Sunday, May 18, 2008

FairTax: Why I love it, and why it will never pass

"FairTax" is the common name of a bill in Congress that essentially makes the IRS obsolete by replacing the income tax with a national sales tax (roughly 23%). The equivalent of the "standard deduction" under FairTax is the "prebate", a monthly check (or direct deposit) to all taxpayers, intended to offset the taxes you're paying on food and other necessities. For me, I'd be getting a check for $606 every month, *and* not paying income tax!

"How can the government just give out money like that, it's going to be hugely expensive and create a welfare state! It's socialism! Ridiculous!"

This is a great example of congressional "smokescreening", scaring people with statements that are just completely wrong. I'll get back to why congress-people do this in a minute.
The FairTax was designed by smart people to be revenue neutral, meaning the federal government doesn't make more or less money with it -- only that they collect it differently. Here's the deal: unless you're poor, at the end of the year, the IRS ends up with a huge wad of your money from income taxes. They're going to under FairTax too. But for poor people the gov't instituted the standard deduction, a way to keep poor people from having to pay any federal taxes by not taxing them on the first X dollars they make ($10,700 in my case). Under FairTax, the prebate does the exact same thing, except people are getting money as a check in exchange for what they're expected to pay at the cash register, instead of have a little less withheld in their paycheck. They expect a family the size of mine sitting right on the poverty line would pay roughly $606 in sales taxes during a month, and they're returning that amount to me -- that's all.

Why I love it

Oh, so many reasons!
  • 1040-wha? Tax season is a painful, stressful time for the whole country. Imagine if that were just gone. Gone. Millions of hours returned to the people! Thousands of H&R Block employees and other tax accountants freed to work on things that actually make our lives better -- like knitting sweaters! (Love you, Shells! =)

  • Tax evaders actually have to try. Tax evaders are everywhere now -- tons of people just don't file at all. Then we have to spend taxpayers money chasing them down and prosecuting them, paperwork and courts and wasted time and happy lawyers. Under the FairTax, there is no dodging, buy something at the store and you pay taxes on it. Now some say the FairTax will create a huge black-market -- but we already have sales taxes, how's that black market look now? Besides, how would such a black market work anyway? All large transactions are tracked, not like people are buying thousands of cars from Ford and selling them on the black market so people can dodge the taxes. Sure some shady dealers would pop up, but enforcement of taxes would still exist -- it would just shift from chasing mostly careless or otherwise over-burdened individuals to chasing truly dishonest businesspeople trying to make a whole living dishonestly. A *much* easier job, for sure.

  • Illegals penalized! Instead of illegals squeaking out of paying taxes by taking jobs paid under the table, the illegals would have to pay sales tax for everything, *and* they would *not* get the prebate! Those evading the system would have it worse! Much lower incentive for them to come here illegally.

  • No more taxes on business. Huh? Aren't they the ones with the money? Yes, but they're also the ones creating all that value that you and I are after! Who made that shirt you're wearing? And that computer you're staring at? The economy is a bunch of businesses making things that make our lives better, and giving people jobs. If you burden that process you just slow it down and make it less competitive against factories in China.

  • Savings and gardens. Grow your own food? Pay no federal taxes! Saving your money? No taxes there either! Let's incentivize those two things for a change.

What's not to like?

But it will never happen

"Huh? Why not, it sounds like a terrific idea!"

Why? Because Congress would have to pass it, that's why.

My incredibly smart sister pointed out that Congress wields a *lot* of power. Some in lawmaking, some in regulating commerce, etc., but a huge amount of their power comes from the budgetary process. You see, Congress has but one real goal, and that is to get reelected. How? By swinging as much of the federal budget as possible into their own state and constituency. Riding pork into the federal budget is one way, but another equally powerful way is via the tax *incentives* they give. "Let's buy the impoverished vote by eliminating their taxes, the homeowner vote by not taxing money paid on mortgages or charitable donations, the business vote by not taxing business expenses, etc. etc. etc." Yuck.
You see, if they eliminate their own ability to decide how the money comes *in* by enacting the FairTax, they'd be voluntarily stripping themselves of half their fiscal power. Where would they get the incentive to do that? Nowhere, that's right.

So now we're back to "smokescreening"

Cover the whole FairTax thing with vague scary political buzzwords ("welfare", "regressive", "cutbacks", etc.) to keep the populace from seriously considering it, and America stays stuck in the same mudhole we've been in for 95 years.


sb said...

My point was not exactly that Fair Tax won't pass because it will take away Congress' power (because, I think most of Congress' power comes from stimulus money and subsidies for their constituents rather than tax breaks, since tax breaks affect the whole nation on the 1040, as opposed to just their own state), but that all those who will lose their jobs as a result of the Fair Tax would come calling to their Congressmen. Heck, all those folks who work at the IRS would have only a short walk to go march on Congress.

