As a rule of thumb, economists usually insist that a tax system is equitable, feasible, easy to collect and fair. If President Obama’s idea for a millionaire’s tax and the dissent that followed is any indicator, politicians still can’t agree on what fair is. This is why the FairTax, also known as Congressional bills H.R. 25/ S. 13, is so interesting.
According to the website www.fairtax.org, “The FairTax plan is a comprehensive proposal that replaces all federal income and payroll-based taxes with an integrated approach, including a progressive national retail sales tax.”
At first glance, you might think this proposal is the brainchild of those two crazy Texans on the Republican stage, Gov. Rick Perry and Congressman Ron Paul (who both want to repeal the 16th amendment), but the FairTax was actually conceived by Rep. John Linder (R-GA) and his colleague Sen. Saxby Chambliss (R-GA) and it has been introduced to the Congress every year since 1999.
At first I was enthralled by the idea of the FairTax, it seemed reasonable and feasible, and I was perplexed as to why Democrats responded to it even more coldly than Republicans. But after doing more research, I discovered the FairTax isn’t fair.
I start by saying I completely understand the allure of a national sales tax over
the federal income tax. It’s a consumption tax, which means it taxes spending over earnings, which is rewarding to savers. It wouldn’t have all the infamous loopholes allowing companies like General Electric to pay almost nothing in taxes. And lastly, FairTax advocates say the tax rate would only have to be around 23 percent.
But, since the FairTax is a national sales tax the tax burden would unduly fall on the middle class and the poor, even with its rebates, which would reimburse taxpayers who are below the poverty level. It’s simple math. Consumers in the lower and middle ends of the income scale spend more of their disposable income, and would be affected more harshly.
Let’s also not forget this national sales tax would be compounded onto state sales tax. In Michigan, the rate is 6 percent, which means Michiganders would be paying closer to 29 percent.
According to the nonpartisan Tax Policy Center, “Economists Jonathan Gruber and James Poterba have calculated that this tax change would boost the price of health insurance by an average of 21 percent. They estimate that this price increase would reduce both the number of people insured (by between 6 million and 14 million) and the amount of insurance that each remaining insured person would choose to carry.”
The FairTax also boasts being able to enable workers to keep their entire paychecks, retirees to keep their entire pensions, refunds to be given in advance for the tax purchases on basic necessities, to allow American products to compete fairly and to bring transparency and accountability to tax policy.
I’m sure the FairTax would do almost all of those things, except it fails to guarantee its own namesake – fairness. Also, according to the nonpartisan Tax Policy Center, “No country in the history of the world has enacted a retail sales tax at anywhere near the rates that would be required to replace the U.S. tax system.
Whether such a tax could be implemented effectively is, therefore, an open question.”
So this is all completely untested and unfair, which is why I think all you reform advocates should curb your enthusiasm.
I applaud the efforts of FairTax advocates. Ideas such as the FairTax are refreshing, especially after listening to Pres. Obama and Congressional Republicans haggle over raising the top marginal tax rate by only around 1 percent.
Maybe the U.S. should consider having a flat income tax rate, or a value-added tax like most European countries, all of which are more considerate of the poor and middle class and, simply put, are more fair.
