“Fair Tax”


,

“Fair Tax” Offers Neither Fairness Nor Simplicity

October 12, 2011

I would merrily accept a simple national sales tax as a replacement for the income tax—only if it followed the repeal of the Sixteenth Amendment. John Keel seems to misunderstand the purpose of my initial article about the so-called “Fair Tax.” I did not endorse the income tax over a sales tax; instead, I devoted my opening paragraph to denouncing the income tax, and I wrote that a sales tax “could be better or worse” than an income tax, “depending on particulars” of each. My purpose was to argue that “there is nothing about a sales tax that is inherently more fair than an income tax, and the Fair Tax would impose a new set of burdens on businesses and consumers.” While Mr. Keel disagrees with my article, he does not locate any errors within it. Instead, he mostly offers additional details about the points I made, and he argues that certain facts deserve greater emphasis. Unfortunately, he also makes a few mistakes in discussing the details of the tax, and he largely ignores my broader points. The first problem with the “Fair Tax” is simply its name; a sales tax offers no more “fairness” than any other major sort of tax. If it is “fair” to add a 30 percent sales tax to every consumable good or service, then it is equally “fair” to tax people’s income or property. If an income tax is inherently unfair, then so is a sales tax. True, any given sort of tax can be more or less unfair depending on how it is set up. Other things equal, a tax that imposes higher compliance costs is thereby more unfair. However, there is nothing inherently simpler about a sales tax than an income tax; a sales tax could be made absurdly complex, and today’s income tax could be radically simplified. Taxes that impose unequal burdens on people are by that fact more unfair than those that don’t, but both the income tax and the sales tax invite such problems. Just as an income tax can set higher rates for top earners, so too a sales tax can impose higher rates on “luxury” and “sinful” items and lower rates for “essential” (and politically-correct) items. Usually the most important marker of fairness is a tax’s rate, which can fluctuate for any given sort of tax. Surely no one who values government limited to protecting individual rights would regard a sales tax of 50 percent as more “fair” than an income tax of five percent. Overall Mr. Keel dramatically understates the complexity of the “Fair Tax,” though he does add useful detail about requirements to “register with the sales tax authority” and submit one’s books for government auditing. For example, Mr. Keel writes, “Sales tax returns are very simple (multiply your sales by 23 percent and send it in).” However, to calculate one’s total sales, one must first tack on the 30 percent tax to every sold consumable good or service, track each entry separately, and figure out which sales count as “intermediate” rather than final sales. (See page 6 of FairTax.org’s “Plain English Summary” of the Fair Tax Act of 2007.) An “intermediate” sale is one involving “property or service in the production, provision, rendering, or sale of other taxable property or services.” The huge list of goods and services that can serve both “intermediate” and consumable ends includes paper, cell phones, automobiles, clothing, computers, books,. . . Continue »


,

Concerning “Fair Tax Looks Ugly in the Details”

