Remaining from a September debate, I owe regular commenter Scott my analysis and opinion of a national sales tax. To be upfront, I began my search against the idea. Not because I wanted to hate it, although I do hate it. Yet, as I’ve thought about my 15-year support for a flat tax plan – and I acknowledge that it has its problems – I’ve considered some of the basics of a national sales/consumption tax. The economics and politics of a national sales tax fail miserably.
From Americans for Fair Taxation, I roamed through some of the finer points of what is now under consideration. I used this recent editorial to focus mostly on the ideas. For example:
What emerged from this research is that a national retail sales tax is a preferred method of taxation among most Americans surveyed.
A majority of Americans supported slavery at our nation’s beginning. Segregation was hunky-dory for most well into the 20th century. Even today, a majority of Americans believe that surgically altering the healthy genitals of their male children is reasonable. Of course income versus sales tax is not comparable to those sorts of oppression, but forgive me if I fail to be swayed by such arguments in favor of any position. Mob desire is irrelevant because good intentions do not guarantee good outcomes. The details matter.
Research on the price of consumer goods reveals that up to 20% of all prices today represent hidden income taxes and payroll taxes. Once these taxes are repealed and replaced with the FairTax, it is likely that market pressure would force retail prices to fall.
This is either ignorant or dishonest. The FairTax will not eliminate embedded taxes; it will merely change the source of which businesses collect taxes from individuals. Even something as simple as an apple will have embedded taxes.
The apple will require a seed to create an apple tree. That seed will have a sales tax. The tree will require fertilizer to make grow. That fertilizer will face a sales tax. The fertilizer will need to be transported from producer to apple grower. That fuel will face a sales tax. The distributor needs a truck to haul the fertilizer. That truck will face a sales tax. The truck will require gas to operate from A to B. That fuel will face a sales tax. And so on, all the way to my cupboard.
Now, imagine something more complicated, with multiple ingredient raw materials. Think that iPod that Americans love doesn’t consist of parts purchased from vendors with an “s” for plural who all require inputs to make their products? The disappearance of embedded taxes is a myth, unless we assume that someone who currently fails to absorb hidden costs will suddenly absorb non-hidden costs. I will not assume something quite that silly.
Which leads to this, perhaps the boldest claim:
The FairTax would collect revenue from the underground economy.
How, exactly, when basic logic suggests the FairTax would push more of the U.S. economy underground, not less? There would be evasion everywhere. Need to get your hair cut? Here’s $20 cash. Need your lawn mowed? Here’s $40 cash. Never doubt the human capacity to subvert rules. Simplicity is important, but reducing the burden of complying is much more effective. Absent that, reducing the ability to bypass the system is important. I don’t have to believe that taxes are good to push the idea that collecting as close to the assumed amount is wise. Otherwise, reality will be destroyed by the theoretical estimate and actual receipts. The rate would increase more the greater those two figures differ.
As the FairTax advocates own figures indicate, the sales tax is not 23 percent. That’s only the tax-inclusive rate offered because it looks better² than the tax-exclusive – the common metric – rate of 30%. Dividing 30¢ sales tax by the final price of $1 and 30¢ gives a 23% tax-inclusive rate. But in Virginia, if I go into the store and buy a bottle of water, I see the price of the water as 99¢ and the final price as $1.01 after the 2% sales tax is added. No one pretends that the rate is 1.98%.
In the end of the editorial, this:
Significantly, the FairTax eliminates all loopholes, gimmicks, exemptions and deductions from the federal tax system.
The “prebate” is certainly an exemption, and given the details, I’d call it a gimmick. The details:
Another benefit of the FairTax is that, unlike other sales taxes, it would not hit the poorest Americans the hardest. The FairTax proposal calls for sending every American a “prebate” check to offset the cost of the national sales taxes paid by those living in poverty. This feature would effectively exempt those living below the poverty line from paying taxes to the federal government, and provide all taxpayers with a reimbursement of a portion of taxes paid.
Who’s administering this “prebate”? How are differences in regional cost of living factored into the “prebate”? Are the differences factored in? According to the following document, “The Prebate Explained” (pdf):
Poverty level spending represents what it costs families of varying household size and composition to buy their necessities.
All consumers are alike. Every central planner believes that and the “prebate” requires the adoption of central planning. You need four chickens, two gallons of milk, one dozen eggs, and eight ounces of cheese. That’s normal. Except it’s not, because the government can’t know everyone. It can only assume and expect you to fit that mold. Some people will receive a larger “prebate” than they should and some will not receive enough. It’s inevitable.
And what about those people who spend their “prebate” on lottery tickets, for example? I’m not offering that as an expectation of what “the poor” will spend their “prebate” on or as a judgment on lottery tickets. I think people should be able to spend their money on whatever they want. But this plan specifically relies on government-managed handouts, in advance and tied to no actual spending, to make the plan plausible and not regressive. How do we prevent such wastefulness among citizens when it leads to further reliance on the government to pay for necessities? There will be people who waste their “prebate”, just as there are now millions of Americans who believe that their tax refund is found money rather than an interest-free repayment of excess taxes paid as many as 16 months prior. There will be a call to further assist these people through government resources. The loopholes, gimmicks, exemptions, and deductions aren’t going anywhere.
Neither is the intrusion of government into each person’s privacy. To get the “prebate”, Americans must do the following (according to the pdf above):
The registration form requires only the following information:
- The name of each family member who shares the residence;
- the Social Security number of each family member;
- the family member to whom the monthly prebate check should be paid;
- a sworn statement that all listed family members are lawful residents, that all family members sharing the common residence are listed, and that no listed family members are incarcerated;
- the address of the shared residence; and
- the signature of all family members 21 years of age and older.
Failure (unwillingness) to adhere to those instructions results in no “prebate”. And again, who will be managing this information and
distributing monthly checks to millions of households? Maybe the IRS goes away, but why should I believe its replacement will be any better? (Who validates that my claim of 6 children is correct? Fraud and waste, anyone?)
The effect of eliminating regressive payroll taxes is commonly overlooked when analyzing the FairTax, but it would have a very significant impact, as these taxes represent the single largest tax burden on these income earners.
I agree with fixing the burden of payroll taxes. It is inherently regressive. Making it “fair” would be a huge tax increase on higher earners, but it wouldn’t help our economy. So what to do?
Eliminating the tax is a great idea, but the FairTax only seeks to fund the underlying flawed entitlement through a sales tax without addressing the fundamental flaw in seeking to be revenue neutral to maintain ineffective programs. And since when has Congress been expenditure-neutral? Why should I believe it will suddenly find fiscal responsibility? Taxes are bad¹ and should be lowered as much and as soon as possible, but we need to cut expenditures first. Without that measure, we’re engaging in diversionary games³.
Finally, and most damning from a practical path, how do we transition from an income tax to a sales tax? The Y2K nonsense was overblown. Flipping the switch from Income Tax on December 31, 20xx to Sales Tax on January 1, 20xx would be a realized nightmare, but I’ve seen nothing other than that simplistic transition implied. That’s foolish.
I also used this chain of entries from Kip at A Stitch in Haste as research.
¹ We have a $9,124,016,501,555.91 national debt, as of today. That has to be repaid.
² For another example of this sleight-of-hand marketing, read this.
³ There is one final caveat looming large. We’d have to repeal the 16th Amendment.