"Fair Tax": Prescription for Disaster

There is renewed talk right now of abolishing the income tax, FICA, the estate tax, and all other federal taxes and replacing them with a 23% national sales tax. The idea is being bandied about by former Governor of Arkansas Mike Huckabee, one of the Republican candidates for president. While the idea might seem superficially plausible, it would in fact be an economic catastrophe. An unusual, radically anti-tax organization called Jews for the Preservation of Firearms Ownership has a surprisingly comprehensive and well-argued attack on the Fair Tax proposal here. Among its highlights:

We're likely to end up with both a national sales tax and an income tax. Even if legislation required abolition of the income tax (as HR 25 does), a “national crisis” would soon cause the income tax to be “temporarily re-instated” and the Internal Revenue Service would remain in our lives on an “emergency basis” that never ended.

Likelihood: High probability.

It gets worse. A 1998 analysis by the William Gale of the Brookings Institute calculates that in reality (to pay all current government expenditures while also compensating for such factors as tax evasion), the national sales tax might have to run as high as 67 percent. AFT disputes that high figure. But they do not dispute that their initial “23 percent” tax rate would actually be achieved by adding 30 percent to the purchase price of goods.

Bruce Bartlett a senior fellow for the National Center for Policy Analysis, slams the 23 percent claim, also, saying it's too low even to cover current government spending. He writes in the National Review:

When Congress' s Joint Committee on Taxation scored the Linder proposal [The “Fair Tax Act”] four years ago it estimated that it would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate.(2)

Likelihood of the tax actually being more than 23 percent: Certainty.

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Inflation will kill you. For decades, the income tax gradually crept up as government-caused inflation pushed Americans into higher and higher tax brackets. This outrage caused horrific hardship before Congress was finally forced to index the income tax to the inflation rate (meaning that if your income goes up with the inflation rate, your tax rate doesn't). There is no indexing with the sales tax. As goods become more expensive, you have only two choices: pay more in taxes or do without the things you need.

Consider just one example. You've been saving to buy a new house. That house now costs $260,000 (which is already 10 times what your parents would have paid for an identical house in 1968). Your “FairTax” on that home will already be a whopping $78,000, for a total purchase price of $338,000. Then government printing presses go into high gear. While you're still saving up for your down-payment, double-digit inflation takes over and the price of your house zooms 20 percent in one year. The house now costs $312,000. Your “FairTax” on that house is now $93,600 for a total purchase price of $405,600. And you have to wait another year to buy it. And if inflation continues to go up, your hopes recede even further. (And all this is without mentioning the increased mortgage interest you'll have to pay over the decades to cover both the government-caused inflation and the government-benefiting tax.)

Likelihood of inflation boosting the sales tax: Certainty

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The FairTax is monumentally unfair to retiring Baby Boomers. People who have paid 1/4 or 1/3 of their income in taxes for 40 years will now have to pay an equally high tax on all the after tax income they've managed to put aside for their retirement. Every time Boomers buy anything with their lifelong savings, they'll be double taxed.

Likelihood: Certainty

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The tax will be used to track your entire financial life. While H.R. 25 does not contain any requirement that every purchase be linked to an individual's ID, the trend toward tracking every purchase is growing. We expect that eventually, your “national ID cash card” will be required when you buy anything. Or giant databases will combine the records of your credit cards, store loyalty cards, radio-frequency ID tags on merchandise, government ID, etc. into one vast set of interlinked records, immediately accessible to – and subject to manipulation by – government agencies.

Therefore, the national sales tax will eventually be used to track – and manipulate – what we purchase. Instead of merely being profiled by Wal-Mart or Safeway, your buying habits will be available in detail to the Department of Homeland Security, the Department of Health and Human Services, the FBI, the Bureau of Alcohol Tobacco Firearms and Explosives, university researchers – you name it.

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Although the tax is initially only to apply to services and new items, here's another projection: Swap meets, farmers' markets, gun shows, and garage sales will automatically come to be considered prime places for black market activity. Either the tax will eventually be extended to used items, or all such free markets will eventually be heavily regulated and patrolled – or banned outright as havens for the new anti-sales tax criminals and resisters.

Likelihood: Certainty (of black markets); high probability (of regulating used and private sales)

And remember – to whatever extent some people manage to keep more of their own money through black-market purchases, those who buy on the legal (taxed) market will end up paying higher taxes to feed the insatiable federal government.

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The national sales tax will give government another reason to make cash purchases illegal. Because buying with cash will make it easier to evade the sales tax, taxing authorities will quickly conclude that buying with cash is a sure indicator of criminal activity. The federal government has already classed all large cash transactions (in some cases, that means amounts as low as $750) as “suspicious.” Expect cash purchases of all sorts eventually to become criminal under the sales tax regime. After all, as government and the media will soon tell us, “It used to be that big drug dealers and crooked businessmen evaded taxes on large purchases. But now millions of Americans are cheating their countrymen every day by evading tax on billions of small, but cumulatively huge, purchases of milk, coffee, CDs, and tee-shirts!”

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Cash purchases, of course, will also make it more difficult for government social engineers and corporate marketers to make sure your buying habits meet their standards. Cash purchases make it harder to tell whether you're guilty of eating too much butter, consuming too much beer, or owning too many guns. That will be yet another reason to make all purchases trackable. But the excuse given will be to prevent the terrible crime of sales tax evasion.

Likelihood: High probability.

Absurdly, the article concludes by advocating the abolition of ALL taxes. (Now how in the hell do these people propose funding such activities as defense, infrastructure maintenance, national law enforcement, and all other vital services provided at the Federal level, not to mention Social Security, the abolition of which would be a disaster?) Still, the article makes persuasive arguments, and ones that I think need to be heeded.

Even lunkheads can be right sometimes.