Now, some devil's advocate-type arguments...

A lot of the current tax deductions were created in an effort to be more "fair." For instance, most people believe a single guy making $40,000 should pay more in tax than a husband and wife making $40,000 with four kids. So, there are deductions (and a separate tax bracket) to ensure that the married couple pay less. Have a lot of medical bills? Pay less tax. Struggling to start up a small business? Pay less tax. With the Fair Tax system enacted, measures such as this to supposedly even things out would be gone. Some of us might like that, but some of us may not. Those who would end up paying more than they do now will surely complain to Congress.

I think, should the Fair Tax be enacted, we'd be surprised at how many people would be out of work. Everyone at the IRS, all tax accountants, all tax attorneys, tax professors, etc. And everyone who majored in something tax related would now be completely useless. I love capitalism and am not one to support artificially sustaining jobs that aren't needed, but I don't think your argument that those who lose their jobs would be "freed," to spend their time elsewhere is valid. If so, why isn't this an argument we use more often when there are layoffs? "Hey, laid off employees at Intel, you should be really excited because now you have more time to do other things!" doesn't exactly fly. Besides, me knitting a sweater doesn't do much for society since machines do that much more efficiently for retail purposes.

Also, it seems very inefficient to me to send out checks to people once a month (which, is what would mostly happen, since currently I believe it's less than 50% of taxpayers utilize direct deposit for refunds). Why not send out annual checks, or why send out checks at all? Why not just eliminate altogether any sales tax on food or charge a lower percentage on everything and then not refund any of it?

bharris said...

Thanks for the comment, "sb", that was well thought out!

A few thoughts in response:

You're right, I'm sure that nobody working in the tax industry would feel "freed" -- instead they'd feel unemployed! Yet from a whole-society standpoint, we have a whole industry of people who expend their careers trying to navigate a ridiculously convoluted and unnecessary tax code. Wouldn't it be better for our society if they could be doing something that actually benefits society, like writing books or hand-knitting sweaters or programming robots?

And how many people are we talking about? If it's relatively small compared to the population, it's a blip and they'll find other work. If it's relatively large, then look how much time we're wasting!

Perhaps a gradual implementation would solve that problem by ramping up the FairTax a few percent a year, while dropping the income tax rates -- allowing all those tax professionals to transition over time. Seems more natural than a binary switch to the FairTax.

As for the deductions being "fair", the FairTax does a lot of those things too. Married households get a larger prebate. Medical expenses may not be subject to the sales tax (I don't actually know, but policy could be set that way). Businesses wouldn't pay tax at all on business accounts because only consumer retail sales are taxed. Rich people who buy more stuff pay more taxes, poor people pay less -- works just like tithing. Seems a lot more fair to me than the current system which is game-able.

As for sending out checks, why would it be expensive? I get a mailed statement from my bank every month, and they're not making thousands of dollars from me -- why should mailing a single check be so costly? If it is, direct deposit could be required, or grocery stores could sign up to print/cash prebate checks at the cash register -- which would encourage people to spend that money there at their store.

I still think Congress wields a lot of power through tax breaks, though I think its effects are more for a party than a state -- "the Republican Congress lowered our taxes! we like them!" or "the Democratic Congress repealed the Bush tax cuts, boo!"

What do you think? Are my arguments any good?

sb said...

Certainly your arguments have merit, and I don't have anything in particular against the Fair Tax (although I agree it will never pass). Although, I do wonder why it would be any better than a flat tax system...

It's true that tax-related jobs are only needed if there are taxes to do, which, if the system were simplified, would be eliminated. Good riddance - why keep people in unneeded jobs? Still, "better for society" sounds a bit pretentious. All these folks are well educated and it seems the average voter would have a bit more sympathy for them than the Ford plant worker who may or may not even have a high school diploma. I don't have any numbers to quote as far as how many people would be out of work - certainly in comparison to the general population it would be smallish - but, as I mentioned, I think we'd be surprised. A phase-in would be essential.

Banks have been trying to reduce costs by pushing customers to go paperless for awhile. Either way, there are thousands of banks across the US that "share" those costs for all of us citizens (and the bank probably is making a fair amount of money off you anyway). The US government would be issuing hundreds of thousands of checks a month - think of the paper and mailing costs, not to mention the manpower to deal with them (and the customer service needed when folks call complaining that they never got their check, lost it, etc.). That's not to say that it would be more expensive that mailing out tax materials and hiring IRS workers, but it would be a sizeable expense nonetheless.

At any rate, you have valid points, and the tax system does need simplification. As you said, Fair Tax won't pass, and while I'm not convinced it would be the answer, I do find it a shame that year after year Congress doesn't do much to simplify the process. As a more tax-educated citizen, though, it's not anywhere near the top of my concern list, so I guess you'll have to write extra letters to your Congressman to make up for me.

Does anyone read this thing?

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