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Would the “Fair Tax” Gut the Economy?

Written by Nickel - 182 Comments

Recently, I’ve been seeing a lot of news about the so-called Fair Tax, which is being championed in one form or another by people like Mike Huckabee and Ron Paul. All of this talk about overhauling the federal income tax system has gotten me to thinking about what effect such a system would likely have on our consumer-oriented economy.

I will start by admitting that I haven’t read about the Fair Tax in depth. I should also note that I’m not necessarily against the idea of changing our tax system — it’s pretty archaic as it is, and could stand a good bit of improvement. I should also note that I’m not an economist. But, at least on the surface, there are some things that worry me about the Fair Tax.

The Fair Tax

For starters, here’s a (very) brief synopsis of the Fair Tax, as I understand it:

Under the Fair Tax, the current tax code would be scrapped and replaced with a federal sales tax. Things like income tax, Social Security tax, and Medicare tax would no longer exist. Same goes for the Alternative Minimum Tax (AMT), capital gains tax, and estate tax. Instead, everyone would pay a flat sales tax of 30% on nearly everything that they buy, including food, clothes, and health care.

It should be noted here that Fair Tax proponents like to think of the percentages in a slightly different way. Rather than viewing it as the additional percentage charged, they prefer to think about things as a percentage of your spending. Since a $1.00 purchase would cost you $1.30 (ignoring state sales taxes), this is sometimes referred to as a 23% tax since $0.30 is 23% of $1.30.

Anyway, because sales/consumption taxes are inherently regressive (i.e., they hit those that live paycheck-to-paycheck harder because 100% of their income is subjected to the tax), every household in the United States would receive a check to cover their taxes up to the poverty level. The argument here is that, for most people on the lower end of the economic scale, this would result in a more progressive tax system, with people closer to the poverty line spending less on taxes than people with higher incomes (and thus more spending).

The (Possible) Problem

Setting aside the issue of whether or not the Fair Tax is actually fair (this has been the subject of a lot of debate), let’s talk about the downstream impact on our economy. For better or worse, we live in an extremely consumer-oriented culture, and our economy is driven by one thing above all others: spending.

Think about that for a minute… Right now, our economy is stalling out and, in recent years, economic slowdowns have been dealt with in two major ways: (1) slashing interest rates, and (2) offering stimulus checks. Both of these moves are intended (at least in part) to stimulate spending, thereby helping to get the economy back on track.

Taking that at face value (i.e., that increased consumer spending is what keeps the economy humming), I find it hard to imagine that we’d be able to transition to something like the Fair Tax without doing serious damage to our economy, at least in the short term. Why? Because American consumers are highly price-sensitive, and our current income tax system is relatively invisible when it comes to making day-to-day purchases. But if you start adding to the cost of an item at the checkout counter, people will think twice before buying a random geegaw or doodad.

Given that consumer spending is so central to our economy, anything that has the potential to put the damper on our spending seemingly has the potential to drag the economy down. This isn’t to say that less spending (and thus more saving) would be bad for individual Americans — quite the opposite. But I’d imagine that, at least at first, there could be a good deal of economic pain if we were to overhaul the tax system in this way.

What do you think?

Published on January 29th, 2008 - 182 Comments
Filed under: Economy, Taxes

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

182 Responses to “Would the “Fair Tax” Gut the Economy?”

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1
ChristianPF Says:
January 29th, 2008 at 1:19 pm
I don’t know too much about the Fair tax – but like most, I think we need an overhaul done with our tax system. You are probably right that it would put a damper on the economy for a while, but do you think it would be worth it – if it yielded a long-term benefit?
2
BKLNYC Says:
January 29th, 2008 at 1:25 pm
Ron Paul does not support a Flat Tax. See this link and on the right side click on the video on Taxation.

http://www.ronpaul2008.com/issues/debt-and-taxes/
3
nickel Says:
January 29th, 2008 at 1:33 pm
BKLNYC: We’re talking about the Fair Tax, not a flat tax. Those are two different things. And yes, Ron Paul is against taxes in general, and advocates dramatically reduced spending. That being said, he has said that he would support the Fair Tax as long as it truly resulted in the elimination of income taxes.
4
Steven Says:
January 29th, 2008 at 1:56 pm
>> But if you start adding 30% to the cost of an item at the checkout counter, people will think twice before buying a random geegaw or doodad.

