February 18, 2008
FairTax: Is it really fair?
By: JERRY BOWYER
January 8, 2008
If talk show hosts ran the world, we'd have a national sales tax. We'd have no immigration, and we would have long ago carpet-bombed the entire Middle East. We'd also have something called "fair trade," which means no real trade at all.
But they don't run the world; they just pretend that if they did, everything would be great. I would be a lot more confident that this was true if I didn't know so many talk show hosts. I would be even more confident if they had really run anything of consequence before. But I do, and they haven't.
I mention this because last week Mike Huckabee won the Iowa caucus partly on a movement incubated in large part on radio talk shows: the FairTax. If words were deeds, then life would be great. We could simply declare that by switching from a federal income tax to a national retail sales tax, tax cheating would end, code complexity would be a thing of the past, and illegal immigrants would start paying taxes. And, of course, we'd switch into high economic growth - forever.
The problem is that none of this would happen. People would simply switch from cheating on income taxes to cheating on sales taxes.
Small vendors often fail to withhold sales taxes. Buyers cheat on sales taxes now. They often fail to pay taxes on interstate catalogue sales. They buy some goods in black markets.
This doesn't happen much because sales taxes are much lower than income taxes, but if that were reversed, consumers would cheat more. Look at cigarettes. Organized crime sells smokes on the black market in jurisdictions that impose high cigarette taxes.
There is a large category of economic activity designed to avoid sales taxes - it's called smuggling. We don't hear that word much anymore, because we're not a sales-tax or tariff-based system anymore. Increase sales taxes to a combined state and federal 30%, up from a state-based 6% now, and watch the dodging begin.
The immigrant stuff is nonsense on stilts. Let me ask you this: If they're here illegally, why won't they also buy and sell goods on the black market?
Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.
And what about business transactions? If you tax business-to-business transactions, then you'll set off a wave of corporate consolidation. Instead of buying from a supplier at a 30% markup, I'll just buy my supplier and be tax free. And what about financial firms like Goldman Sachs, which spend most of their money on payroll and investments, and very little on goods and services? Goldman will pay taxes on what? Paper clips?
If, on the other hand, we institute the most widely supported version of the national sales tax, then business transactions are to be exempted. In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?
What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?
I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?
And what about transition rules? There are millions of transactions that are, at any given moment, occurring over an extended time. The most obvious example is retirement. I defer taxes now, for retirement later. So I make a decision based on an income-tax regime that doesn't make any sense in a sales-tax regime. Do I get my money back? What about Roth IRAs? I pay income taxes on the money now, and then pay again later when I spend it during retirement? Double taxation isn't really a "fair" tax, is it?
These are the easy-to-see cases, but what about the incredible variety of tax questions raised by installment sales? Inventory accounting? Wholesale purchases? Ebay?
None of this matters anyway. We will never make this change. The 16th Amendment will not be repealed in favor of a tax vigorously opposed by an army of restaurants, pubs and retail stores. It's hard to get good ideas through the ratification process; imagine how hard it would be to push this stinker. In point of fact, the FairTax serves one main purpose right now: It gives Mr. Huckabee the chance to sum up his economic plan in one line. And that just doesn't seem, well, fair.
Mr. Bowyer is chief economist of BenchMark Financial Network and a CNBC contributor.
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