Against the FairTax Proposal

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

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 website: "…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.

March 29, 2005

Jim 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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