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.