The FairTax is a Bad Idea
I hate wage taxes and I think most people do too even if they accept that "taxes are the price we pay for civilization." The IRS has turned into one of the most feared agencies carrying the power to make someone's life a living hell. Businesses have gone bankrupt, houses have been lost, families have been broken up all due to the IRS.
The federal tax code has ballooned to an incomprehensible number of pages. In tests, professional tax accountants will come up with different totals when preparing taxes for the same individual or family. Something is terribly wrong when people have to hire professionals to ensure they are even complying with the law.
The federal tax code has ballooned to an incomprehensible number of pages. In tests, professional tax accountants will come up with different totals when preparing taxes for the same individual or family. Something is terribly wrong when people have to hire professionals to ensure they are even complying with the law.
Then there are the constitutional issues such as direct taxation and self-incrimination. The courts and the IRS claim that these issues have been settled (often with lawsuits as if threats and force logically prove something), but the code is so complicated and self-referential, that I'm not sure that anyone knows. Given the horrors of the current system, almost anything seems better. There is one system that has been proposed as a revenue-neutral replacement to get rid of the wage tax and IRS (at least in one's personal life) - the FairTax. An unfortunate number of libertarians have jumped on board with this tax despite it being terrible (though, arguably, not as terrible as wage taxes). I believe that the FairTax is both misguided and dangerous and it distracts people from asking certain important tax policy and political structure questions necessary to get more liberty. |
Trade is a Good Thing
The FairTax is a consumption tax which functions like a Value Added Tax with a prebate to make it less regressive and exemptions for existing goods. What that means, at the end of the day, is that it's taxing trade. Here's the problem: trade is good. It creates wealth by leaving both parties better off than they would've otherwise been. It builds trust which is a necessary social component. It spreads truth by weeding out errors through human interactions.
If we are to believe that taxing something creates less demand for it, then taxing trade will create less demand for it. Sure, people aren't going to stop eating, but they might focus on buying more used goods, resort to barter, or simply consume less. When consuming less, the would-be seller and the would-be consumer are in worse positions than they would've otherwise been if they had been free to trade without the tax. The term "value added tax" should've been the first clue since it translates into "we want to tax people who add value" and then "we want to discourage people from adding value."
In the FairTax's favor, at least some used goods aren't taxed (see below) which gives it a leg up over the current wage tax. This may provide environmental benefits by enticing people to reuse rather than buy shoddy products from China and store them in our landfills. However, anyone offering or purchasing a service is screwed since those can't be sold second-hand.
If we are to believe that taxing something creates less demand for it, then taxing trade will create less demand for it. Sure, people aren't going to stop eating, but they might focus on buying more used goods, resort to barter, or simply consume less. When consuming less, the would-be seller and the would-be consumer are in worse positions than they would've otherwise been if they had been free to trade without the tax. The term "value added tax" should've been the first clue since it translates into "we want to tax people who add value" and then "we want to discourage people from adding value."
In the FairTax's favor, at least some used goods aren't taxed (see below) which gives it a leg up over the current wage tax. This may provide environmental benefits by enticing people to reuse rather than buy shoddy products from China and store them in our landfills. However, anyone offering or purchasing a service is screwed since those can't be sold second-hand.
Sending Money to the Federal Government is a Stupid Move
If there was a single reason to oppose the FairTax, this would be it. The Federal government has proven terrible at managing money and centralization of power has led to a palpable loss of liberty. People rail endlessly about "getting money out of politics." Well, first you have to get power out of politics and part of that is to stop giving politicians money. Having 435 congresspeople, 100 senators, 9 supreme court justices, and 1 executive branch to effectively rule over 310,000,000 citizens is a dumb idea. Those people lack the context to make the right decisions a lot of the time (per the calculation problem). They are highly prone to corrupting influences since lobbyists know they only need to target those few individuals. Any laws they come up with are bound to piss off a large percentage of the population as compared to if such laws were made and enforced at more local levels of government.
