Karlonia.com

In a follow-up to yesterday’s post about the Fair Tax debate, here is a summary of what I have been able to determine are the major pros and cons of the Fair Tax (or national sales tax) as it is currently written:

Pros:

• Federal income taxes would be completely abolished. According to Fairtax.org, this would include all ancillary taxes on personal income such as estate, gift, capital gains, alternative minimum, self-employment, Social Security, Medicare, and payroll taxes.
• With the repeal of federal income taxes, the IRS (Internal Revenue Service or Income Robbery Service, depending on one’s perspective) would have much less power to snoop into the personal and private financial lives of American individuals. Ideally, the IRS would simply cease to exist.
• The Fair Tax would be “progressive” in the sense that it would avoid taxing financially challenged (i.e., poor) people for basic necessities. This is accomplished by means of a “prebate”, which according to Fairtax.org would be $2,348 per year for a single person or $6,297 per year for a family of four.
• The Fair Tax is calculated to be “revenue neutral”, meaning that all current government services would continue to be fully funded because the money that is raised from this national sales tax would be equal to the amount of revenue that is lost due to the repeal of federal income taxes. Programs such as Social Security, Medicare, etc. would be unaffected.
• Because this tax system is consumption-based rather than income-based, people could exercise a certain amount of control over how much tax they pay. Since the tax is only applied to new (not used, secondhand, etc.) items at the point of sale, a relatively frugal person could avoid paying taxes on most things, and might even make money because of the “prebate”. Meanwhile, wealthy people who choose to live “high on the hog” without paying attention to their spending choices would probably pay more tax.
• Since the Fair Tax only taxes consumption, it would not punish businesses for expanding and creating more jobs, investing in research and development, or donating to charity. Also, because the individuals who create and maintain those businesses would have more disposable income to expand and compete in international markets (assuming that they make relatively wise choices, see the point above).
• The base price of goods and services (that is, their cost of production before adding any taxes, profits, etc.) would be lower because the embedded costs of the current income tax system would no longer be a factor. This would partially offset the increase in the total price of new products and services that would result from the Fair Tax.
• From the standpoint of government revenue collection, the “problem” of tax evasion would be reduced because people who currently resist paying income taxes and/or derive their income from black market sources would be taxed automatically at the point of sale whenever they purchase new goods and services. Moreover, the government would no longer need to spend taxpayer money in order to chase down income tax evaders.
• A national sales tax such as this would be much more transparent than the current tax system. There would be no more loopholes, special exemptions, payroll taxes, embedded costs, or other factors that allow people under the current system to avoid realizing how much tax they are actually paying. With the amount of taxation clearly visible to the general public, people (hopefully) would be less likely to tolerate wasteful spending, corruption, and inefficiency in government, resulting in lower levels of taxation and a stronger economy overall.

Cons:

• The retail price of new goods and services would increase.
• If the income tax is not fully repealed as promised OR a future president and/or Congress decides to re-instate some portion of the income tax code under the guise of a “national emergency” or something similar, we could end up with a national sales tax AND an income tax, which would be disastrous for our economic freedom.
• The actual rate of the national sales tax would be 30%, not 23% as the Fair Tax proponents claim. This difference is due to the deceptive language that the proponents use to describe the tax rate calculation. Not only is this deception insulting, but it also makes it easier for the government to raise the tax rate in the future because people will think that the current rate is lower than it actually is.
• Unlike the income tax brackets, this national sales tax proposal is not indexed for inflation, meaning that as inflation increases the base price of goods and services, the amount of sales tax that you pay will also increase.
• People who have paid into the Social Security system and/or private savings accounts for retirement will be effectively double taxed when they begin withdrawing their money and spending it. This is because most of the money that people have managed to save up to this point already has been taxed under the current system.
• Because tax rates would be simplified under the national sales tax system, this could ironically make it easier for the government to raise the tax rate on certain items that it deems “unhealthy” or “dangerous”. If this occurs, things such as fatty foods, cigarettes, firearms, and an indeterminate number of other politically unpopular items could wind up being taxed at exorbitant rates, which would certainly go against the spirit of a “fair” tax system.
• If the Fair Tax is sufficiently high (like 30% or more), this could encourage more people to enter the black market in order to avoid the tax. This could cause crime that is often associated with black markets to escalate and effectively criminalize otherwise ordinary people.
• The “prebate” that is built into the Fair Tax system could actually do more harm than good in the long run because it would effectively put all Americans (except those without Social Security numbers) on the government dole, and this could create problems with dependency and the “free lunch” mentality as experienced by recipients of current government welfare programs.
• The Fair Tax does nothing to solve the underlying cause of high taxation, which is excessive government spending. As long as the federal government keeps spending taxpayer dollars on things that it has no business being involved with in the first place, it will continue to require high taxes in order to finance its expenditures, including the increasing cost of the national debt. Simply changing the method of taxation is not going to change the root causes of unfair taxes.