Tax Reform in America

Why the So-Called Fair Tax Isn't Very Fair

Oct 12, 2007 Greg Cruey

The "fair tax" proposal is promoted by the organization Americans for Fair Taxation, and embodied in a bill in Congress called called H.R. 25. It has problems...

There is a movement underway in American political circles that could radically alter the way in which the government collects revenue. It’s called the "fair tax" movement. And it is slowly developing a following among political conservatives.

The "Fair Tax" Proposal

The proposal is simple: do away with income tax and replace it with a national sales tax on all new goods. Everyone would pay the same tax rate. We’ve no longer need the Internal Revenue Service (IRS), so it could be closed. And since everyone pays the same rate on what they spend, that would be “fair.” Wouldn’t it?

The rhetorical question is seldom answered, but the answer is “NO, it wouldn’t be fair.”

The Morality of Taxation

We tax money. We tax it when it moves. Yes, the current American system is fragmented and obtuse. It has loopholes that should be closed. Fairness is a moral concept. But there doesn’t seem to be a moral argument for taxing money when it moves away from you (when you spend it) instead of when it moves toward you (when you make it). Yet the “fair tax” crowd functions with a tone that presuppose the moral superiority of their position.

The fallacy of the “fair tax” position is that they make it sound like normal Americans don’t have to spend their money if they don’t want to.

Here’s an example. Say a husband and wife both teach. They have five or six college degrees between the two of them. They have an adjusted gross income of about $100,000 a year. If they managed to put $8,000 in an IRA (save it instead of spending it), and they get what the fair tax proposal calls a “prebate” (reimbursement for paying taxes on their first few thousand dollars worth of income), that would mean that they paid taxes on 70% or so of their income. Compare that to a doctor or lawyer who had an adjusted gross income of $425,000 in the same year and managed to put $275,000 of that away. He lived off of a paltry $150,000. He and his wife (assuming they have no dependent children at home) would pay taxes on just over 30% of their income.

How is that fair…?!?

The sales tax itself is also not fair because it applies to only new good. The idea that the average Joe could pay $4K to $5K in tax on a new Subaru that retail for $19,500 while a banker pays no tax at all on a $55,000 used Dodge Viper seems bothersome and disturbing.

The Hidden Agenda of the "Fair Tax

Conservatives like the fair tax proposal for a couple of reasons. One is that it has the potential to drastically reduce the amount of revenue the government takes in. Liberals would no longer have a choice about pork barrel projects – like children’s health insurance and tuition grants for low income college students. The revenue to pay for those things simply would be there. The Conservatives would get through the back door of politics what they haven’t been able to get through the front door.

The so-called fair tax is also about the ability of the upper rungs of society to control how much they pay in taxes. Under the national sales tax proposal, taxes become voluntary - but only for the upper third of society – for people that don’t have to spend most of what they make in order to live comfortably. That’s not fair. Whatever problems exist with the current system, that is not FAIR!

The truth is that the “fair tax” reduces the percentage of the federal budget that is collected from the rich and increases the percentage of the federal budget that is collected from the bottom half of society. It does so by NOT TAXING money that rich people decide NOT to spend. Rich people have the luxury of not spending large portions of their income; the poor and much of the middle class spend almost every penny they make in order to make ends meet. That’s why they are proposing a flat sales tax instead of a flat income tax. Under the “fair tax” those people (teachers, nurses, police officers, most military personnel, most industry workers, etc.) will pay taxes on a much larger percentage of their income than what doctors, lawyers, bankers and stock brokers will pay taxes on.

As badly as America needs tax reform, the “fair tax” (and most other sales tax proposals) are only fair to the rich…

The copyright of the article Tax Reform in America in American Affairs is owned by Greg Cruey. Permission to republish Tax Reform in America in print or online must be granted by the author in writing.

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Dec 16, 2008 1:45 PM

Guest :

First, I'm a democrat and voted for Obama.

The Fair Tax is designed to be revenue neutral. By using the GNP, they have come up with the percent that should be taxed to collect the same as the current income tax system.

You say that conservatives want to reduce the amount the government spends, but you need to look at history. The so called "conservatives" in recent history have actually out spent the liberals.

What you seem to forget is that under the current income system is that the consumers in the lower 50% are already paying taxes on 100% of their expendable income. Not only are they being taxed before they get their money, but EVERY business that is taxed passes on their income taxes to the consumer. In effect, consumers like us are getting taxed twice!

By removing income(and business) taxes, there would be a draw to bring more manufacturing into the US as opposed to exporting. It also would allow US manufacturing to compete on the international market.

On a local basis, tourists from other countries pay a share of taxes by consuming US goods, so the tax burden is shared across a wider base. Collecting taxes via the incredibly inefficient method of citizens filing taxes had a discrepancy of 290 billion dollars. Average taxpayers' costs to file tax forms this year was $207. Taxpayers spent $28 billion on software, tax preparers, postage, etc.

So, if the government could gather taxes in a more cost effective and efficient manner by using businesses, less money accomplishes more. At the same time, the increase in jobs would increase spending, manufacturing, and ultimately create more revenue for the government without placing additional tax burdens on the citizens.

The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. Someone who is wealthy can already avoid income taxes, much easier than they could avoid a consumption tax.

There are plenty of other factoids I could throw at you, but you should take the time to do a little research yourself to see all angles before picking just one point of view. Good luck with your narrow minded views that will mislead gullible people into ignoring a possible solution. I hope people are smart enough to do a little more reading that your article.

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