But you forget that you take home a whole lot more of your paycheck. People will be able to control more (through choosing what to buy) what they pay in taxes. So I don’t think the 30% increase of the cost of new goods will be that much of a disincentive.

What is exciting to me is that used items have no tax.

An additional good thing is that foreign purchasers will be paying the taxes also.
5
Andy Says:
January 29th, 2008 at 1:58 pm
Also, if you are in the 25% bracket and pay about 8% in sales tax, a 30% flat tax would result in a shortfall of 3%. This is basically a simplistic calculation, but it illustrates a challenge of how to price the flat tax so that it does not shortchange the tax revenue.
6
Justin Says:
January 29th, 2008 at 2:03 pm
You can’t forget the affects of IRAs, 401(k)s, and their Roth counterparts and how they would be affected by a drastic change. The money in tax deferred accounts hasn’t been taxed via income tax yet, would it end up being tax-free? Or would it immediately get taxed at your current marginal rate? The Roths have been taxed and promised to be tax free afterwards, then a 30% consumption tax afterwards?
7
Justin Says:
January 29th, 2008 at 2:06 pm
@Andy: That 25% plus 8% sales tax ignores state income tax. Would states still be taxing income under this new tax system? Would states still tax sales in this system?

I find it hard to believe that states would stop both, or either. Add that 8% sales tax to the 30% sales tax and … yay?
8
Jeremy Says:
January 29th, 2008 at 2:08 pm
I tend to agree with Steven. While the initial “sticker shock” of everything costing 30% more, I think that would largely be offset by the 30% larger paycheck. If someone is used to getting $1,500 every two weeks, when they start getting $2,000+ paychecks I think that would alleviate some of the pressure to not spend money because they appear to cost more.

I do agree there would be a short-term effect, but just take gas prices for example. Last year the price of gas jumped nearly 40%. People bitch and moan about it and talk about how they are going to cut back on consumption, but after a few months people forget about it and continue on their ways. Demand is virtually unchanged.

So at first there might be a cut in spending when they flip the switch so to speak, but in a matter of months getting used to more take home pay, people will begin to not even realize things cost 30% more.
9
Deborah Says:
January 29th, 2008 at 2:11 pm
I have many questions about the Fair Tax, but like most people, I think the tax system needs an overhaul in a bad way.
People don’t bother to look at how much money is being taken out of their check in taxes – they base their financial situation on take home pay. But if they suddenly got that extra money on their paychecks, would they know how to be responsible about it?

Would the government have to pay the new sales tax on everything it purchases? How much is that going to change our national budget?

What about the possibility of a black market? I see that as a very real problem, especially in areas that have high local sales taxes. It’s 10% around here, which would be a total of 33% or 40% (the difference being how you classify the Flat Tax – as 23% or 30%).

Also, it strikes me as a bad sign that 2 out of 5 commenters on a blog devoted to personal finance get “Fair Tax” and “flat tax” confused. If we can’t get the lingo down, how much more confusing will it be to the country as a whole?
10
Minimum Wage Says:
January 29th, 2008 at 2:12 pm
Steven said:

But you forget that you take home a whole lot more of your paycheck. People will be able to control more (through choosing what to buy) what they pay in taxes. So I donâ€™t think the 30% increase of the cost of new goods will be that much of a disincentive.

A lot of people are going to be in for a big shock when the 30% tax rate kicks in. Worse, people overburdened with debt will really get stressed when they discover that the interest on their debt payments is taxed!

