I attended my local Republican Congressman’s townhall last night and while their was plenty to see and hear I will spare everyone the story on the townhall and instead focus on my rebuke of the “Fair Tax”, a tax reform proposal that my Congressman is a strong supporter of and loves to tout at every opportunity. The “Fair Tax” is a proposal to repeal the 16th amendment, eliminate all federal taxes and replace it with a national sales tax that would be set at 23%.

It is a somewhat modern idea even though the idea of using consumption taxes has been around for a long time. It is mainly supported by conservative politicians and has garnered a handful of support mostly from conservatives and libertarians in the South where its main touters and creators syndicated conservative/libertarian talk radio host Neil Boortz and former Republican Congressman John Linder from Georgia have the most reach.

They wrote 2 books on the “Fair Tax” as well and the plan also got some traction from the candidacy of Herman Cain. His 9-9-9 plan was meant to be a bridge to instituting the “Fair Tax” and was his eventual goal. The “Fair Tax” bill has been proposed before the House multiple times with numerous co-sponsors but has never passed.

As a regular listener to Mr. Boortz and a resident of the South I am well versed in the “Fair Tax” idea and have had a lot of exposure and debate with its supporters. While nearly everyone agrees our current tax system is ineffective, wasteful and often unfair, the “Fair Tax” is not the best solution to fix our tax system and has many drawbacks that make it both ineffective and unfair.

The most glaring problem is the tax rate itself which would be set nationally at 23% as a starting point. This 23% federal sales tax would be applicable on all goods and services purchased. In addition to the 23% federal sales tax all state, local, county and municipal sales taxes would still be applicable which for most Americans would raise the total tax burden to around 28%-35. At this level the tax rate becomes very heavy and would create “sticker shock” that could cause people to purchase less goods and as a result hurt consumer spending and economic growth.

Supporters claim that by eliminating the hidden and embedded taxes in the price of goods and services overall item prices would go down and help balance out the effect of the new sales tax rate. While I don’t deny that the price of items would likely go down a little bit it would not be by 23% much less 28%. Most likely a majority of the savings that producers would receive from the elimination of embedded taxes would be pocketed as profit, used for investment or given to shareholders in the form of dividend increases. All those things are positive but it would not help consumers as a whole and sticker shock would still be a major issue that could harm the economy if prices increase overall.

The “Fair Tax” puts far too much trust and power in business something I and many Americans don’t trust for good reason. The “Fair Tax” also would unfairly impact lower income Americans because with their lower, tighter incomes a new sales tax would hurt them a lot more especially if they are currently paying a low tax burden. It relies too heavily on assumptions rather than proven facts. Not to mention the 23% tax rate could well go up if Congress feels it is warranted.

“Fair Tax” supporters point to something called the “prebate” which is part of the “Fair Tax” proposal. The prebate would be a monthly check to all Americans ,who register yearly. up to the federal poverty level would receive from the Government to cover the cost of “essential” goods and services such as food. While this idea would help it’s not enough to offset the new burden on lower income Americans as it would not cover non essential goods and services people may purchase. It would also not apply to non-citizens which is part of the anti-illegal immigration agenda many conservatives uphold.

While illegal immigration is a problem and something I have addressed in detail before this tax proposal and form of punishment is not the best way to address the problem. The other problem with the prebate is how large the program would have to be in order to cover all Americans who would rely on it. It is a massive and unfunded entitlement that would crush any savings the fair tax might achieve. The prebate is a bad solution to try and fix a flawed proposal.

The “Fair Tax” benefits higher income Americans the most as it would serve to lower their effective tax rate by a large margin (30%-35% to 23%) and the sticker shock is something they can absorb more easily. While supporters claim it would eliminate the IRS I highly doubt that because someone still has to collect and keep track of the federal sales tax revenues. Federal tax collection agencies are not going anywhere whether we call it the “IRS” or not.

It would also require repealing a constitutional amendment and fundamentally changes our current behind the scenes tax system. Most of all it would not help balance the tax system or raise revenues. Its supporters claim its either “revenue neutral” or even “revenue positive” but analysis have found that it would reap lower revenues especially if the economy slows down as it is prone to.

You cannot get rid of all the federal taxes including income, payroll, corporate etc. and expect it to be revenue neutral. Your simply bleeding too much revenue to expect a 23% consumption tax to replace it all the math doesn’t work.

During the 2008-2010 recession state sales tax revenues plummeted across the board and states were forced to make tough cuts to stay afloat. The federal government should not subject itself and its revenues to the whims of consumer spending like states have to. Of course, it does nothing in regard to state tax systems so if your state has an income tax you would still have to file and pay a state return.

The other fear is the possible creation of a “black market” for people to take advantage of the somewhat lower prices of goods and services without having to pay national sales tax. This would be very bad and could breed many negative consequences in addition to the lost revenues.

The “Fair Tax” is easier for people in the sense that they would not have to file a tax return and would simply pay sales tax but its harder for them to keep up with their tax bill (who keeps a record of sales taxes they paid?). It also encourages more saving and investment which is great but their are better ways to do that.

The “Fair Tax” is not the worst idea and is better than the current system but it is in reality the unfair tax, would be terribly ineffective and instead of unleashing economic growth could instead harm our consumer based economy and serve to hurt our most vulnerable lower income Americans and the middle class as they are hit by the brutal reality of sticker shock.

The tax system needs reform, its broken and rigged that is one thing we agree on which is why I will detail my tax reform proposal a “layered flat tax” in my next column.

 

Steen K