The Federal government effectively undermines the spirit of the 10th amendment by siphoning wealth from the residents of each state and then returning it to the states with conditions. This further centralizes power and diminishes the effectiveness of a "laboratory of the states."
While I fervently believe that they type of taxation is a very important consideration, that doesn't mean I ignore the recipient or the amount of taxation. One stated goal of the FairTax is to remain revenue-neutral. Whether it's entitlement spending or the military industrial complex, it's hard to imagine there's an appreciable amount of citizens who believe that the Federal government doesn't have enough money already.
Do you want more power, quicker turnaround time to solving political problems, more options and voices in the political sphere, benefiting more directly from your tax dollars, less corporate influence in politics? The answer is localism. Yes, it's not a panacea, but it's a hell of a lot better than top-down control by most liberty and cost metrics. A critical part of effective localism is keeping the tax money local. If the Federal government is to be paid, taxes should be trickle-up not trickle-down. The FairTax keeps the status quo.
The Federal government effectively undermines the spirit of the 10th amendment by siphoning wealth from the residents of each state and then returning it to the states with conditions. This further centralizes power and diminishes the effectiveness of a "laboratory of the states."
While I fervently believe that they type of taxation is a very important consideration, that doesn't mean I ignore the recipient or the amount of taxation. One stated goal of the FairTax is to remain revenue-neutral. Whether it's entitlement spending or the military industrial complex, it's hard to imagine there's an appreciable amount of citizens who believe that the Federal government doesn't have enough money already.
Do you want more power, quicker turnaround time to solving political problems, more options and voices in the political sphere, benefiting more directly from your tax dollars, less corporate influence in politics? The answer is localism. Yes, it's not a panacea, but it's a hell of a lot better than top-down control by most liberty and cost metrics. A critical part of effective localism is keeping the tax money local. If the Federal government is to be paid, taxes should be trickle-up not trickle-down. The FairTax keeps the status quo.
Saving Relies on Borrowing, Wages Rely on Selling
It's easy to know that transactions have at least two parties in the abstract but people have a tendency to think of only their side in the transaction when considering the impact of various policies. It's easy to forget that sales can't exist without purchases and (interest bearing) saving can't exist without borrowing. When looked at holistically, the FairTax primarily moves the tax from one side of the transaction to the other. If it weren't for its exempting some used goods, it would be extremely similar to the current wage tax in its horribleness. (I'd still give it a slight nod on having a larger prebate than the personal exemption and having a lower compliance cost.)
Let's use two examples.
Alice wants to save money. That's good, right? A large percentage of Americans live on their credit cards or paycheck to paycheck and that's irresponsible. But it's important to understand why humans do that; humans have a time preference. What good is it to set money aside if you could have something now? You could die or get hurt later, the price could go up, the dollar could go down, the company could go out of business, someone could buy the last one. Note that I am not talking about insurance. Laying by something for a rainy day is a different story. I'm talking about enticement to save more than you realistically expect you'll need for emergencies - long term savings / investment savings.
FairTax proponents correctly point out that the U.S. could use more investment. Investment involves lending and lending involves having enough saved beyond what one needs in the day-to-day available to lend. So, let's do some math.
Alice has $100 to spend and there's a $100 widget to buy. Let's say she's on the fence. After the FairTax (at 23% inclusive ~ 30% exclusive), the widget costs $130. Alice decides to save instead and earn 1% interest. Bob needs a loan and he can get one for 5%. Let's say he needs $100 worth of product. He could get a loan for a total cost of $105. However, due to the FairTax, the product he needs is now $130 making that loan cost $136.5. If he was also on the fence, he might not take out the loan. Other than rainy day insurance, $100 sitting in the bank does no one any good.
Now, people might point out that, since wage taxes (ostensibly) disappear under the FairTax, Alice and Bob would both have more money making Alice willing to spend the $130 where before she'd only spend $100 and Bob to take out a loan for $100 since he'd have earned $30 more (though he'd still have an increased interest cost). This assumes a lot of things, but let's go with it for a minute. That means that neither Alice or Bob would behave any differently than they already do under the existing system. One can't prima facie argue that the FairTax would lead to more savings. In fact, it could lead to less as people can keep their extra earnings and buy used goods instead.