Renters will freak out when they discover even their rent is now taxed.

I see a large initial drop in spending – if nothing else, a lot of people will need to spend their “extra” money just to pay down the debt and shake off the “tax-on-interest” demon.

Spending will recover but it will take a hit at the start.
11
Carolyn Says:
January 29th, 2008 at 2:12 pm
It’s a great thing and everyone should read more about it. One thing people don’t talk about is that corporate taxes would also be cut. That corporate tax is always passed onto the consumer, usually around 25%. If you take that tax off the price then add the 30% fair tax, you’re pretty much paying the same thing. The best part is that if you don’t buy lots of things, you won’t pay lots of tax. That sounds fair to me. You also have people that are currently not paying taxes but using government services (medicare, medicaid, welfare, public schools, etc.) are now contributing to those things they are using. I’m also a strong supporter because I work in multiple cities and states and have to pay taxes everywhere which SUCKS at tax time…this would get rid of that. No more April 15:)
(Tourists that pay heavy sales taxes can usually get reimbursed…as you’ll find out if you visit most European countries and some South American cities as well. So the fair tax would probably not curb tourist spending.)
12
FMF Says:
January 29th, 2008 at 2:21 pm
I agree with you…you’re not an economist.
13
mlathe Says:
January 29th, 2008 at 2:24 pm
Changing the tax system like this would really be hard to do. What would happen to the IRS employees, corporate accountants, tax lawyers, not to mention the tax perparer industry (HR block, el al). There is a lot of money sloshing around. Also i’ve never really understood a good argument about what would happen to the tourist industry. Seems like it a German tourist would pay German taxes, and then come to the USA to pay for goods and services +30% taxes. How could that be good?

I think we’ll find that if this goes anywhere, there will be a lot of resistance, and in the end, we will have a patch or some other crappy solution.

Last thing… politicians like giving benefits to small constituencies by giving tax breaks (ie tax rebates for Green Energy). A simplified tax system like this, would take away an important tool that these people use to tweak the system.
14
Ernesto Says:
January 29th, 2008 at 2:39 pm
There are three areas of thought on this issue that need addressing before Iâ€™d throw my support behind the “fair” tax:
1 The notion that the price of all goods will go down due to businesses passing along tax savings.
2 How to determine Social Security benefits if not by income.
3 Addressing how businesses expense the items they purchase and how that affects the economy in the long term.

1. How do we determine if the price of goods will go down appreciably and the business owners donâ€™t just decide to keep the extra profit. Also, any business that makes money by consuming goods (raw material) is at a disadvantage to businesses that make money without consuming goods (banks, insurance companies).
2. Social security bases your retirement benefits on your earnings. Do they now track your spending instead? Sorry youâ€™d get a bigger retirement check if only youâ€™d have spent more money. Should have bought that Winnebago.
3. Iâ€™m a business person myself and am of the opinion that MOST businesses pay no or virtually no income taxes to begin with. I keep my businesses primarily for the tax write off. Face it, by the time a business pays all its expenses, depreciates all their assets and sends money to the shareholders, there is no money left for Uncle Sam to tax. 35% business tax? 35% of what? Sure there is a large expense in the form of payroll taxes paid for employees; Iâ€™m just not sure any of that would get passed on to consumers in any meaningful way.
Also, businesses expense all equipment they purchase. If I own a construction company and purchase bulldozers every 5 years (based on a deprecation schedule) then what happens when my tax structure shifts from income avoidance to consumption based? Now instead of a tax write off, I get charged 30% extra for purchasing a bulldozer. All of a sudden, itâ€™s cheaper for me to hire a mechanic than it is to buy new equipment. Good news if youâ€™re a bulldozer mechanic, bad if youâ€™re a Caterpillar shareholder.
15
Dave Says:
January 29th, 2008 at 2:52 pm
IMHO, calling the 30% tax only 23% is slight of hand. Might as well be honest about how the number is being generated. Which is why I think they describe it as 23%. Its a lower number which people can feel better about than the 25% of the larger tax bracket or the 30% value of true tax amount.
16
mlathe Says:
January 29th, 2008 at 2:53 pm
I think one part of the Fair Tax is that an item is only taxed once, and only once. This event happens in the retail market. Ie a person buys a table. The wood and nails used to build the table would not be taxed, but the end product would be taxed. Furthermore when the table is sold in a private sale (ie used on Craigslist), it is not taxed, since it was already taxed before. This is supposed to give biz an incentive to invest. By that Truck or Bulldozer, you won’t pay taxes on it. One thing i don’t understand is if a biz owner buys his wife a company car (no taxes!), but she doesn’t use it for company biz, how will the government catch this?
17
Owen Says:
January 29th, 2008 at 2:58 pm
Quick comment since I’m still at work and can’t read all of the comments right now. But a big thing that the comments I did read are missing is that the tax is on the final goods and services. All of the products we buy today have taxes imbedded along the way at each point of manufacture. So the studies on this show that the prices we would end up paying would be a percentage or two above what they are now. This would also make the US one of the biggest corporate tax havens in the world because they wouldn’t pay corporate taxes. This would in turn bring companies back to the US so they could get in on the savings and bring lots of jobs with them.

