Beware The Fair Tax

minute-man-2-lithoI 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, .


9 responses to “Beware The Fair Tax

  1. I looked at the Fair Tax almost 2 years ago and laughed. It HAD to be drafted by economists as it was/is, a clear example of policy based on goals, ignorant of consequences. You do a much better job of ripping into it than I did. I have been a fan of flat taxes but I am getting more interested in a land tax for government ($1 per acre does it for the Federal Government)

    • Tracy

      A land tax would be in line with the method of revenue raising used by the founders. However, one problem with a land tax is that the majority of tax payers do not own land which would leave us with the same problem we have today. Too many people not paying taxes and therefore having no stake in increases in the tax rate.

      How about a flat income tax of 10% with NO exemptions. Those who earned or received $1.00 of income would pay $0.10 in tax. By applying the tax on the first as well as the last dollar earned we would eliminate the non-taxpayers who have no investment in our country and therefore not as much stake in its policies. I guarantee you, no fiscally irresponsible politician would ever be elected.

  2. I see the biggest initial issues as (1) a requirement to define at the federal level what is old and new, (2) perform administration and enforcement tasks, and (3) to determine what will be exempt. I suspect such a document will at least equal the size of the current tax code because Congress will amend the “Fair Tax” to insert their propensity to continue to use the tax code as social engineering and special interest rewarding tool. As a result, the “Fair Tax” will eliminate the IRS, but, we will need replace it with FTRS, the Fair Tax Revenue Service to administer collections, and decide what is old and new and everything in between, and administer exemptions.

    Selling the “Fair Tax” will require a detailed analysis of who pays what now and later, for what. So far, this lack of comprehensive detail, and the absence of the total roles and responsibilities of the FTRS, has obscured revealing the complete and actual impact of transitioning from the IRS to the FTRS.

    As you pointed out, the “Fair Tax” expressed as a percentage of the the total sale is 23% just as the proponents state. However, also as you pointed out, this is at least a bit misleading, because most sales taxes are paid as a percent of the price of the commodity or service. Considering this paradigm shift in approach, the “Fair Tax” is indeed a 30% tax on top of the state sales tax typically anywhere from 3% to 7+% [see:

    Today, as you have noted, a large block of Americans [voters] don`t much care about considering the politics of a candidate`s position on raising or lowering federal taxes because they don`t pay federal taxes. Thus, I believe that the basic thrust of the “Fair Tax” is that every American will have a “Me issue” stake in the political issue of taxation. This new issue in the minds of many voters might result in more conservatives getting elected.

    A definite good point attributable to the “Fair Tax” is that ordinary Americans will regain their privacy regarding their incomes when the IRS disappears.

    The “Fair Tax” needs work before it becomes an acceptable alternative to the IRS. However, one thing that Congress could do right now would be to send a complete paper copy of the tax code to every income earner annually. This 12 foot pile of paper in everybody`s mailbox will really heat up the debate.

    • Fenton
      When you have some extra time, you should read the 36 page summary of the fair tax. (Link at bottom of article) I believe you will find it interesting and it clarifies all of the questions you have. “Privacy regarding their incomes” is covered by a requirement that income still be reported for the purpose of determining social security benefits.

      • Thank you. I missed that little nugget relating to the continued requirement for the federal government`s new FTRS to continuing with the collection of income data to support other programs like Social Security. I`m sure there are others.

        I am a “Flat Fair Tax” proponent – no exceptions – “Flat” because everyone pays the same percentage – and actually “Fair” because each person`s percent share of the tax load is the same. The only problem is that the lobbyists who currently own the majority of Congressional seats will never let “the people” get a vote on it.

        Lastly, I am dying to see the first actual amendment to the sixteenth amendment signed by an actual congressional sponsor shifting the basis of taxation away from incomes to a sales basis.

  3. bygracenotmerit

    You wrote: “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.”

    That is blatantly false. More money would come in under the Fair Tax because everyone would be paying into the system which is not the case currently.

    Also, monies placed off-shore would be brought back to America because the tax-structure for business would be more favorable here.

    • To Bygracenotmerit

      “Blantly” false??

      You said, “More money would come in under the Fair Tax because everyone would be paying into the system which is not the case currently.”

      That assumes that the fair tax will magically change human nature. The current tax-evasion rate is about 15%. I see nothing in the fair tax that would induce that 15% to suddenly start paying taxes. The human being is a clever creature, and when many people see how much the fair tax is going to add to the cost of everything they buy, both services and goods, they are going to begin to look for ways to cut their cost. The “feeling” of more money in their paycheck is only going to last for a couple of paychecks before it begins to “feel” normal. On the other hand every trip to the store reminds them how much the tax man taketh.