October 12, 2011

[We received the following letter from John Keel regarding a recent post by Ari Armstrong, and we’re posting it here with Mr. Keels’ permission. Mr. Armstrong will reply shortly. –Ed.] In his post “Fair Tax Looks Ugly in the Details,” Ari Armstrong makes several claims that I regard as false. I will address each point. Mr. Armstrong wrote, “The Fair Tax would replace income-related taxes with a 30 percent sales tax” and he correctly stated that the tax’s sponsors tout a 23 percent “tax inclusive” rate. If you earn $130 under the current federal income tax system and paid $30 in taxes, your tax rate would be 23 percent ($30/$130). Under the Fair Tax system, if you earned $130, and if you spent it all, you would also pay $30 in federal tax or 23 percent. If you did not spend all your earnings, you would pay less. The income tax rate is calculated using all of your income in the denominator so why not calculate the fair tax rate the same way for comparison purposes? Mr. Armstrong wrote that subsequent to the calculation of the revenue neutral 23 percent Fair Tax rate in 2007, federal spending has increased about 40 percent. He wrote we could only guess at how large a black market such a high sales tax would encourage. First, the Fair Tax would capture a huge amount of the black market transactions escaping taxation under the current income tax system. Drug dealers would start paying tax on groceries, gasoline, etc. Secondly, everyone who buys goods from a wholesaler will have to register with the sales tax authority. Would a wholesaler attempt to accommodate tax evading customers by not obtaining a copy of such registration? If the wholesaler did, he would have to hide all his under-the-table sales and related costs. An audit of his books would reveal reveal costs incongruous with recorded sales. I can tell you as a retired C.P.A., this would be a nightmare to manage. From wholesaler records, a government auditor could select wholesale customers for audit. It would be extremely difficult for a tax cheat to hide significant purchases in an audit because purchases can be easily traced to wholesaler records. Financial analysis of these purchaser’s books would easily reveal distortions in cost compared to revenue. Plus the tax evading retailer and wholesaler accomplice would not be able to use the banking system to deposit the clandestine money or write checks to employees or vendors.  A businessman could opt to take the risk he won’t be audited but most businessmen want to sleep. Knowing you are a sitting duck if audited will keep the vast majority of people honest. Again, the ability to go black market not only requires the ability to hide sales, it requires the ability to pay your bills off the books, in cash.  Certainly major businesses would not attempt this and even smaller businessmen would know they could be easily caught. Moreover, the tax does not apply to used goods so a black market would not exist in used goods. Mr. Armstrong wrote, “The Fair Tax applies to services as well as goods, whether sold or bartered, adding dramatically to the tax’s compliance costs.” Actually, service businesses compliance costs would be much lower because they would no longer file an income tax return as they do now.  Filing a sales tax return is much simpler than figuring out the. . . Continue »


,

"Fair Tax" Looks Ugly in the Details

October 1, 2011

No wonder so many Americans want to abolish the income tax and the IRS along with it. The IRS pries into our earnings, our daily spending habits, even our mileage records. The nightmarishly indecipherable tax code imposes huge compliance costs, along with the risks of arbitrary persecution for innocent errors. Pandering to special interests, politicians endlessly complicate the code with deductions, exemptions, and special breaks, distorting the economy. Hoping for a simpler, less-meddlesome tax system, some call for replacing all income-related taxes with a national sales tax. Those championing the idea include author and financial advisor Peter Schiff and Republican Presidential hopeful Gary Johnson. (Another candidate, Herman Cain, advocated a sales tax some months ago and then adopted a proposal blending a sales tax with an income tax.) The Texas-based group Americans for Fair Taxation offers the most mature proposal with its “Fair Tax.” However, there is nothing about a sales tax that is inherently more fair than an income tax, and the Fair Tax would impose a new set of burdens on businesses and consumers. The Fair Tax would replace income-related taxes with a 30 percent sales tax added to most consumable goods and services (an amount that would fluctuate over time with entitlement spending). The tax’s sponsors tout a 23 percent “tax-inclusive” rate, but that just means that a $30 tax on a $100 purchase represents 23 percent of the total price. The 23 percent figure comes from the revenue-neutral level for 2007; notably, federal spending has increased about 40 percent since then. Congress would determine the initial rate as well as future hikes, and no doubt Congress would treat the 23 percent figure as the floor. We can only guess at how large a black market such a high sales tax would encourage. The Fair Tax applies to services as well as goods, whether sold or bartered, adding dramatically to the tax’s compliance costs. Today, most states do not charge sales taxes on common services such as hair styling, massage, and lawn care (though a federal sales tax on services might encourage states to follow suit). Notably, many service providers work alone or in small shops, and each business would need to “register as a ‘seller’ with the sales tax administering authority” and make regular payments. The compliance burden may encourage some service providers to join larger corporations to handle the paperwork. The Fair Tax does offer some exceptions to service providers remitting the tax. If you earn less than $1,200 “not in connection with a trade or business” and “in connection with a casual or isolated sale” (as determined by the taxing authority), then the purchase is exempt. Also, if you work as a “domestic servant,” a category that apparently includes maids, nannies, and gardeners, then you don’t have to remit the tax; your employer does. Those hoping they’d never need to remit another federal tax under the Fair Tax, then, should check again. If you sell goods, provide services that are taxable (and most are), or hire help at home, you must remit the tax. If you spend more than $400 per year on foreign goods or services, you must remit the tax. And if you file something incorrectly (say, by improperly listing a purchase as “95 percent for business purposes”) the taxing authority can fine you and throw you in prison for up to a year. That the taxing authority no longer operates under. . . Continue »