The other problem I’m seeing is that everyone is hung up on this 23% vs 30% figure. The reason they go with the 23% tax is that they are replacing a tax system that uses that same format for reporting. So if you use the fair tax supporter number a person who earns $60,000 a year in the 25% bracket pays $15,000. Now the non fairtax supporter would have to look at it as someone who earns $60,000 would pay the same $15,000 but it would be about a 33% tax since the $15,000 is 33% of $45,000 that they take home.

Must have a disclaimer in here. I’m oncall this week and my brain is fried already so numbers might not add up right but the ideas should still be sound. If not, I’ll try to catch up once I get home.
18
Owen Says:
January 29th, 2008 at 3:05 pm
One other quick note. The prices would be embedded in the price so you wouldn’t have a product that is $5.00 and then add 23% or 30% (depending on which one you want to use). The price is just going to be 5 bucks.
19
morydd Says:
January 29th, 2008 at 3:28 pm
I read the “Fair Tax Book” a while back, and the thing that struck me is that the authors seemed to imply that it was going to magically generate more income by removing the taxes along the way, so the retail prices of items would go down, thereby offsetting a portion of the “sticker price” with the tax included. So the government would get the same amount of money, but all the people would have more, except the IRS auditors and tax lawyers and who cares about them.

That last bit about no one feeling bad about thousands of people suddenly out of work was the part that got to me.

While I think that a system like this is probably a more efficient way of managing the tax system, I don’t think it’s something that is going to make a huge difference in the day-to-day lives of most people.
20
Kevin Says:
January 29th, 2008 at 3:28 pm
Everyone seems to be forgetting that under the FairTax all corporate taxes are eliminated and companies will be given a tax rebate on any items currently in inventory. Since companies will no longer have to pay taxes, they have more money to throw around, and the Law of Supply and Demand dictates that prices will fall. That coupled with the fact that FICA taxes are eliminated, and companies will be able to pay their employees more, should eliminate any fear of “sticker shock”.
21
scott Says:
January 29th, 2008 at 3:50 pm
Nobody can explain the fair tax like Neal Boortz! try boortz.com
22
pharmboy Says:
January 29th, 2008 at 3:57 pm
owen has it right…calling it a 23% tax (v. 30%) is using the same math that is used currently to report income tax rates.

taxes always discourage the behavior to which they are attached…so if it’s a choice between taxing income and taxing consumption, the choice seems obvious.