Example two:
Cindy currently makes $100 per unit time but pays a 23% (inclusive) tax rate. She takes home $77. She wants to buy something from Dan for $100. It will take her 1.30 units of time to buy that item. Enter the FairTax. Cindy now takes home $100 per unit time but has to pay $130 still requiring 1.30 units of time to buy that item.
Let's use two examples.
Alice wants to save money. That's good, right? A large percentage of Americans live on their credit cards or paycheck to paycheck and that's irresponsible. But it's important to understand why humans do that; humans have a time preference. What good is it to set money aside if you could have something now? You could die or get hurt later, the price could go up, the dollar could go down, the company could go out of business, someone could buy the last one. Note that I am not talking about insurance. Laying by something for a rainy day is a different story. I'm talking about enticement to save more than you realistically expect you'll need for emergencies - long term savings / investment savings.
FairTax proponents correctly point out that the U.S. could use more investment. Investment involves lending and lending involves having enough saved beyond what one needs in the day-to-day available to lend. So, let's do some math.
Alice has $100 to spend and there's a $100 widget to buy. Let's say she's on the fence. After the FairTax (at 23% inclusive ~ 30% exclusive), the widget costs $130. Alice decides to save instead and earn 1% interest. Bob needs a loan and he can get one for 5%. Let's say he needs $100 worth of product. He could get a loan for a total cost of $105. However, due to the FairTax, the product he needs is now $130 making that loan cost $136.5. If he was also on the fence, he might not take out the loan. Other than rainy day insurance, $100 sitting in the bank does no one any good.
Now, people might point out that, since wage taxes (ostensibly) disappear under the FairTax, Alice and Bob would both have more money making Alice willing to spend the $130 where before she'd only spend $100 and Bob to take out a loan for $100 since he'd have earned $30 more (though he'd still have an increased interest cost). This assumes a lot of things, but let's go with it for a minute. That means that neither Alice or Bob would behave any differently than they already do under the existing system. One can't prima facie argue that the FairTax would lead to more savings. In fact, it could lead to less as people can keep their extra earnings and buy used goods instead.
Example two:
Cindy currently makes $100 per unit time but pays a 23% (inclusive) tax rate. She takes home $77. She wants to buy something from Dan for $100. It will take her 1.30 units of time to buy that item. Enter the FairTax. Cindy now takes home $100 per unit time but has to pay $130 still requiring 1.30 units of time to buy that item.
It's Still Intrusive and Will Most Likely Need to Expand
The FairTax still requires tax compliance from every company and the agency enforcing it will almost assuredly need to spy on the bank accounts of those companies to make sure they are collecting and remitting the taxes. Is this easier than doing it for every company plus every adult citizen? Sure. But it's still going to miss a lot and it's still creating an incentive to cheat.
The current system is pretty effective because everyone has an incentive to turn everyone else in to get out of tax obligations. I'm skeptical that this would be as prevalent in a situation where individuals aren't being made into informants. I'm as happy as any libertarian-leaning person when the Federal government loses money, but if there's going to be a tax system in place, the taxes should fall on who the law says they should.
Right now, I suspect individuals have a lot more personal aversion to risk and are more patriotic than businesses. If I can hire people under the table, I damn well will. What incentive do they have to correctly report things especially if they're a small business like an individual contractor? Big companies, instead of just screwing over their employees with taxes, can gain a price advantage for all downline businesses if they can lower their reported sales.
Even if my skepticism is undue, how likely is it that the FairTax will stay fair or stay at 23%? A push to catch cheaters (or absorb their costs) or something as simple as needing revenue for a war could easily change things.
The current system is pretty effective because everyone has an incentive to turn everyone else in to get out of tax obligations. I'm skeptical that this would be as prevalent in a situation where individuals aren't being made into informants. I'm as happy as any libertarian-leaning person when the Federal government loses money, but if there's going to be a tax system in place, the taxes should fall on who the law says they should.
