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Wednesday, September 28, 2005

Fair Tax Flawed??

I've been in an interesting discussion on Usenet (alt.economics) about House Resolution 25, the 2005 Fair Tax initiative, which would remove income, payroll, estate and gift taxes in favor of a 23% national sales tax on all new goods and services.

conceptually, I like the idea, but as written, I don't, for a few reasons.

First is that it doesn't require the repeal of the 16th Amendment which allowed for the income tax. Unless that goes away, my guess is that like every country that's gone to a Goods and Services Tax (which is what this is) we'll end up with an income tax also.

Second is the law of unintended consequences. The folks at www.fairtax.org like the idea that you can chose to save taxes by buying a used car for instance, because it wouldn't be subject to the tax. However, the unintended consequence is that new car sales would drop considerably, because they'd be subject to this tax. That means lots of auto workers looking for a job.

On that same line, rents and leases are taxable on real and personal property. Meaning that if you are a renter, you would pay a 23% premium.

I personally see new home sales falling through the floor, as the 23% tax is added to them.

Third is inflation. I say this because in 1997 The Cato Institute proposed just such a tax (http://cato.org/pubs/pas/pa-272.html) that was to be set at 12-15%, and would have eliminated more taxes than this one! That means in 8 years, the numbers have already jumped 50-90% depending on where they would have started. Where will in be in 8 more years?

Fourth, I believe that the figures they are throwing out are based on a flawed premise. They claim that all prices will come down because of the loss of the currently embedded taxes. However, only corporate taxes and the payroll end of SSI (7.65%) is embedded as a business cost on a product. The workers taxes cannot be considered an embedded cost to be saved and passed on unless the worker is going to take that amount of a pay cut, you figure the odds of that. The cost of labor, which is the workers full wage, is the cost, and the tax end of that comes from the worker, not the company.

Finally, while I hate the current "progressive tax system"; even with it's built in poverty level protection, The Fair Tax becomes a very regressive tax. For myself, in a 15% tax bracket, when you add in social security about 23%, it's kind of a wash. However, for someone in the lower end of the tax scale, say under $35,000 a year, who pays little if any taxes, and if a family gets the earned income credit, this would end up costing them money. Of course, if the little guy only buys used "stuff" they can save their tax money.

I'm personally in favor of moving to a flat tax, with a starting point of $35,000 for a family of four to be taxed, and a rate of about 15%, but don't see that going anywhere anytime soon either.


Blogger jomama said...

...my guess is that like every country that's gone to a Goods and Services Tax (which is what this is) we'll end up with an income tax also.


The UK started their GST at around 8% in 1964 or thereabouts. Last I heard they were at 17.5%.

Government is a poor parasite as it will eventually kill the host.

7:19 AM  

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