and I usually keep my cynicism about the poor to myself, but for all the people concerned about how this will adversely affect the “hard working Americans”:

a woman that I work with, who makes substantially less than I, and is receiving a tax “refund” for five grand in a few weeks because she’s a single mom…yesterday she casually mentioned that she has a 52″ TV…glad to see where my income tax dollars are going.
23
Colin McConnell Says:
January 29th, 2008 at 4:04 pm
I’ve read that a national sales tax is on its way, whether we like it or not? Why, since politicians on neither side of the aisle have the chops to raise income taxes to the point necessary to bring our nation’s entitlement programs (I.E., Medicare, Medicaid, Social Security, etc) back into solvency … they will instead look to the less politically painful solution of a national sales tax. Of course, this will be years, if not decades, down the road, as no one in Washington does anything until its too late (consider the climate for the ’stimulus’ checks).

This is why Roth IRAs / Roth 401Ks are a BAD IDEA … you’re paying in after-tax dollars NOW, for the promise of a tax-free withdrawl. No one has promised you that there wouldn’t be a national sales in the future, though. A tax break in the hand is better than two in the Bush (HA ha).
24
Justin Says:
January 29th, 2008 at 4:08 pm
@Colin: If there is a national sales tax, how does that make a Roth worse than a tax-deferred account? You will still have to pay the national sales tax with the tax-deferred money, as well as the income tax that will still be around.
25
Owen Says:
January 29th, 2008 at 4:16 pm
Justin – With the Roth you are paying tax upfront in the hopes that it is tax free when you take it out. If they put the tax on purchases you are essentially getting charged twice for what you put in. I would like to think that the growth in the account would make up for having to pay on what you put in but that’s probably just me. The other thing is that for the Fair Tax to work the income tax would have to be repealed which is why you see the tag lines “make April 15th just another day” and Let’s put the IRS out of business.
26
Dan Carter Says:
January 29th, 2008 at 4:18 pm
You state that that you do not know much about the Fair Tax and then you proceed to make comments and assumptions about it. Cost of goods will not go up by 23 or 30% or whatever. Embedded taxes on the manufacturing process will go away and the net is that while the tax on retail goods will go up, prices will go down. There is much more, please become more educated before you write about a subject.
27
Minimum Wage Says:
January 29th, 2008 at 4:53 pm
Carolyn said:

The best part is that if you donâ€™t buy lots of things, you wonâ€™t pay lots of tax.

Actually, since rent is taxed and the purchase of an existing home is not taxed (and thus mortgage principal is not taxedl), many renters will buy fewer things than the homeowner down the block, yet pay more tax.

What do you say to a renter with no hope (FarTax or not) of buying a home? Why should I have fewer things than my neighbor yet pay more tax than he does?
28
Minimum Wage Says:
January 29th, 2008 at 5:00 pm
mlathe said:

I think one part of the Fair Tax is that an item is only taxed once, and only once.

Not exactly. If you buy an existing rental property, the tax has been paid. It is an established accounting principle that the purchase price of the property is equal to the present value of the future rent stream – you are buying precisely the future rent stream.

Therefore, the tax has already been paid on the rent, and the rent should not be taxed a second time.
29
Minimum Wage Says:
January 29th, 2008 at 5:03 pm
Ernesto:

Payroll taxes (Social Security) taxes disappear under the FairTax. Benefits are not affected.
30
Minimum Wage Says:
January 29th, 2008 at 5:09 pm
Dan Carter said:

You state that that you do not know much about the Fair Tax and then you proceed to make comments and assumptions about it. Cost of goods will not go up by 23 or 30% or whatever. Embedded taxes on the manufacturing process will go away and the net is that while the tax on retail goods will go up, prices will go down. There is much more, please become more educated before you write about a subject.

Do you seriously believe rents will go down?

There is NO evidence, anywhere, ever, that rents have gone down as a result of any tax cut, not even California’s huge 57 percent property tax cut of Proposition 13.
31
Minimum Wage Says:
January 29th, 2008 at 5:12 pm
Here’s something to think about:

Landlords will have to register their rental properties with the tax collector.