Right now, I suspect individuals have a lot more personal aversion to risk and are more patriotic than businesses. If I can hire people under the table, I damn well will. What incentive do they have to correctly report things especially if they're a small business like an individual contractor? Big companies, instead of just screwing over their employees with taxes, can gain a price advantage for all downline businesses if they can lower their reported sales.
Even if my skepticism is undue, how likely is it that the FairTax will stay fair or stay at 23%? A push to catch cheaters (or absorb their costs) or something as simple as needing revenue for a war could easily change things.
What's Interestingly Not Taxed
What's not taxed? Capital gains and inheritance. I'm no fan of either of those taxes, but I'd rather have them taxed than the sweat of one's brow. But the FairTax isn't taxing wages? Are you sure? Wages are just one half of the transaction. If you perform work either the company, the customer, you, or some combination need to eat the taxes. Who has more leverage than the individual? Businesses. Either way, it's taxing trade which is necessary for wealth creation and a robust society.
I've already pointed out how savings will be unaffected (or negatively affected) overall. Capital gains are harder to tax than wages because capital flight is more likely than wage flight. That doesn't mean that I like taxing trade more than capital gains. A lot of capital gains these days are from speculative financial instruments which aren't really helping the economy much compared to other forms of investment and certainly not as much as trade generally.
I dislike inheritance taxes too but it's hard to argue that one has a property right to something after they're dead or that their wishes should be respected for some reason. If they want to give the money away before death, then so be it. Taxing someone on buying shoes while letting people who chose their parents well keep that money seems pretty unfair.
I've already pointed out how savings will be unaffected (or negatively affected) overall. Capital gains are harder to tax than wages because capital flight is more likely than wage flight. That doesn't mean that I like taxing trade more than capital gains. A lot of capital gains these days are from speculative financial instruments which aren't really helping the economy much compared to other forms of investment and certainly not as much as trade generally.
I dislike inheritance taxes too but it's hard to argue that one has a property right to something after they're dead or that their wishes should be respected for some reason. If they want to give the money away before death, then so be it. Taxing someone on buying shoes while letting people who chose their parents well keep that money seems pretty unfair.
Deception Built In
According to some sites, there is a lot in the fine print of the FairTax which ought to give pause to the liberty-minded and the population in general.
First off, the tax on local governments which will force them to pass expenses along in property or local sales/income taxes.
First off, the tax on local governments which will force them to pass expenses along in property or local sales/income taxes.
City county and states would have to pay tax on any retail purchases, yes, but they have to pay taxes on ALL expenditures -- all operating expenditures, all wage expenditures, all pension expenditures, all benefit expenditures. |
It also taxes some wages:
Also, 23%? Would that replace all Federal taxes or just the Federal Income tax?
A 23% fed retail tax would replace, theoretically, the income tax. But just the income tax -- and that's in theory. When people see a 23% retail tax, they will, history has shown, avoid buying the same way as a lower retail tax. But even if somehow people bought as much, that fed retail tax would only replace the INCOME tax.
Fairtax of course, knows this. President Bush Tax Advisory Panel studied Fairtax and made this quite clear in their report about it, which is why President Bush didn't get taken in by these lying bastards.
If you want to replace ALL fed taxes with a retail sales tax, you'd need an 89% tax rate, maybe higher. No one would buy an 89% retail sales tax, so Fairtax could not sell that, even to stupid people.
But they could sell a great sounding fraud to people, by claiming to be a retail sales tax, but actually tax much more than retail sales, by using fine print tricks. That's essentially what the lying bastards at Fairtax have done.
As National Review pointed out, under Fairtax, people would probably "riot in the streets" -- because a true retail sale tax would need to be 89%, fed tax, plus state and local sales tax would remain, making it over 100% retail sales tax!
How does Fairtax get around that? Easy -- they tax a lot more than retail sales. They just hide that in the fine print.
