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Friday, February 19, 2010

Why a Fair Tax is Flat on it's Face


No matter your economic status when someone says the word “taxes” a few thoughts inevitably occur at the speed of light: “my money I’ll never see again,” followed by “it’s not fair” followed by “wouldn’t it be great if I could keep it all.”

Under current “Progressive” taxation, wealthier folks pay a greater percentage of their income to taxes (or a larger slice/fraction of their own pie) then the poor who pay a smaller slice of their pie and receive in turn the same level of government services. “Regressive” taxation works backwards from progressive taxation in that the poor pay the same slice of pie that the wealthy do, and the wealthy enjoy the same level of government services.

There has existed for more than a decade a proposal called the Fair Tax. It basically imagines a large “flat” sales tax on retail goods and services. The Fair Tax proposal says that instead of paying federal income taxes everyone should have to pay $23 out of every $100 at the state level, except (in progressive fashion) the poor, who earn less than or near the federally established poverty level, would get a monthly rebate which represents the personal value of their spending on needed goods.

The bait for support of the proposal is a plethora of goodies: it forecasts the elimination of all federal taxation, no more capital gains taxes, the end of tax shelters, closure of the IRS, a simple tax form, a repeal of the 16th amendment to the constitution. The proposal imagines that already in place state tax authorities would administer the Fair Tax. To emphasize simplicity one republican congressperson compared the size of a Fair Tax bill, which was initially 133 pages, to the 3 foot high stack of federal tax code currently in place which could be trashed under a Fair Tax.

Who favors the Fair Tax? The term "fair" is subjective, the name of the plan has been criticized as deceptive by liberals and claimed accurate by many conservatives. The proposal was first introduced in 1999 by Republicans, but the bill and several successive attempts have never made it out of committee. The newly organized right-wing group that call themselves the Tea Party favor the Fair Tax. Many of them listen to a conservative charismatic loud and sometimes obnoxious radio talk show host named Neil Boortz, who frequently touts the Fair Tax on the air nationwide, and has written a book called The Fair Tax Book. The website Fairtax.org states that the proposal has hundreds of thousands perhaps millions of supporters including less than 80 U.S. economists.

What is wrong with the Fair Tax? In a regressive manner struggling middle income families won’t have exemptions yet wont be wealthy either so their taxable slice of the pie will be the same as the wealthy. Even with the rebate exemption for the poor who are earning under or near the federally established poverty line, the question remains; is it fair that a middle income person pays the same slice of his or her pie as the wealthy person? The price of consumer goods will rise by 23%, the greatest rate of inflation ever known. This inflation will likely reduce the rate of national consumption. Luxury items will cost far more, motivating cheap-skate rich people to buy overseas and maybe even leave the country. State sales taxes will not be eliminated. The additional taxes can effectively raise the tax burden to 30% or more.

World wide, tax rules share one thing in common; they start out simple and end up complex. Exceptions are born slowly as new realizations of unfairness are discovered and brought to the attention of the governing bodies. Already the complexity of the Fair Tax proposal begins as exemptions pile-up. Beginning with the “prebate” for the poor. Then comes an exemption for families with children. Next, the middle income families feel cheated because they earn too much for monthly prebates and earn too little to be called wealthy. Next, since the Supreme Court now considers corporations persons, folks will begin to demand that they pay the Fair Tax as well. Then particular corporations will petition/lobby for tax exemptions, and get them.

They want to scrap the tax code, which is a very tempting piece of bait. But while they start over with a new tax system we all have to wait for them to learn their lesson and pile on exemptions to the point where our new tax system will look an awful lot like the old tax code.

One good way to think of the flat or “fair” tax is to realize that the same percentage to a rich person is not nearly as valuable as the same percentage to a poor or middle class person. Does that sound fair?