A homeowner with spare rooms to rent? You think they’re gonna register? You think the tax collector will ever find – and pursue – them?
32
Meg Says:
January 29th, 2008 at 6:25 pm
Maybe the economy NEEDS to slow down. Why are we so obsessed with “growth” anyway? Sure it wouldn’t be best for everyone’s wallet’s if the stock market just quits going up by 8-10% a year, but I think what we’re doing is unsustainable anyway.

We are trying to consume the whole world, and eventually it will have to plateau–probably when population growth slows because we can’t produce enough food anymore.

Perhaps if people were incented to spend/consume less and save more, it would be a good thing for humanity, for the environment, for everyone.

(I’m in a philosophical mood today, obviously)
33
Rick Says:
January 29th, 2008 at 7:51 pm
@Minimum Wage:

Are you sure rent will be taxed? I’m not sure, but, as you point out, it doesn’t make sense that rent would be taxed. If the backers of the FairTax movement really wanted to make it fair, it seems they would think of these issues and not tax rent.
34
Minimum Wage Says:
January 29th, 2008 at 9:40 pm
Yes, services are taxed and that includes rent.
35
Dan Says:
January 30th, 2008 at 12:45 am
I am on the fence about the fair tax. There are definitely downsides to it, as well as to our current system.

The proposal seems to be less regressive than current FICA taxes, which would be good.
36
Jerry in OC MD Says:
January 30th, 2008 at 7:03 am
“That coupled with the fact that FICA taxes are eliminated, and companies will be able to pay their employees more, should eliminate any fear of â€œsticker shockâ€.”

Do you really think that companies will pass FICA (or any other) savings on to their employees? Call me a skeptic, but I don’t think they will.
37
Money Conversations Guy Says:
January 30th, 2008 at 8:22 am
I want to make sure it is noted that although prices of goods will increase based on the tax, the cost of producing the goods will DECREASE about the same amount resulting in all goods costing about the same.

The reason this can happen is only the final consumer pays the tax, and the corporations don’t need to spend millions hiring tax lawyers.

If you believe this, then the fair tax makes a whole lot of sense.
38
Brandon Says:
January 30th, 2008 at 8:42 am
I wonder how imports would be effected by Fair Tax. I don’t mean like buying a Sony HDTV made in Japan, but rather buying a Sony HDTV in Canada and shipping it to the US. If you could avoid the tax that way, it might be worth it on big ticket items.
39
nickel Says:
January 30th, 2008 at 8:45 am
Brandon: That’s a good question. I would assume that it would work similar to state sales taxes. In this case, if you were to go out of state to buy (say) a car, you would owe taxes in your home state. However, in that case you would be forced to pay since you have to register your car before legally using it. In the case of a TV from Canada, there would be no such registration requirements, and so it would be very difficult to enforce.
40
Owen Says:
January 30th, 2008 at 9:22 am
Brandon – One thing that might happen is that American goods would be purchased more because they would take advantage of not having the embedded taxes and quite possibly would end up being cheaper than a foreign made tv even if purchased in Canada. The other thing is that perhaps Sony would move some manufacturing to the US in order to take advantage of not having corporate taxes which would mean no embedded taxes.
41
Ryan Says:
January 30th, 2008 at 10:19 am
I am a supporter of the fair tax, and have a little insight into the whole thing for us all. What we’re all forgetting, or don’t realize is that about 20-30% (depending on who you ask) of the price we currently pay for goods is an “embedded tax”. Remember: businesses don’t pay taxes, they pass them on to us in the price of their goods or services. So, the thinking is that since this new Fair Tax would increase competition, and remove federal income taxes on businesses, the price of goods SHOULD come down by 20-30%. Then tack on the Fair Tax, and VIOLA…you have a net price increase of 0%. So that pack of gum that costs $1.00 BEFORE the Fair Tax is enacted SHOULD cost $1.00, AFTER the fair tax is enacted. BUT…we all get to take home our whole pay check. AND…we get that refund check from the government every month. SOUNDS GREAT TO ME.

