Against the FairTax Proposal

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The proposal to replace the current income tax
system with a national retail sales tax is a bad idea for several

First, politicians cannot be trusted with a
new tax traded for some existing tax. We’ll end up with both: the
sales tax on top of the income tax.

American history is replete with politicians
promising to deliver a later benefit to the American people if they
get more taxing authority immediately.

During World War II, American workers were for
the first time subject to the withholding tax, having been told
that it was only a temporary wartime measure.

The war ended more than 59 years ago; the withholding
feature lives on.

In 1982, President Reagan – the most celebrated
of all tax-cutting presidents – agreed to an income tax increase
on the promise from Congress of a $3 reduction in spending for every
$1 increase in taxes. Reagan boasted to the American people of the
bargain he had engineered. Americans suffered the tax increase but
never saw the promised spending reductions.

Why so many people are anxious to repeat these
foul experiences is baffling. The clear lesson is: never pursue
tax trades with politicians.

Further, the FairTax proposal can be passed
by a simple majority of both houses of Congress plus the President’s
signature. But the much-touted repeal of the 16th Amendment, which
authorizes the income tax, requires a much more demanding 2/3 vote
in each house and then approval by of state legislatures. The
likelihood of ending up with both the 23% federal tax and the current
income tax is therefore all the greater.

Second, the proposed national retail sales tax
will be set at 23 percent to replace the revenues from the individual
and corporate income tax, as well as the payroll taxes for Social
Security and Medicare. Added to this 23 percent tax will be the
states’ average sales taxes of more than 6 percent. A 29 percent
sales tax will generate pressure to turn the sales tax into a value-added
tax (VAT).

This will happen because such a large tax will
generate a black market in goods to avoid the added tax. Politicians
will find it in their self-interest to transform the FairTax into
a tax at various stages of production – a VAT. This same process developed
after the income tax was instituted – withholding was created in part
to mask the actual level of taxation.

Third, the much-touted end of the Internal Revenue
Service is a sham. Some enforcement agency will be needed to handle
tax collections. One provision of the national retail sales tax
is to issue rebates equal to the sales taxes paid on essential goods
and services to ensure that no American pays taxes on necessities.
There will have to be a way to distinguish who gets these monthly
checks. So a federal agency that tracks individuals will persist.
Changing the name of the IRS while maintaining its functions is
pointless. Added to this is the very serious concern of so many
Americans becoming accustomed to a monthly check from Uncle Sam.
A massive constituency will be created which will pressure Congress
for increases in the definition of necessities. The FairTax will
indirectly become the means of an ever-greater expansion of government.

Further, the Social Security Administration
will keep records for the federal government to determine an individual's
Social Security benefits based on…their income. Here's
the way it's stated at the FairTax
: "…Social Security
[will] operate exactly as it does today, …Employers will continue
to report wages for each employee…."

And fourth – and most importantly – working on this
tax trade diverts scarce political energy from the cause of limiting
federal spending and taxation to the cause of rearranging the means
of tax collections.

One could believe that this entire movement
is a grand conspiracy to waste the time and energy of political
activists – activists who are now chasing after insignificant differences
in the way taxes are collected and therefore ignoring the real issues
of obscenely high federal taxes and obscenely high federal spending.

29, 2005

Cox is an Associate Professor of Economics at the Lawrenceville
Campus of Georgia Perimeter College and author of Minimum
Wage, Maximum Damage

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