While I’m trying to wean myself from all things political, I’m finding that I have to rid my brain of a few things that have been hanging out in there, shooting endless games of pool and smoking cigars. In any cleansing process, one must dispose of the impurities, so just think of my post here as me taking a trip to a virtual sweat lodge.
Okay. There is a proposal out there in the world to replace income taxes with a national sales tax. Mike Huckabee is a proponent, as is, I believe, Ron Paul. (N.B. FairTax proponents: You can get a great slogan out of that. “Two out of three Republican Presidential candidates prefer FairTax!” That’s for free. As you’re about to find out, I’m not in favor of the FairTax proposal, but you’ve got a right to sell it as effectively as you can.) The FairTax proposal is, I think, an honest attempt by sincere people to fix a system that irks the hell out of them: our income tax system. As someone who has been getting mugged by the IRS every year in recent years, I am not without sympathy for this sentiment. Warren Buffett has discovered that while he pays 17% of his income in taxes, his middle class staff members pay an average of 32% of theirs, which is not right. (Mr. Buffett, by the way, is the first to admit that it’s not right.) A system that leans so heavily on the middle while going easy on those at the top is in need of revision somewhere. The question then becomes, is the so-called FairTax the way to achieve that?
After looking into it pretty carefully and trying to be as objective about the whole subject as I can, I think the answer is, unfortunately, “no.” I’ll try to explain why not.
First, the FairTax’s proponents never seem to take into account that there is a huge industry that exists solely because we have a complicated and burdensome tax code, the accounting and tax preparation industry. This is an industry that employs over 800,000 people, a large percentage of whom would be thrown out of work in one fell swoop if the FairTax was implemented. The industry as a whole accounted in 2002 for $82 billion in income, $5 billion of which came directly from tax preparation. Of the $48 billion that went to CPAs, a huge portion would have been charged for tax planning and preparation. By shutting down this industry, the FairTax would take billions of dollars out of the economy and flood the job market with a tidal wave of the newly unemployed. Perhaps some FairTax advocate has some method of dealing with this disaster, but I’ve yet to see it.
Second, a goal of the FairTax proposal is to eliminate the IRS (another 45,000 or so employees thrown out of work). However, although it might be possible–and I want to emphasize the word “might”–to reduce the size of the IRS, some agency like it would still be needed to ensure that the system proposed by the FairTax worked. You see, one of the ways that they try to keep a national sales tax from being as regressive as it wants to be is to send “prebates,” either in the form of checks or debit cards, to individuals to individuals and families who live at or below poverty level or some percentage above it. The prebates would seek to give them the money that they would have spent in sales taxes up front. And this is where the IRS becomes necessary. Because, although the claim is made that income information will not have to be collected, you still have to know who is poor by the definitions of the legislation and who isn’t. Without some sort of income verification, cheating will be rife. Since income verification is built into the current system, parts of that system will have to be retained simply as a matter living in the real world.
But the real problem with the Fair Tax proposal is this: No matter how they try to game it, such a system will still be inherently regressive. Middle class people will still end up paying a disproportionate percentage of their incomes as taxes than would the wealthy. Some assumptions are made about middle class families avoiding taxes by saving their money rather than spending it, however, that’s not likely to happen in the USA I live in. We actually have a negative savings rate, which means that most people spend more than they make. The difference between what people make and what they spend is financed, of course, through borrowing, which means that not only will most people be taxed on 100% of their income, after paying for shelter, plus some. And the sales tax that gets rolled into debt would accrue interest, and folks would be paying on that tax for the life of the loan or, in the case of credit cards, in perpetuity.
Meanwhile, rich people, who don’t come anywhere near spending 100% of their income, would actually only pay tax on a fraction of what they make They, as investors and savers, would be spared in ways unimaginable to most middle class families. Since they are less likely to finance–and I’ve known people who pay cash for expensive cars who owned homes with seven-figure values outright–they would even be hit for a smaller amount of money on major purchases. Also, one of the advantages of being rich is that you can buy quality items, which last longer and therefore need to be replaced less often.
The FairTax proposal is an idea for people who want to believe that things can be simple, but that has never been my experience of this mortal world. The reality I inhabit is subtle, difficult, and complicated. And the society I live in is rich, diverse, and as simple as an algorithm. It would be wonderful if something as fundamental as a national tax system could be simple, but I don’t see it happening. Not to say that proposals such as FAirTax aren’t worth putting forward. It’s all a conversation.
