Fair Tax

As many readers may know, I have long been interested in replacing the income tax with a consumption tax. Thus, I was interested to discover the Fair Tax proposal, an ambitious attempt to get rid of the income tax and implement a so-called "voluntary consumption tax." There is currently draft legislation in Congress for the Fair Tax. It sounded exciting. Unfortunately, it was too good to be true. First, it is nothing more than a national sales tax, which is not the same as a consumption tax. It's "voluntary" because people can choose to buy or choose not to buy, thus choosing to pay or not pay taxes. A consumption tax taxes income that is not saved. A sales tax taxes retail sales (and in the Fair Tax proposal, only new sales, not used sales). Big difference. Second, the proposal calls for the repeal of the 16th Amendment, which created the income tax. This step exposes the ideological agenda of the group, because the 16th Amendment gives Congress the power to collect income tax but doesn't say that it has to. Thus, there is no reason to repeal the amendment to reform the tax system. Repealing the amendment is something that libertarians would do. Third, the group claims that their tax will be revenue-neutral, which is to say that there will be no change to the total taxes collected by Uncle Sam. The only change is the method of collection. But read this paragraph that I pulled from the official web site and see if it's not a little fishy. If you were in a 23-percent income tax bracket, the federal government would take $23 out of your paycheck for every $100 you made. With the FairTax, if the federal government gets $23 out of every $100 spent in America, the same total revenue is delivered to the federal government. This is revenue neutrality. So, instead of paycheck-earning Americans paying 7.65 percent of their paychecks in Social Security/Medicare payroll taxes, plus an average of 18 percent of their paychecks in federal income tax, for a total of about 25.65 percent, consumers in America pay only $23 out of every $100. Or about 30 percent at the cash register when they elect to spend on new goods or services for their own personal consumption. And this tax is collected only on spending above the federal poverty level, providing important progressivity. It's fishy because it misstates how federal income tax works. We have marginal tax brackets, while this implies a total tax bracket. Worse yet, look at the numbers and see if they add up. According to their example, the Fair Tax would be revenue-neutral if it collected $23 of every $100 (a 23% tax rate). But just a sentence later, it says that the average tax is 25.65%. Thus, Americans pay $25.65 for every $100 in tax. So somehow $2.65 has disappeared from the equation. Doesn't seem revenue-neutral to this simple observer. Maybe this is just a mistake, you say. Could be, but this is their national propoganda. You'd hope that they would correct things like this. But I think that the whole thing is a shell game, and they are trying to baffle us. You decide for yourself. Here's the text of the House bill. Supposedly, a lot of economists have endorsed the proposal. But my recommendation: the Fair Tax is not fair.