Tuesday, September 4, 2007

The "Fair Tax" - Reposted

A lot of very intelligent people I know as friends and acquaintances seem to really be on board with the "Fair Tax". I've avoided talking about it, because, up until the last week I've done almost no research on the issue. Whether you are a supporter of the proposition, an opponent, or not sure, I strongly recommend that you go here and view the pdf FAQ from www.fairtax.org. I did earlier this week and enjoyed the group's presentation of the issue.

There are some things I want to say from the outset about the whole debate. And I use the word debate very honestly, because I'm going to talk in this post about what I like about the idea and what concerns me about the idea. And anyone who reads my work here at JG&AH is more than welcome to send me an email answering any question or challenge and I'll be glad to post your response.

First off, I use quotes around the words "fair tax" because I hate the use of the word "fair" in the context of anything political. At the risk of plagiarizing Mark Belling, who made this same comment while filling in on the Limbaugh show this week, I usually associate the term "fair" with devious, Left Wing policy aimed at spreading misery rather than elevating through opportunity and hard work those who are less successful . I'd prefer those who advocate this new tax policy call it something - anything - other than the fair tax. How about "equal tax"? How about "consistent" tax? Granted, each of these things almost equally reeks of modern liberalism, but fair is the worst by far. Now that I've aired that grievance, I'll move on and refer to it as "The Fair Tax."

In a nutshell, those who have been living under a rock and don't understand even the basics about the Fair Tax, its essentially a tax on consumption that replaces all other national taxes. The mark that the group seems comfortable with is 23%. So, at the register, the price tag says $100, your final bill (assuming there's no state sales tax) will be $123. Now, Fair Tax advocates, HOLD ON - don't panic, I haven't told the whole story yet, I'll get there in a moment to explain my math.

Let me tell you the main reason this kind of tax reform appeals to me. I hate the progressive income tax. Its from the very bowels of hell.

Those who know me best know I'm really, despite some of my venting about various Democrats on these pages, a very laid back guy. In person, when we're watching a ball game together, I'm really hard to agitate. But one of the fastest ways to rile me up is to play the class warfare card. The progressive income tax does nothing more than legitimize class envy and class warfare, and that sickens me. How anyone can make the claim that I should, for example, pay 40% of my income in taxes because I'm successful at what I do, while someone less successful pays a lower rate? It is absurd and offensive. It has no logic other than class envy.

This is why I have supported the concept of a flat tax for the longest time. If the tax rate across the board is 10% and you make $20,000 a year, you pay $2000 in taxes. If I make $1,000,000 a year I pay $100,000 in taxes - five times what you earn total. Who is paying more? I am. But the rate truly is "fair". Its an equal percentage of what we earn. As Daniel Mitchell of the Heritage Foundation says:

"A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penal­ize success and discriminate against citizens on the basis of income."

What's more, those who pay a vast majority of the taxes in America will get a huge break - spurring investment and infusion of capital into the economy. It also takes no more from those who are the definition of "poor". Says Mitchell:

"For instance, a family with an annual income of $20,000 faces a tax rate of zero."

However, the flat tax replaces only the income tax. There are still business taxes, while unseen by many, those who own businesses have to adjust their product price based on the hidden burden. The Fair Tax as proposed replaces not only these hidden taxes, but the payroll taxes needed to fund Social Security and Medicare (FICA). That's huge. The main attraction of a consumption tax like the Fair Tax is the fact that, save for your state income tax (I'll address that later) and your payroll deductions like 401k, you take home your entire paycheck.

So lets go back to my math on the retail example above. Under the current system, lets say, a tire for your car costs $100 before the current local sales tax is put into effect. What goes into that $100 price? First, you have the costs of actually producing the product - raw material, labor, machine upkeep, and logistics. Those costs total $50 (again, just pulling numbers together for example). Then you have the hidden taxes - on all levels - that total $35. Add to that a profit mark up of roughly 20% and you get your hundred dollar price tag - and that is before you add the local sales tax. If you are lucky enough to live in the people's democratic paradise of Chicago, that's another 10%. So, I go to Chicago, buy this same tire, and the total price with tax is $110.

What would it look like with the Fair Tax?

First off, add in the usual costs of $50 for production. What next? Your 20% mark up for profit, and that puts the price of the product at $60, and that is the price that the product goes onto the shelf with. Add in the 23% national sales tax and your tire is $73.60, assuming there is no local sales tax. Once Daley dicks you with his 10%, you still pay only $79.80 with all sales taxes - a full $30 less than with the current system of taxes. And that's assuming there are still local sales taxes (more about that later). What's more, there will be a trickle-down effect with the costs of the raw materials and other services that the manufacturer pays for any services he uses that go into the price, because his supplier will pay less in taxes. The $50 production costs could very well drop to $40 when all is said and done.

