Six Reasons Why The FairTax Is A Really Bad Idea

The subject of the FairTax- a proposed national sales tax- comes up from time to time as a better alternative to the federal income tax. Proponents- like former Arkansas governor Mike Huckabee- argue the FairTax would encourage savings by taxing consumption rather than income, encourage economic growth by eliminating the taxation of business' profits, tax "under-the-table" incomes by collecting the tax at the point of sale, and (confusingly) eliminate or greatly reduce the size and scope of the IRS.

However, I can see six very good reasons why the FairTax is a really terrible idea:

1) A sales tax is, by nature, a regressive tax. In fact, sales taxes are often the most regressive form of taxation. This comes from the fact that a sales tax generates the bulk of its revenue from the sale of consumable goods- food, fuel, household supplies, etc. The lower a person's income, the greater the percentage of it they must spend on consumable goods, hence, the greater the share of their income which is subject to taxation.

Proponents of the sales tax propose a "prebate", to alleviate this concern. I'll address this momentarily.

As an aside- some people mistakenly believe that their state "exempts food", "exempts medicine", etc. from sales tax. THIS IS NOT TRUE. Every state with a sales tax exempts some, but not all, of these purchases.

2) A sales tax would be just as convoluted as the current income tax. An advantage cited by FairTax proponents is that it would simplify the tax code. This is true- initially. All tax schemes, including the federal income tax, are initially simple. Tax codes become convoluted over time- exemptions, deductions, credits, tax brackets, etc., are added, removed, re-added, modified, etc. If one wants to see this effect on a sales tax, simply read your state's sales tax code. You'll find it to be just as mind-boggling as the US income tax code. This (eventually) equally-convoluted sales tax scheme would (eventually) require an equally-large, and equally-invasive, IRS to administer- striking down one of the basic claims of FairTax proponents.

3. A national sales tax would provide more opportunity for the federal government to manipulate the economy. A national sales tax would provide a mechanism for manipulating the purchasing habits of the public- either by increasing the tax rate on certain goods to price them out of reach of many consumers, or to reduce the tax on other goods in order to induce people to buy them where they otherwise wouldn't. For example- if Congress wanted another means to force the substitution of compact flourescent lightbulbs for incandescent bulbs, all that would be required is to simultaneously raise the sales tax on incandescents, and lower it on CFLs, and CFLs would become artificially cheaper. Needless to say, the free market would become much less "free", contrary to the claims by FairTax proponents that a national sales tax would encourage greater market freedom.

4. A national sales tax would be unconstitutional. The Constitution has already been amended to authorize the taxation of incomes- and nowhere does it authorize the taxation of consumption. FairTax would either authorize Congress to engage in an action with significant consequences without Constitutional authority to do so (just like ObamaCare), or would require the passage of a new amendment authorizing it. Even more difficult than passing a new amendment, would be passing one and simultaneously repealing another- which would mean Congress would have two authorized forms of tax: incomes AND consumption. Don't believe for a second Congress wouldn't tax both simultaneously.

5. A national sales tax would place greater strain on small businesses. Businesses are currently able to deduct many of their business expenses from taxation. FairTax would eliminate this advantage- because all business-related purchases would be taxed at the point of sale, just like private purchases. There are much more effective- and easier- ways to provide relief for businesses- such as reducing (or eliminating) the corporate income tax.

6. The proposed prebate would create a new welfare entitlement. The FairTax proposal includes a "prebate" proposal, wherein each taxpayer in the country would recieve a monthly check for predicted amount of tax paid, up to a certain income level. Here is a proposed Schedule to illustrate this concept:

As explained in my Negative Income Tax Credit post, entitlements with a hard income limit only serve to create and reinforce a welfare trap. This prebate proposal carries with it the undeniable risk that future Congresses could change the amounts paid in prebate, exempt some (wealthy) persons while being quite generous with (poor) others, eventually converting the prebate into yet another welfare entitlement- much like the Earned Income Tax Credit- and in so doing, reinforce the already-existing welfare trap.

Additionally, I can't understand how FairTax proponents believe that this proposal would reduce the size and scope of the IRS, when the IRS would have the responsibility of paying out a prebate to more than 100 million people every month. That would require an awful lot of bureaucrats!

Finally, read the FAQ at Fairtax's website. Read it thoroughly. Then come back and tell me whether or not (to paraphrase a line from a favorite TV show of mine) you "smell alot of 'if' coming off this plan".

