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Monday, December 10, 2007
posted by Kyle Hampton | 4:48 PM | permalink
I think that the fair tax is a pie-in-the-sky idea. Generally, I think that the idea of getting the tax code simpler and flatter is a good idea. However, I don't see how the fair tax accomplishes that. When pressed on the specifics of how it would affect low income Americans or other special interests who now pay no taxes, they talk about prebates. Once we've gotten to that point, however, there is little stopping the government from recreating any or all the tax exemptions now currently in the tax code. Thus, we have done little to affect who is paying taxes, but only shifted how they pay it. How that helps the tax situation is beyond me.

Proponents also argue that the national sales tax would help tax black market activities. James Taranto over at Opinion Journal looks further into this claim:
"Ask Mike Huckabee about his tax plan and he'll talk about pimps and prostitutes," the Concord (N.H.) Monitor reports. Not a bad lead. The story continues:

The Republican presidential candidate often says that one of the selling points of his plan to replace the federal income tax with a 23 percent sales tax is that it would force those who deal in cash to pay taxes.

"You end the underground economy," Huckabee said at a recent luncheon for the Greater Concord Chamber of Commerce. "Illegals, prostitutes, pimps, gamblers, drug dealers--everybody pays taxes."

Huh? Does Huckabee really think prostitutes are going to collect sales taxes and pass them on to the government? Apparently not:

William Ahern, spokesman for The Tax Foundation, a nonpartisan tax research group in Washington, D.C., said even Huckabee's claim about pimps and prostitutes isn't true.

"Say (a drug dealer) spends $100,000 on a tricked-out Hummer," Ahern said. "Instead of just paying the local car tax or sales tax, he would be paying, according to the Fair Tax, the full 23 percent (tax).

"But he won't be collecting the Fair Tax on his sale of drugs," Ahern added. "You and me, the two secret heroin addicts who are pouring our wages into the coffers of this drug dealer instead of making mortgage payments . . . we avoid paying the Fair Tax by buying heroin instead of taxable goods."

To put it another way, under Huckabee's plan, johns and drug addicts would pay for sex and drugs with pretax income.

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The other, and I think more compelling argument, is that rather than end the underground economy, the "fair tax" would actually create a black market for everyday goods such as one never before conceived. When everyday products are tagged with a 30% premium by way of a national sales tax, widespread smuggling and black market transactions will result almost immediately. People who want to WILL find a way to get cheap goods without paying the tax. Those that dodge income taxes now WILL find ways to buy products on the black market for far less than they can pay at legitimate retailers. NOt only will such a black market become a fiscal drain, it will pose a potential public safety hazard to consumers who buy goods on the black market from unaccountable suppliers who hold no regard for product safety / liability concerns.

The fair tax is a volatile, risky, unrealistic dream and is a complete non-starter. Huckabee is selling a horrible bill of goods simply because its false promises appeal to just about everyone who doesn't like to pay taxes and is not well educated on fiscal policy (which happens to be a majority of American citizens)

It should always be mentioned that the 23% sales tax is inclusive. Or, in other words, it's actually a 30% sales tax the way most people think of it.

A $1.00 item will be taxed an additional $0.30. However, $0.30 is only 23% of $1.30, hence the more appealing number cited.

What happened to the actual "Flat Tax"? It's simple, and fair. And you don't have to get rid of the IRS.

I think the point of the "pimp, prostitute" example was that it would force them to pay taxes when they spent their money. Right now they totally avoid taxes by not declaring income.

However, the potential to create a bigger black market in the USA is huge. The incentive to do so is increased dramatically as under-the-table deals will now result in 300-400% increased tax evasion.

So prostitutes have to pay some taxes and black market problems spike. Great plan.

Devon: Your point is right on. Saying 23% gives everyone the wrong impression.

As I've said before, the Fair Tax is very, very unfair to people who have saved throughout their working years in anticipation of spending in their "golden years." The Fair Tax takes money that they've already paid income tax on and makes them pay "Fair Tax" on it when they spend it.

Do we really want to penalize savers?

I think that the Fair Tax is intended to ENCOURAGE savings (people will think twice about discretionary spending if they have a 23%-or 30% as stated above-Federal sales tax), but it sure starts off on the wrong foot.

Generally speaking I am ifavor of concepts like the fair tax. One thing no one has brought up is the impact that implimenting a 30% increase on all goods will have on the economy. The biggest reason it will never be implimented is that the politicians know that we will plunge into a recession if it is.

On average, each $1 you spend on goods in the United States has $0.22 of embedded tax. Think about it. Corporations have to pay 35% tax on every dollar they earn, in addition to social security, Medicare, and payroll taxes for each dollar they pay you. When the fair tax is passed, $1 goods will drop to $0.78, and then add the 30% tax, and you get $1.01 in today's dollars. Not much for Americans to pay considering they spend 6 billion hours a year filling tax returns (not to mention we pay the IRS $10 billion to keep an eye on us)

Perhaps the easiest way to make sure everyone is getting taxed, is to tax real estate. Everyone lives somewhere, right? If all property gets a federal tax hike, it's pretty difficult to avoid the taxman. However, a property tax then provides an incentive to people to not own US real estate, which would totally trash the real estate industry.

I think the only "Fair" thing to say about taxes is that there are no easy answers. Mike Huckabee spouting the "Fair Tax" as a panacea/great alternative to what we've got now is one more piece of evidence that he's a lightweight who doesn't have serious proposals to offer.

The black market issue is real. The internet will be the channel. People will begin buying EVERYTHING on-line to avoid the tax. This will require the Fed to monitor the net like never before to get those nasty tax evaders. Despite any such monitoring, people will be able to buy merchandise from companies in countries that won't allow our government to scrutinize their books. Not only will this kill tax generation, but it will force American companies to fight at a bigger disadvantage (23% bigger), causing more and more business to leave the USA. The lack of tax generation may require us to raise the rate only increasing the incentive for evasion. The IRS is a patsy compared to what the "fair tax" would require.

For this reason alone the fair tax idea should be laughed off stage.

That said, I think the fair tax has at least two or three more pressing deficiencies than the black market effect. The whole idea is lunacy.

Everyone remember that the fairtax would only tax new goods. That might hinder the relevance of a black market. As far as the effect on the economy, how many major corporations have left the US because of the tax penalties encountered due to their success. Relieving some tax burden would encourage corporations to stay in and/or return to the US.

Who cares if the IRS is abolished, I haven't seen too many people who have been audited with big smiles on their faces.
To the person stating this would hurt savers... I saved by putting money into my 401K for 5 years, at which point I found myself needing an engagement ring. I owed 40% of the money I put in the 401k to taxes. That is not what I would call fair.

Taxes caused this country to be created, when in the 1700's England thought they knew better how to spend our money than we did. This country can't continue to stand with the taxes as they are today.

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