My only concerns are: 1. For simplicity’s sake, let’s say I make a gross salary of $1,000 per week, and my take home pay is $750 per week under the current tax system. My employer knows that I live off of that $750 and that somehow I make it work. What’s to stop them from cutting my pay down to $750 and keeping that other $250, which is what the government used to take for medicaid and social security and income taxes, for himself? Multiply this by every employee in the company and someone has just created one hell of a raise for himself/herself.

2. The increased competition in the US will be GREAT for business and theoretically great for us, the consumer. BUT…if the businesses ally and decide not to drop the prices collectively, we’re right back where we started…with the government meddling in business. Theoretically, this would make the US the most friendly place to do business in the world…but then we’ve got some of the most corrupt CEO’s in the world too. This concern is not nearly as worry-some to me as number 1.
42
Dan Says:
January 30th, 2008 at 10:26 am
Jerry in OC MD, I think that companies will keep the 7.65% in FICA taxes they pay. However, the employees will still get the 7.65% in FICA taxes that are now withheld from their paychecks.

Money Conversations Guy, you make a good point. The resultant rise in prices will probably not be the full 30%. Corporations will be saving 7.65% in payroll taxes, as well as up to 38% in income taxes on profits.
43
Chris Says:
January 30th, 2008 at 10:46 am
You know, I think before a new posting, maybe just a little research should be done, perhaps read the book, so that you can inform your readers about what the “Fair Tax” plan is really about, and not just what you read in articles by people that are against it.

This posting shows exactly what is wrong with this country today. People make an opinion based on what the news and media say, instead of doing their own research. Maybe as a whole we can stop letting our politicians run the country as they see fit, and realize that we are supposed to have a say in what goes on… Just a thought…
44
Ernesto Says:
January 30th, 2008 at 11:24 am
Minimum wage,

You’re making my point for me: if FICA is not withheld from payroll, how does Social Security know how big of a benefit check to send you when you retire?

SS Benefits can range from $700 /month – $2600 / month depending on your earnings. Does the SSA track all your spending? Do your employers report how much you earned? What’s to keep your employer from lying to get you a bigger SS check? If either type of reporting is the case, you’re getting away from the government-free simplicity your hoping to achieve with the fair tax.

My fear is the fair tax will create a nation of liars and tax cheats. All for the sake of 30% off.
45
Dan Says:
January 30th, 2008 at 12:08 pm
Ryan, the fair tax is revenue neutral. The outcome you predict of prices being the same is impossible. Right now, a company only passes on the cost of its taxes in its goods. Under the fair tax, the company would also have to cover taxes that you and I no longer pay. The pre-tax price of goods will decrease, but the tax will bring the total cost higher than it is now.

Net effect: you take home more, things cost more, and no more headaches around April 15th. Most people won’t see a huge difference in their net income.

Ernesto, the government can just require employers to report all wage information. Cheating on your fair tax would be extremely difficult for an individual. I guess you’d have to convince a business to not collect it from you. There is far more lying and cheating under the current system.
46
Sam Says:
January 30th, 2008 at 12:51 pm
A big part of the fair tax or national sales tax is that it will get rid of the hated IRS. That might be true but another government agency would be in charge of keeping track of how (and I would assume where, when, etc.) you spend money which seems just as bad to me if not worse. Tracking the spending and spending habits of all Americans seems way too big brother for me.
47
Minimum Wage Says:
January 30th, 2008 at 5:05 pm
A big part of the fair tax or national sales tax is that it will get rid of the hated IRS.

My landlord will have to register his rental properties with the state tax collector – your tax collector will be in your back yard, not thousands of miles away.