Contrast this with the Flat Tax proposal. Less regressive (and with a NIT credit, not at all regressive). No room for complication (which really would cut down the size and scope of the IRS). No constitutional issues. No additional strain on businesses (indeed, a major benefit to smaller businesses). No opportunities for government to manipulate spending. AND- it provides an avenue to eliminating the massive welfare system, rather than adding another potential entitlement program.

Which sounds more "fair" to you?

EDIT (13 July 2011): Google won't let me sign in to post comments, for some strange reason. Anyway, here is my reply to the comment below.

No Taxpayer Funding For Abortions Act: Great, Just One Problem...

I'm writing this in response to a discussion on Twitter- frankly, I needed much more than 140 characters.

Jenny Erikson wrote a blog post which excellently describes the issue at hand: Namely, the insertion of the word "forcible" into the text of the No Taxpayer Funding For Abortions Act, and addressing the hyperbole that this measure would "legalize rape".

Firstly, let me be clear that I am opposed to taxpayer funding of abortion. Period. My critique is about the problems with the legislation itself, not the issue driving it. Stated differently, I see this as a problem of execution, not a problem of concept.

From Jenny's post:

There is no such thing as non-forcible rape.

This is true, but problematic- the problem isn't in "redefining" rape, as some truly disturbed leftists claim, but in proving that force was used or threatened. Specifically- what constitutes sufficient proof, and how will that proof be obtained?

How, for example, does one prove to their doctor that they were threatened with a weapon (i.e. "raped at gunpoint"), unless the weapon is actually used? How does one prove that they submitted because a loved one was threatened ("Do as I say, or I'll hurt your child")? How does one prove to their doctor that they were blackmailed? Each of these types of force- or forcible coercion, as the case may be- have been used extensively by rapists, and none of them leaves any medical evidence.

Not to mention the number of cases where a rape victim's injuries have been attributed to "rough sex"- and the number of rapists who've been acquitted because of this disturbingly blurred line.

Does this necessitate the involvement of the police? The phrase "Dammit Jim, I'm a doctor, not a detective" comes to mind (and please forgive the frivolity). In addition to the prospect of requiring women to violate their own doctor-patient confidentiality (and the attendant Constitutional issues), it must also be said that our criminal justice system has an appallingly low rate of success with sex offense cases.

In effect, such a requirement- taken to its logical ends- would discourage some victims- those who 'need' an abortion- from seeking a taxpayer-funded abortion.

On the other hand, what if no proof were required? What if all that were needed were the patient's claim of rape? It's already a well-known and disgusting fact that some women falsely claim rape- the Duke University case being a well-publicized example of this. I am deeply troubled by the notion of subsidizing another incentive to do so- in fact, funding those who 'want' an abortion, which is exactly what this legislation seeks to prevent.

I won't speculate on the reasons for adding the term "forcibly" to this legislation. I'm sure it's nothing more than well-intentioned, but short-sighted, attempt to limit the amount of taxpayer money spent on such procedures; but, as they say, the devil's in the details.

The Egyptian Revolution

Unless you've been living under a rock since January 25th, you've seen the news coverage regarding the current near-civil-war in Egypt. The TV analysis of this conflict essentially boils down to these two questions:

1) Should the United States interfere in the conflict, to assist the Egyptian people in removing Hosni Mubarak from power?;

2) If Mubarak is removed from power, will his successor be even worse? Possibly someone supported by radical Muslim groups?

It must be understood that we, the United States, essentially put Mubarak into power. We believed we were 'helping' the Egyptian people by 'maintaining stability' in the Middle East. In order to avoid bloodshed, we gave the Egyptian people a dictator. We're now seeing the results of that decision.

Instead of interference, I believe the most compassionate course of action, one which will create the greatest long-term stability and the greatest degree of long-term freedom in Egypt, is to do nothing at all.

It is a fact that, even today, we benefit from a revolution where there was minimal outside interference. Our Founding Fathers fought a very long, very bloody, and very costly war of independence from a despot. Afterward, they created our form of government- one intended to prevent another despot from emerging, by instituting limits on the powers of government and guaranteeing the liberties of individuals- and as a failsafe, the Second Amendment, ensuring that the people would always retain the option to start another new government.

We should be thankful that France assisted us late in our Revolution- rather than 'helping us' by ending the war quickly and installing a pro-France dictator.

Thomas Jefferson said, of our own Revolution and future ones:

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.

Please understand, I don't romanticize war. I write this with a heavy heart. I genuinely want what is best for the Egyptian people- and I believe that what is best for them, is to form their new government the way we formed ours. If we want to ensure that radicals won't seize power, and if we want to ensure another Mubarak won't emerge, then the Egyptian people must learn the lessons of freedom. They must fight a war so terrible, that they'll never want to fight it again.