Not the change we need: National sales tax PLUS income tax
Elections have consequences and we’re hearing the smatterings of an extremely troubling one: a possible 10% value added tax (VAT) in addition to our current income tax. Yikes. Given all the other changes Team Obama is implementing or proposing why don’t we just go ahead and change our country’s name to New Europe.
I like consumption taxes. Taxes have a social engineering effect which is unavoidable. I’d much rather penalize consumption than productivity. I’ve long argued that we should scrap the national income tax and replace it with a sales tax levied on new goods and services (the FairTax). The key element is eliminating the income tax, which is onerous, inefficient, and harmful to businesses. To layer a sales tax on top of the income tax would be a travesty.
The VAT also misses two elements (well, I’m only naming two here) that the FairTax possesses. One is that the FairTax includes a monthly prebate so that no one pays taxes on the necessities of life. The second is that the FairTax is at the point of purchase and is very clear to the consumer. It will show up as a line item on the receipt. The VAT is more of a hidden tax to the consumer, one that is levied at each point in the manufacture of a product.
I’m sure we’ll be talking more about this later.
I have a Fair Tax question…
Why not just make “essentials” tax free and do away with the “prebate”.
Or just do away with the “prebate” which has the potential of becoming a hmm.. a “citizen’s stipend” or your monthly gift from the Party That Cares ™
I’m all for the VAT. It strikes me as just the sort of Democratic overreach that is likely to get the GOP base fired up and infuriate independents. Doing away with the VAT could be the first order of business for a new GOP-controlled Congress.
As for the “FairTax,” I continue to be amazed at how many otherwise intelligent people keep pushing that lame idea. The FairTax is a perfect example of an idea (e.g., communism) that is great on paper, but does not work in the real world where factors like human emotion come into play. Major problems with it include, but are not limited to:
1) By putting a huge sales tax on consumer items, you force the creation of black markets that even normally law-abiding citizens will be greatly tempted to participate in.
2) You depress consumer spending. People will quickly forget the “pay raise” they got when the income tax disappeared, but the price increases at the store will affect their behavior from then on.
3) The transition will be hell. There would be massive hoarding prior to the institution of the FairTax, and the 30% price jump would cause market havoc for months.
4) By putting all your tax eggs in one basket — and a fairly volatile one at that — the government will be even more vulnerable to economic disruptions than it is now.
5) The fact that the FairTax will represent a huge tax hike for the poor and working class (right now, they pay no income tax) will give Dems and GOP squishes all the excuse they need to expand the welfare state even further to help “the most vulnerable.”
6) By taxing legitimate and legal forms of entertainment, less socially-desirable (and often illegal) forms of entertainment will become relatively cheaper. I doubt the FairTax will be applied to lap dances, dog fights, crack, or prostitution.
I could go on, but you get the idea. I am all for tax reform, but I wish the FairTax would die very soon. Frankly, it discredits the right because it strikes most independents (and a heck of a lot of conservatives) who hear about it as just plain loony.
Jack,
Have you bothered to even read any of the books about the Fair Tax? Most of the objections you raise are discussed in detail. Also, the current tax situation and any of the other alternatives also have their problems. You may call it loony but compared to the current tax code, it refreshingly sane.
Bill,
Have I read the books? No, I have not. But I have read quite a bit about the plan both pro and con online. Frankly, the arguments for how these problems will supposedly be mitigated are not convincing, and the case made by the critics is damning. This is snake oil straight up.
Yes, the prospect of a 10% (for now) national sales tax ON TOP OF income tax is more than a little disturbing. This isn’t the fairtax or anything like it, because the FairTax is based upon the elimination of income taxes.
http://politicsalabama.blogspot.com/2009/05/ready-to-pay-10-national-sales-tax.html
Jack,
I’ve read the books and a lot of the discussions online. One thing is clear, most of the people online distort and miss facts whether in support or opposition. The books are concise and address each of your points directly and comprehensively.
Counter responses to your main points:
2 & 3.) Transitioning from old tax code to FairTax, prices would be basically the same. It comes down to how you calculate your tax at sale. Inclusive or Exclusive. But basically, with the FairTax, product prices would reduce by about 22% from all the stacked taxes through the products life, then a 23% sales tax is put on the final point of sale. The biggest plus of this is that it’s more transparent and we the people will have more insight into what’s going on without having the burden placed on each of us individually.