And here's the biggest shocker to me. Those used goods you thought you could just buy? Well it turns out that the FairTax has its own definition of used!
A good would be considered "used" and not taxable if a consumer already owns it before the FairTax takes effect or if the FairTax has been paid previously on the good, which may be different than the item being sold previously.
- Wikipedia
(16) USED PROPERTY- The term `used property' means--
(A) property on which the tax imposed by section 101 has been collected and for which no credit has been allowed under section 202, 203, or 205, or
(B) property that was held other than for a business purpose (as defined in section 102(b)) on December 31, 2012.
- Chapter 1, Section 2
What that means in layman's terms is that, I don't have to pay Fairtax on my car since I already own it. If someone wants to buy it from me, since they didn't own before the FairTax went through and the FairTax was never collected on it... boom, it doesn't count as used and FairTax must be paid. Yet another public oversimplification with a hidden "snare" later.
An Alternative, Constitutional Proposal
I bet you thought I was going to say a national LVT since this post is in the LVT section. Nope! I like to keep you guessing. As strongly as I believe in the LVT, I don't think that should be the bulk of taxes at the Federal level. My proposal is constitutional NOW and, with the removal of a few amendments would lead to even more liberty.
The solution is simple: for the purposes of general taxation (and preferably for most everything else) the Federal government shall have no interaction with individuals or private businesses.
What that means in English is the Federal government has 50 "individuals" it can tax. The 50 states. It does so in proportion to their population according to the census. The states then figure out how to raise the money internally. While I'd prefer that the states use an LVT, may the best tax system win. This is constitutional NOW!
What I'd like to repeal:
I make no attempt to hide my belief that these, along with parts of the 14th, are the absolute worst amendments in the Constitution.
What I'd like to add:
What are the advantages of this system?
There are still a few things the Federal government should be able to tax directly:
The solution is simple: for the purposes of general taxation (and preferably for most everything else) the Federal government shall have no interaction with individuals or private businesses.
What that means in English is the Federal government has 50 "individuals" it can tax. The 50 states. It does so in proportion to their population according to the census. The states then figure out how to raise the money internally. While I'd prefer that the states use an LVT, may the best tax system win. This is constitutional NOW!
What I'd like to repeal:
- The 16th amendment or at the very least actually clear up the definition of "income" as it was used back in the day.
- The 17th amendment - the senate wasn't supposed to be the SUPERHOUSE. If the states are ponying up the dough, then they should have a seat at the table. I also suspect they'll more jealously guard power and money than people who are promised all sorts of freebies.
I make no attempt to hide my belief that these, along with parts of the 14th, are the absolute worst amendments in the Constitution.
What I'd like to add:
- A ban on indirect taxation. This is often a way to get the foot in the door to legislation and restriction. Don't believe me? Oh, how's that fully automatic tax stamp that the BATFE won't issue working out for you? Or the one for marijuana? If the Federal government doesn't like something, they can tax it into oblivion.
What are the advantages of this system?
- No IRS
- Probably not revenue-neutral, would likely result in less taxes or more local service per unit tax
- Allows states to experiment much more dramatically with tax policy (since the current overarching Federal tax damps much of the benefits of good local tax policy).
- Allows states to experiment much more dramatically with policy since the 10th amendment becomes much more effective
- Is already constitutional. The repeals just help make things better.
- States have much more power than an individual and can lobby much harder for local collection and control.
There are still a few things the Federal government should be able to tax directly:
- Mineral / logging / fishing leases on Federal land
- Maaaaaybe the EM spectrum
- Maybe interstate pollution
- Maybe tariffs (I'm not a fan, but I see it as a political compromise)
Conclusion
Don't get bamboozled just because you hate the IRS so much. A tax on sales is a tax on trade - it's just the other side of it. A federal tax other than an apportioned one is still an implicit endorsement of centralized control. If you don't like the LVT, then fine. You're probably wrong, but fine. Push for a consumption tax or wage tax or head tax or whatever in your state. If it works, people and businesses will eventually move to your state. If it sucks, people will leave. When governments compete, people win.