I have been considering the “Fair Tax” since it became the centerpiece of Mike Huckabee’s campaign for the Presidency in the 2008 elections. A number of “tea party” protests on April 15 were given over, all or in part, to rallies for the Fair Tax. It is also getting accolades from a number of conservative commentators whose opinions carry a lot of weight with conservatives. For that reason I thought in might be wise to reconsider my original position of opposition.
After reviewing my original research, extensive scrutiny of the FairTax.Org and FactCheck.Org websites, I find I am still opposed to the tax for a number of reasons. The primary one is that it is unconstitutional.
FairTax.Org describes the Fair Tax as a progressive national retail sales tax. Any type of regressive or progressive tax, whether under our present tax system or under a Fair Tax is, in my opinion, unconstitutional. One of the underlying principles in all of our founding documents is that of equality or uniformity in the application of all laws, including tax law. It is the principle of equality/uniformity that underlies the words “created equal” in the Declaration of independence and Articles 1.2.3, 1.8.2, 1.8.5, 1.9.4, 1.9.6, 1.9.8, 4.1.1, 4.2.1, and 5.0.3 in the Constitution, as well as Amendments 13.1, 14.1.3, 14.2.1, 14.2.2., 15.1.1, 19.1.1, 24.1, and 26.1.
The Sixteenth Amendment grants the power to Congress to, “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” It does not grant the power to make those taxes progressive. There is nothing in the Constitution that would justify a progressive tax of any kind, whether on income, sales, or consumption. The concept of a progressive tax comes from Karl Marx not James Madison.
Article 1, Section 8, Clause 2 requires that all “Duties, Imposts and Excises shall be uniform throughout the United States.” At the time, the idea of an income tax was not contemplated, therefore it is not included, however it does establish the principle of uniformity in levying taxes.
Ordinarily an argument of unconstitutionality would suffice, but in this case not everyone will agree with my contention that equality/uniformity is a basic principle underlying the founding documents. Furthermore, a large percentage of citizens including many of my fellow conservatives, are more than willing to accept unconstitutional proposals if they appear practical and offer them a personal benefit.
A significant consequence of our current tax system is the redistribution of wealth with a sizable number of lower income citizens paying no tax at all. In fact, many not only pay little or no taxes, they also receive a portion of the taxes paid by higher income citizens in refundable tax credits. This creates a mindset that causes many in the lower income brackets to be unconcerned about exorbitant taxes levied on fellow citizens with more income.
In fact, they are more likely to vote for spendthrift representatives rather than those who are more fiscally responsible, on the supposition that the spendthrift will provide more personal benefits. This is one of the fundamental causes behind the current state of our government. The Fair Tax does not eliminate this obnoxious characteristic of our current tax code.
Many of the claims made by advocates of the Fair Tax are misleading, either unintentionally or by design.
1. Tax rate: The advertised tax rate is 23%. This is misleading in spite of the fact that advocates of the Fair Tax readily admit it is an “inclusive rate”. The real tax rate is 30%. To illustrate this I will use an example given on the Fair Tax website.
“A lawyer bills a client $500. Taxes due on this sale are $150 for a total of $650. If his/her client only pays $350, then the lawyer would only remit 23 percent of the gross payment as tax ($80.50) with the monthly sales tax report. The next month, his client pays the balance of $300. The lawyer would remit 0.23 times $300 or $69.50 on that month’s sales tax report. The total tax remitted is the same.”
The average citizen, accustomed to paying sales tax, would assume the tax on $500 to be $115 at 23% ($500 x .23 = $115). However, in this example the tax is not $115, but $150. The reason is that the price is tax inclusive, that is, it is included in the price of the service.
The lawyer wishes to get $500 for his services. If he adds 23% to the $500 fee as he would with a regular sales tax, the total fee for his services, including tax would be $615. Under the Fair Tax however, he would pay 23% of his gross revenue ($615 x .23 = $141.45). His net income from his service would be $473.55 ($615 – $141.45 = $473.55) In order to realize his full fee of $500, he would have to add 30% into the fee for a total of $650 ($650 x .23 = $149.50). His after tax fee would then be $500.50, close enough for government work.
The real tax rate then is 30% not 23%.
2. Market dislocations: The imposition of the Fair Tax would cause major dislocations in the retail market since the tax is only payable on new items, not used, regardless of price. This fact would induce consumers of expensive durable goods such as houses, autos, appliances, etc. to purchase used items rather than new. For example a refrigerator selling for $1000 if purchased new would be $1,300 including tax. The same refrigerator, used, would not be subject to the Fair Tax. Allowing for depreciation a refrigerator used for a year would probably sell for a few hundred dollars less than a new one plus there is no tax. Which one would the smart consumer buy?
A new car valued at $20,000 would cost the buyer $26,000 including tax. The same make and model, used, with a few thousand miles on it, would probably sell for around $15,000 to $17,000, with no tax, a savings of about $10,000. Which would you buy?
It is easy to predict that the Fair Tax would depress the sale of new homes, autos, major appliances and other big ticket items. It is unlikely the seller would be able to pass the tax along by inflating the price of used items. The more sophisticated the buyer is; the less likely he or she will be willing to pay a premium price for a used product.
3. Less buying power: Most of those who advocate the Fair Tax point to the fact that it eliminates the IRS, stops deductions from our paychecks for Social Security and Medicare and gives us more buying power. After going through the 36 page summary of the legislation, I believe it is safe to say that any additional buying power you have will be short lived.
Let’s say you are a renter paying $1,000 month rent. Rent is taxable under the FT. Your $1,000 rent payment suddenly becomes $1,300. Maybe, you don’t rent, but own your own home. Look at your last mortgage payment. How much did you pay in interest? How much do you pay for insurance? Did you have someone cut your lawn or shovel your snow? All these things are taxable. Pay your own health insurance? That is taxable. So is your auto insurance. Visit a doctor or get a haircut. Taxable.
Furthermore, advocates of the FT claim it is revenue neutral. There are plenty of experts who dispute this claim. However, experts of any kind are wrong almost as often as they are right. So, let’s just apply some common sense. Proponents tell us that the Fair Tax is revenue neutral, meaning the federal government will get the same amount of taxes with FT as with the present system.
The corporate income tax, capital gains taxes, inheritance taxes, and a couple of others would all be eliminated. That means that the ordinary tax payer would have to pay enough additional taxes through the FT to replace the revenue from all the taxes eliminated. There is no possible way the FT can be revenue neutral and at the same time lower the tax burden for the average citizen.
If I have aroused your interest, there are three documents you should read.
The Fair Tax: Fundamentals and Facts
The Fair Tax Act of 2007, Plain English Summary
Unspinning the Fair Tax by Fact Check dot Org.
The tax system we have now is terrible. To dump it and go the Fair Tax, however, in my opinion, would be a disaster, .