4.) Economic studies show that a sales tax is more stable than an income tax system. I challenge you to read into it (also found in the FairTax book, with references)
5.) With a monthly prebate given up to the poverty level, based on family size, the poor are actually helped (you can look up how it’s calculated). Then, as stated above, the prices of new goods are essentially still the same (think clothes, electronics, etc). So no loss of purchase power there on anyone’s part. However, with used goods, and that can be anything not brand-new like houses, they are now even cheaper.
It levels the playing field for everyone, no favorites anywhere. Just like now, a poverty level is determined which is used to calculate the prebate (returned taxes), so no change there.
6.) On forms of entertainment, you miss the point. Sure, we’ll never get rid of people skirting the law. … But, the guy or gal cashing in on that undocumented transaction will eventually have to buy something new (makup, auto parts, etc), at which point taxes are collected because the majority of companies will follow the law.
My final recommendation is to read the 2nd FairTax book since it’s more of a rebuttal to concerns like yours. It’ll only take you a week or two to get through it casually, so it’s pretty easy.
Sample call on Neal Boortz:
Caller: I have these issues with the Fair Tax: a) b) c)….
Neal: Have you read my book?
Caller: No
Neal: You idiot! How dare you question my plan without reading my book. Buy and read My book, it answers all your questions.
DIAL TONE…..
Nel: These idiots…
Dale,
The reason it would not work to just not tax “the essentials”, is the definition of essential. Is food essential? Yes! Is Lobster and Filet mignon essential? no! That may be an extreme, but do we want the Government deciding what is and is not essential? What about cars. I personally believe that a car is essential, but at the same time, I would say that needs to be taxed.
If you open the door for the government to decide what is and is not essential, it will eventually devolve into the mess of today’s income tax, as the government tries to reward and punish different products.
Ah, so we will get a big, fat pay raise (since no more withholding taxes), but prices will stay the same! Money appears from nowhere — It’s magic!
Like I said, snake oil.
You still did not really address the fact that this will create huge incentives for black market transactions that bypass the tax, thus disadvantaging businesses that follow the law. Then there is the fact that the political pretzel factory required to determine “prebate” rates and so forth will simply re-create in another form the kind of bureaucratic hell we are trying in part to get away from. As for sales taxes being more stable than income taxes, this is not true if you exempt staples such as food and clothing, as many have argued should be done (and would almost certainly happen). Once you are only taxing discretionary spending, there goes your stability. There’s also the fact that, as Ramesh Ponnuru has pointed out, in every country that has adopted a national sales tax, it has been an engine for the growth of government. There are no countervailing examples to be found.
Let me just add that, as with Ron Paul backers (one and the same in many cases), the wild-eyed fanaticism of many FairTax supporters is enough to make most folks legitimately wary of the idea. This zealotry, I might add, is quite a contrast to the dearth of seriousness with which respectable economists and political pundits are treating this plan.
I think “snake oil” is unwarranted. First of all, as Bill pointed out, the FairTax must not be evaluated in a vacuum; it has to be contrasted with the income tax it would replace. I will say there is the air of activist idealism associated with it. Your zealotry comment is not without merit. The devil is in the details and as the FairTax (or any other major tax plan) winds through the legislature additional devils may be inserted and seemingly virtuous provisions may be deleted. The final product will not have the same luster as the one activists fought for.
The vast majority of criticisms about the FairTax are misplaced or offset by equally valid criticisms of the income tax.
I would personally like to eliminate the prebate due to the possibility of it being a political vote buying tool, but I recognize its necessity for the FairTax to even be politically viable. A pure “regressive” sales tax would be a non-starter.