In short, the Fair Tax eliminates a lot of hidden taxes that go into the initial costs of the product, driving down prices. Some on the Left may say, "fine, these producers will just inflate their profit back to the original price point, pocketing the difference." But this is ignorant of market forces. Some may try that, but it won't be long before another provider of the service realizes that he can make the same 20% profit and undercut the high price of the person setting at this artificially high price. Those who want to inflate their prices in such an instance will be undercut by the market quickly and have to correct. Simple, simple economics.

Other advantages - and this is not an exhaustive list:

  • criminal elements will finally be taxed - drug dealers who profit from breaking our laws, for example, will have to pay the tax when they spend their ill-gotten money, rather than flying under the radar.
  • government entities like the IRS will no longer be able to terrorize average citizens regarding tax write offs. Business's compliance to the sales tax will be the only thing monitored.
  • all capital gains, gift, inheritance (death taxes), and personal taxes will eliminated. Investment will go through the roof (I've long advocated for the Cap Gains tax to be abolished).
  • as the economy grows, so will personal spending and personal and business investment, thusly, the willful contribution of taxes with the sales tax. This will help the shortfall of funding for the Ponzi Scheme known as Social Security. Suddenly, we could see a subsiding in the panic to reform Social Security.
  • for those of you obsessed with fairness, since the wealthy consume more and consume items that have a higher price tag, they naturally, like with the flat tax, will pay more in real dollars than Grandpa will at Walmart and Denny's.
  • everyday voters will have transparency in the tax they pay. When the government hits your paycheck, you hardly see it. If you gross a thousand bucks, you take home $800, you think "every two weeks I get another $800" without ever really stopping to consider you COULD take home $1000. That's the hidden bitch behind payroll deductions. It has created a culture that shelters a lot of Americans from the realization of how much their porkish government screws them.
All this, of course, is contingent upon the assumption that a rate of 23% will be sufficient to generate this level of revenue. Like with all taxes, there will have to be study to find what the correct level of taxation will be to maximize the revenue from the tax. As the job base grows, as people have more disposable income to spend and invest, a lower rate almost always (up to the point of diminishing returns) generate more revenue. In the long run, who knows, the 23% may be too high.

But the fact of the matter is, there is much more transparency. When you look at the receipt from Walmart and see that the 23% has now gone up to 25%, it'll motivate you to expect more from your congressman. And there won't be a day that goes by without you knowing what their antics are costing you, because you'll see it in your day-to-day living.

Now, that's not to say that I have no concerns - but their mostly minor. I'm chapped about the fact that states and local governments, under the plan, still retain the right to charge a sales tax ON TOP of the national one, in addition to their state income taxes, which most have. FL and TX Democrats may make the absence of a National Income Tax an excuse to justify creating a State Income Tax, because "you can afford it" . Don't be surprised.

I'm also concerned about relying on consumption to fund the federal government. While I acknowledge the chart on page 7 of Fairtax.org's FAQ, consumption is still cyclical. If the government has no ability to tax incomes - people, generally speaking, will always be seeking income - and there is a long downturn overall in spending it will cause a revenue shortfall. If I could count on the government to curtail its spending during these downturns (fat chance), it wouldn't be a big deal. In the example chart by economist Ross Korves, income and expenditures co-vary over a period of thirty years. However, during this period governments had tax streams from both consumption (albeit minor) and income. Once consumption really tanks, the government suddenly is left with reduced income and the same batch of spend happy politicians. Granted, Korves has shown during the study period (1972 to 2002) that consumption has remained constant, but to feel more comfortable that this trend is not an aberration in history, I'd want to see other, less overall prosperous periods to be comfortable. It'd be nice to see how these trends were during the 1920s and 1930s. If our economy really goes into the toilet and people really scale back on spending, we could be stuck with Keynesian busy bodies screwing with the market once again, ala 1933 and beyond.

The biggest concern with the tax from its more conservative opponents (including Mitchell above) has been the danger of double taxation. That is, unless you repeal the 16th Amendment and abolish the income tax that way, we run the risk of having both an income tax and a gargantuan sales tax combined. Even Fair Tax proponents acknowledge this, and repealing the 16th Amendment is a major component of their proposal, as it should be. However, good luck in getting it repealed. That should be priority number one of the implementation of the Fair Tax. No repeal of the 16th Amendment, then no application of a national sales tax. Period.

But, as the example above shows, its still a boondoggle for the consumer, producer, and tax payer.

Folks, they are starting to win me over. Anything that simplifies the tax system that we have now is a good thing. Anything that enables average people and businesses of all sizes to maximize profit and grow the economy, should be applauded and encouraged.

Check them out at www.fairtax.org.