Once the rentals are all registered with the state, it’s a short step to tighten regulations, like requiring annual inspections (paid for by the owner, or course – KA-CHING!).

I don’t want a government inspector in my home every year. Do you want a government inspector in your home every year? Didn’t think so.
48
Nick Says:
January 30th, 2008 at 5:35 pm
30% federal sales tax? Goodbye Internet sale and Ebay, goodbye shipping industry. Such sales taxes are un heard of any where in the world? I pay less in SS, MA&MC, Federal and State combine? Why would I want to have a 30% sales tax alone? When I pay less now? Even if I put the present sales taxes…

And why would I wish to close the SS? I paid bunch of money to that and MA&MC, where they will go? We are not Europe with their negative population growth, I see this as a populist way to get a way with allot of stealing in the government and sticking us with an even more taxes.

I’m against it. If they wish to do something, think about cutting government spending, investigating and revisiting all the lobby/politico/economical deals… Question that is against us is where we go from here? Do we steal more and how…? Or we create a working raw model for the world to envy?

If it’s the firstâ€¦, I pack my bags and leave, I have a place to go. If it is the second…, I may apply for Citizenship after all…
49
Nick Says:
January 30th, 2008 at 5:50 pm
44. (Minimum wage,
Do your employers report how much you earned? Whatâ€™s to keep your employer from lying to get you a bigger SS check? )

Why would your Employer beef up your SS? He has to pay more tooâ€¦ Are you out of you mind? Have your seen Employer to pay more when he can pay less? It is business not a charityâ€¦

And how would you call the next institution of tax collecting doesnâ€™t matter at all. This can work just fine if it is cleared from the clutter. Taxes are good, otherwise forget police, firefighters and good roads. GREED is badâ€¦ next ting you know there will be tax for the air we breath.
50
amx511 Says:
January 30th, 2008 at 6:59 pm
A big part of the fair tax or national sales tax is that it will
get rid of the hated IRS.

The replacement entity will be as big as IRS, just with a different
name. I like the concept of FairTax, but its current form is not a
viable tax code replacement.

Let’s call the replacement entity SRI to signify that it is meant to
be the anti-thesis of IRS. It will be responsible for tax collection
from retailers and rebate distribution.

Under FairTax, tax is collected only by retailers. While there are
less retailers than individuals, the amount of work needed for each
retailer has to increase because the retailers are now the
single-point-of-failure. SRI really has to work hard to reduce the
number of frauds retailers do because now each fraud has higher
potential of deprives government of incomes. Considering that even
businesses in heavily-regulated industries can do and some are doing
‘creative accounting and financing’, the chances of business doing
‘creative tax collection’ is considerable.

SRI will also have to guard against tax rebate fraud. They will have
to monitor even more individuals than IRS ever will: children,
homeless people, and people who do not currently pay income tax. They
will have to think of a way to distribute rebate checks for monadic
people (homeless or those who keep on the move). And are they going to
monitor the birth and death of everyone so as to reduce the
possibility of fraud (e.g., dead people keep receiving rebate check)?
How big do SRI have to be for that? How does this promote a small
government?

There is also the reality of globalisation and realisation that we are
not the world. Purchases (goods or services) from abroad cannot be
taxed. As a matter of practicality and cost, you cannot inspect all
imported goods. Inspecting imported services are even more difficult
and costly because they are not tangible things. Won’t that encourage
people to purchase international services, increasing the trade
deficit? International tourists will most likely be double taxed
(income tax by their government and then by FairTax).

All the above assume that we successfully transition to FairTax. But
how about the transition itself? What are you going to do with
deferred tax accounts? How will you close down the retirement accounts
since they are not needed anymore?

And the most important thing, IMO, is how to keep it away from special
interest groups. It is reasonable to claim that SIGs have been playing
a large part in complicating our current tax code. How to stop them
from tinkering with FairTax?

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