Thursday, January 10, 2008

13 Brief Points on Why the Fair Tax Sucks

If he were to become president, Mike Huckabee has proposed a national sales tax of 23% on all items. This flat sales tax would come with a fixed rebate said to cover "essential goods and services" that everyone would be allowed to have as a sort of way to rig some progressiveness into the tax. Huckabee also proposes to eliminate the IRS, and repeal the 16th Amendment, which states that Congress shall have the power to collect taxes from any source of income without the tax revenue having to be proportional to the population of the state from which it is derived. I think this is a terrible idea, and here's why:

1) Any sales tax is a regressive tax. Rich guy Gallant and middle class guy Goofus eat the same amount of food, drive the same amount of miles per day and use the same amount of medical care. The difference is after Goofus gets home for the week, he's got a couple hundred dollars of spending money, while Gallant has a couple tens of thousands. A sales tax on that food, gas and medical care means a much higher proportion of Goofus's money goes to taxes than does Gallant's money, which imposes a higher burden on Goofus than on Gallant. A progressive income tax attempts to impose a more equivalent financial burden on both Goofus and Gallant.

2) The figure "23%" is awfully misleading. The way our state and local sales taxes are described is a tax on top of the price of the good; i.e., if an item costs $100 and there's a 6% sales tax, the amount of money coming out of your wallet is $106. The 6% is a tax-exclusive description. So if an item costs $100, and you pay $129.87 for it, wouldn't it seem like you were having a 29.87% sales tax imposed upon you? Not according to Mike Huckabee and the proponents of the Fair Tax. The 23% sales tax described by is a tax-inclusive description as an attempt to compare it with an income tax. In reality, it's a 29.87% sales tax. But 30% sounds effing huge, so they play with the math in order to fool a bunch of people.

3) Most of us would end up paying higher taxes. For people living in poverty, the rebate would just about eliminate any of their tax burden thanks to the fixed rebate jiggered into the plan. For people making more than $200,000 a year, their personal tax burden would fall anywhere from 45% to 53%, while for people who earn between $15,000 and $50,000, the tax burden would increase as much as 7%, as I found out when I used 's own tax calculator. (Numbers from President's Advisory Panel for Federal Tax Reform)

4) The IRS couldn't possibly be eliminated. The government runs on revenue. It has to have an agency to collect it! You can call that agency whatever you'd like, but it would still be a massive government bureaucracy. In the case of the Fair Tax, you'd need two bureaucracies: one tax-collecting agency to collect sales taxes from businesses, and another tax-distributing agency to dole out those monthly rebates.

5) A President can set an agenda, but a President cannot change the Constitution alone. As we all recall from Government class, it takes 2/3rds of Congress plus 3/4ths of the states to ratify a new constitutional amendment. So in the years that it would take to officially eliminate Congresses ability to collect individual income taxes, we'd get all kinds of new sales taxes, resulting in potential double taxation. Yippee!

Okay, I'm running out of time, so the next points will be short.

6) Don't you notice taxes a lot more when you see a price and you have to pay an amount that is substantially higher than that price, rather than when you see a check with your name on it?

7) There are doubts as to whether or not the Fair Tax will even be revenue neutral at 30%, especially whether or not it will be in the future.

8) Oh yeah, all those state sales and income taxes that we currently have would of course still be on the books. So for states with income taxes, you'd still have to file a return every year, and you'd still have to pay an additional 5-8% for any goods and services purchased. And this is supposed to be a tax reduction?

9) The rebates do vary by number of children, but a single mother would have to have three children to equal the rebate given to a childless couple. Awesome for me, but seems anything but Fair.

10) Retirees have had their income taxed all their lives, and now that they've developed a nest egg, it will now be taxed when they try to spend it. Seems a little unFair, no?

11) High income earners are able to save much more than low income earners. According to the Bureau of Labor Statistics, the lowest quintile of earners spends 198% of their income, while the highest quintile spends only 61%. Therefore, any sales tax would penalize low incomes much more than high incomes. While the Fair Tax would encourage saving money and not going beyond one's limits (something this country apparently needs), it's just not possible for a lot of people to save money, especially when you're just starting out in life.

12) Fair Tax people promise that the price of goods and services will fall once the income tax is eliminated. I'm not an economist, but don't wages also have to fall in order for that to happen?

13) In order for it to be revenue-neutral, the 23% rate assumes that no fraud, evasion, or EBaying exists.


Jacob said...

We all care about quintile disparity, Steve.

You're right that any flat sales tax is a regressive tax, but theoretically one could mitigate this by taxing certain items (luxury goods) at a higher rate. Not that this is what anybody is proposing.

Yes, there would still have to be some tax-collecting agency, but I think it would be significantly smaller than the IRS (the complaint about the IRS by sales tax proponents is first and foremost the cost of the agency). Whatever second bureaucracy is created to send out rebate checks would be no bigger than the SSA, which is dwarfed by the IRS. The IRS is huge because our tax code is long. We could also significantly shrink the tax code and thus the IRS by getting rid of most of our deductions and exemptions, but that's not really what the sales tax proponents want anyway.

We don't actually have to keep collecting income taxes just because an amendment says we can. If a president were to gain enough
support to actually collect a sales tax, it would definitely be contingent on minimizing or eliminating an income tax. Repealing the amendment would be secondary.

Your number 6 point is a specific reaction sales tax proponents are counting on. These are people that want to reduce the federal government, and they believe that if we notice how much we pay in taxes, we'll care enough to make Congress shrink the budget. They believe that withholding is actually a sham because it seeks to hide the burden of taxation.

Sales tax advocates also predict the success of their plan will lead to adoption by the states of similar plans.

The current income tax code also shifts drastically and arbitrarily depending on one's marital status and children. There's no way to really make this "fair" in any system.

I've heard some sales tax proponents suggest an immediate rebate to those with significant savings (in any form) to offset the cost of future taxation. This is probably the least-fleshed out of any plan by sales tax proponents.

Sales tax proponents don't care about number 11. They like people to save, but only because they'll theoretically invest this money. Those unlikely to invest don't matter, anyway.

Sales tax proponents imagine a universe where the benefit to businesses provided by the elimination of income taxes would be distributed by a reduction in price and a reduction in wages (among other things). There are far too many variables to figure out how well the both could be accomplished simultaneously, but I would bet it would not happen.

Although everyone's saying "sales tax," what would probably be enacted is actually a value-added tax, which eliminates much of the ebaying issues you mention by taxing a little bit at each stage of production. Once one reaches a double digit sales tax rate a black market is created. Instead of buying bread at a grocery store, one will buy bread under the table. But if one taxes the farmer a little bit, and the wheat buyer a little bit, and bread manufacturer a little bit, and all of this cost is passed on to the consumer, it theoretically adds up to the same amount of sales tax...but the only way to "beat the system" would be to buy under-the-table wheat and making the bread oneself. Nobody would do this. This system works in Europe.

The way to get around a value-added tax is to buy from overseas, which gets tariffs involved. These are already ridiculously complicated, but the EU seems to have survived.

Anyway, I wouldn't favor any type of consumption tax over an income tax (though selective consumption taxes along the lines of sin taxes and on luxury goods to defray some of the budget are appealing). But there are people who've spent a lot of time thinking about how to make one work, and they would not have chosen Governor Huckabee as their representative.

Steve said...

Awesome response, Jacob!

It has always baffled me why the 16th Amendment thing is even a part of Huckabee's platform. The amendment isn't what allows the federal government to collect income taxes; it merely allows the taxation to be based on individuals and not on proportions of individuals. So repealing this would further complicate tax laws, but not do away with them. It just doesn't make sense.