regressive tax) while shoving a huge burden to the states. All of those proposals are unworkable:
- there is no increase in revenues when the government pays tax to itself;
- compliance problems are likely to be higher with a national sales tax than with an income tax (most studies, based on other countries with consumption taxes, suggest 20-25% noncompliance);
- an agency equivalent to the IRS would be needed to audit compliance and to interpret laws and to pursue legal cases, just as is needed with the income tax;
- transition problems are gigantic: the elderly already living on retirement income have generally already paid an income tax on their earnings (and possibly on their savings income as well) but will now have to pay a consumption tax when their spend that savings, so they will be double taxed (think of all the areas that would be affected by removing the current tax system as well–prices generally have tax incentives built in, so that is another area that will hit established families much harder than young ones, and the elderly who are not rich especially hard);
- states that have income taxes mostly start from the federal income calculation as the base–they will either have to develop their own equivalent machinery to the IRS or completely revise their tax systems as well; states that already have sales taxes will now have much more of a problem collecting sufficient revenue, since a low-income person making a 100 purchase will have to pay the high federal rate of tax (say 40%) as well as the state rate (perhaps 7%), resulting in the $100 purchase now being $147. Many of the national sales tax proposals assume that the states will do the collecting for the federal tax –which brings its own problems in terms of inordinate burden on already stressed states, likelihood of inadequate compensation to the states, problems of confidentiality and consistency of collection across the states, etc.
IN short, a national sales tax system would be disastrous for us, and especially so as a substitute for the income tax.
The Wall St. Journal editorial suggests that GOP candidates should step away from the Fair Tax during the campaign: The Fair Tax Trap (Oct. 29, 2010). Given the title of the Wall Street Journal piece, one might have thought that it was going to address the many problems with the national sales tax proposal. But it doesn’t really. Instead, it argues that Democrats are attacking Republicans who support the FAIR tax without “mention of the tax-cutting side of the proposal”, bemoans that “the attacks do seem to work” and suggests that the “political reality” means that it would be better not to talk about the Fair Tax now and instead wait until “the income tax is on the road to repeal.” About the only issue it acknowledges is the vast increase in amount paid at point of purchase if someone lives in a sales tax state and ends up also owning a national sales tax amount of 23% (especially if there is still an income tax), which it admits could lead to cheating and the continuing need for an enforcement apparatus.
The Wall St. Journal thus appears to be advising its base (the right-wing and Republican party) on how to win an election by continuing to deceive people. It says it is a problem that the Democrats don’t mention the “tax cuts” from a FAIR tax. Come on. That’s tax cuts only for the rich: the poor will pay even more of their income out in taxes under the extremely regressive national sales tax. What about the transition problem (that people currently ready to retire would have already paid their share of tax on their wage income but would pay it again every time they spend a dime) or the problem for the states or even the deceptiveness of the rate? Not about to fill people in on those issues.