The FairTax would not be a free lunch. Purchasing power after the FairTax would (theoretically and on an aggregate level) equal purchasing power before the FairTax. Now, here is the most valid criticism – pardon me because it does involve some concentration. For the FairTax to “work” as planned everyone’s current net income would become the new gross (and net) income. That cost would be removed from products and then once the sales tax is levied at the point of purchase all would be the same. That will not happen. Labor unions have contractual wage floors. There is a federal minimum wage, which I assure you is not going to go down. Others will be simply unwilling to give up wages on the faith in the free enterprise system that the businesses will decrease prices as costs drop. Just isn’t going to happen. Consequently everyone would see an increase in take home pay, but businesses would have the same cost basis so the amount paid by consumers would increase by the amount of the tax. Inflation. So for each dollar you earn after the FairTax is enacted purchasing power would be the same. But, (and here’s the kicker) “savers,” people with money in the bank on Day 1, would see the purchasing power of their savings drop. That is quite a big negative that would be hard to avoid.
Jack, can you give me us the link to Ponnuru’s column? I know VATs have a tendency to grow gov’t because the tax is not terribly obvious to consumers. A point of purchase sales tax is much more visible, i.e. no stealth increases.
Brian,
I didn’t get Ponnuru’s comment from a column, but from his response to a letter to the editor from Rep. John Linder in the 2/15/05 issue of National Review. Ponnuru’s verbatim comment was:
“Rep. Linder does not address the argument I put forward. A national sales tax cannot possibly win congressional approval. If it did, it would be an engine for the growth of government. If he has an example of a country where it has not been such an engine, I would love to hear about it.”
Ramesh is a careful writer, so I’m sure he has the backup data on this, but I have not had time to research it further.
You are correct, by the way, that the compromises necessary to get something even close to a FairTax approved would kill whatever efficacy it has. You are also correct that there are many valid criticisms to be made about the current income tax (which is why it should be changed), but one should always be wary of the Law of Unintended Consequences, and radically changing the tax system is just begging Murphy to kick you in the pants.
Three other points to consider:
- The actual tax rate for the FairTax, figured as we currently figure sales taxes, is 30%. I know all the rationalizations for why the 23% figure is used, but that’s not how people think of a sales tax. If you’re going to discuss it in terms people understand, the 30% rate is the one that matters. Add to that the 8% rate we already pay here in Huntsville, and you’re up to 38%. And that is before the state piled on. Who doesn’t think that level of taxation will encourage a black market in consumer goods and services?
- Another valid point Ponnuru makes (http://corner.nationalreview.com/post/?q=YjEzZWI5ZGEwY2FiZGIxMzFiYTRkNGY5ZDVkNmU0NTk=): “The notion is that getting rid of income taxes will cause prices to drop to offset the impact of the new sales tax. My question in response: If this theory of how the economy works is valid, then shouldn’t wages drop 23 percent, too?” We do, after all have a “labor market” — If price inflation due to income taxes is built into the prices of goods and services, then it stands to reason it is built into the price of labor, too.
- Instituting a FairTax without repealing the 16th Amendment (authorizing the income tax) would be a disaster waiting to happen. Even if all went according to the FairTaxers’ best dreams, it wouldn’t be too many years before Congress would find some pressing need to introduce, say, a 10% income tax on millionaires. And just like happened the first time, this would slowly creep up to eventually get all of us. So in the end, the FairTax would only manage to introduce another way to tax us. Not good.
A few things about VAT.
This came up in the once before (late 60’s early 70’s) where it was hyped as a way to curb inflation, not so much as a revenue matter. The idea was that those dastardly middle men would not raise prices knowing it make products too costly and/or curb consumer demand and lead to mild deflation.
The Brit’s have gone whole hog for VAT where every price is shown as + VAT. Doesn’t seem to have either cured inflation or fixed the revenue stream either.
BTW, wouldn’t a VAT break Obama’s promise to tax only high (>250K) earners?
Jack,
Re: “4) By putting all your tax eggs in one basket — and a fairly volatile one at that — the government will be even more vulnerable to economic disruptions than it is now.” The gubmint SHOULD be vulnerable to economic disruptions. If they were obedient to the controlling document, there wouldn’t be a problem because 95% of gubmint wouldn’t exist – meaning there wouldn’t be a funding problem.
As f or a black market and “normally law-abiding citizens” participating – you’re damn right. I already participate in them at every opportunity. Why, because I’m sick of paying the enormous tax burden that I do. If I can “cheat” to keep more of what I EARN, I’m doing it.