      Two examples would be the effect of excise taxes and sales taxes on the total amount paid at the register. The excise tax on gasoline, cosmetics, and a lot of luxury items are inclusive, as is the fair tax. The fair tax is added last therefore it will include the excise tax as a part of the price to be taxed, a tax on a tax.

      State and local sales taxes are even more pernicious. It is an exclusive tax added at time of payment, therefore it would also tax both the excise tax and the fair tax. If someone is buying an item for $1 with a 10% inclusive excise tax, the item purchased has a value of only 90 cents. Add the fair tax and the sale price becomes $1.30. Where I live the sales tax is 11% which would be applied to the $1.30 making the amount paid at the register $1.44. The “real” tax paid on the 90 cent purchase is 62.5% (1.44 x .625 = .90)

      Some economist place the additional cost of a gallon of gasoline at about $1 under the fair tax, for example.

      Numbers are tricky things, gotta be careful about the conclusions you draw from them.

      I assume you mean by “money placed off shore”, companies that relocate their operations overseas. If so, you are assuming that companies relocate only to avoid taxes. That, of course is a factor, but not the only one. Government regulations is also a biggie and the fair tax does not change that.

      Projections of any type are always iffy and depend on a lot of assumptions that may or may not be correct. I have found that the more anxious someone is to sell their proposals the more optimistic their assumptions are, quite often to the point of fantasy. That is almost always true of government, and I fear that in this case, it is true of the proponents of the Fair Tax.

  4. The fact that the “Fair Tax” is inclusive almost dooms it to failure because every other tax is typically additive – this change in methodology would require amending hundreds, if not thousands, of federal and state tax laws just to make the “Fair Tax” cost neutral. Add this problem to the impact of changing the level of taxation to every business in the United States and the “fair Tax” moves from doomed to failure, to dead on arrival.

    The fact is that IRS is not the problem and the “Fair Tax” is not the solution.

    The problem is that Congress made the tax code so complex, virtually nobody can file a tax return with the confidence to claim a 100% error free return. There are many, many times that even IRS argues with itself in various their written and oral opinions to taxpayers, which proves this thesis.

    Again, the single best way to change the system is to expose the problem to the light of day – – send a complete paper copy of the tax code to every income earner annually. This 12 foot pile of paper in everybody`s mailbox will speak for itself in terms of the awful job Congress has done with as few as thirty words contained in the sixteenth amendment..

  5. Be against the Fairtax because it is delusional nonsense — it’s very literally a farce. You could call it a hoax — except the Fairtax leaders are deceptive, not joking.

    Fairtax is an absurdity — it pretends to raise most of government revenue by taxing the government. That is how their math is set up.

    Read the book, page 148 Fairtax Book “The federal government will become a MAJOR taxpayer”

    Not only will the military, medicare, medicaid, etc, have to pay this tax to the US treasury — all state and local governments have to pay it too. Every city every township, every police department, every fire department — etc, has to pay 30% of their spending to the US Treasury.

    It’s insanity — and deception.

    Fairtax does tell the truth about its plan to tax the government — but it mentions it in the fine print, in the back part of their books. So its purposely deceptive.

    In 2004, President Bush asked for a study of a national sales tax — because Fairtax fans (true believers in this farce) kept asking him about it.

    The report came back in 2005 — from the Joint Committee on Taxation. Their report was that a sales tax to replace all federal taxation would have to be 60% or more — because of MATH. The government spends so much, that a sales tax to replace all our other taxes would be aburdly high.

    The 60% sales tax — the report said — could quickly go to 90%, if people avoided paying the 60%, as people surely would, by simply not buying as much, or by other means, bartering, black market, etc.

    Fairtax knows very well about this study — I will post a link below. Fairtax knew the sales tax could not be the 30% they claim — because they knew they were using slight of hand — they were pretending the absurdity of taxing the government.

    Now — Fairtax insist that the government CAN pay taxes to itself — because it already does. This is because of embedded taxes.

    Well – partly true. But if Fairtax passed, it wouldn’t matter one iota what the embedded cost were before. The moment the government starts sending itself 1.5 trillion checks for sales taxes on its own spending — is the moment the absurdity is manifest.

    No matter what happened before on this embedded tax theory – the government sending itself a check is not creating income to the government. Yet Fairtax counted every penny of the 1.5 trillion the government would pay itself.

    Here is the link to Fairtax absurdity

    Here is a link to the study President Bush asked for, regarding a national sales tax. The sales tax part is in chapter 9 — the link opens to chapter 8.