The inestimable Steven Brodie Tucker (and perhaps the only reason to read VA Right) has an interesting post regarding the fair tax and why it should be passed:
However, without addressing our budgets, many are left to wonder how, without income and payroll taxes, we will pay for our gargantuan, bloated federal establishment, and the most expensive military in the world. Taxes will be raised through a federal 23% sales tax on the purchase of property or services. This is a sales tax that would be in addition to your State’s sales taxes. Tennessee, for example, as of 2014, had the highest State Sales tax of 9.45%. In Tennessee, any goods or service would therefore be hit with a 32.45% Sales Tax. A $100,000 house would therefore cost $132,450, plus all other banking and settlement fees. A $5,000,000 McMansion would cost $6,6220,500. A $7 combo at McDonalds would cost $9.27.
In a nutshell, a federal excise tax would be levied that would increase the tax on anything bought and sold in America by 23% — groceries, cars, medicine, toys, games, athletic equipment… and it would imposed on top of state and local sales taxes.
The tradeoff? All other taxes would be eliminated or brought to 0%, thus forcing the American government to run within the constraints of the performance of the American economy.
Tucker mentions several distinct points in the argument: (1) that the fair tax is not designed to be a tax cut, but rather a revenue-neutral shift; (2) the fair tax eliminates tax loopholes such as the mortgage tax deduction and corporate welfare; (3) it allows American to be in control of 100% of their income on items they purchase in a consumer economy; (4) it forces the government to operate according to the performance of the economy.
While the neutrality of the tax shift is ideal, unfortunately in reality that is simply not what occurs, for no other reason than economies are rarely if ever stable. In fact, were one to rank taxes in accordance with stability, property taxes are the most stable forms of income for a government (as they are the least susceptible to economic downturns), followed by income taxes and lastly sales taxes.
This is where a flat tax comes into play as an alternative, one that forces every American citizen to be an equal co-investor in their government, simultaneously ripping out the loopholes and corporate welfare that allows others to game the system while allowing incentive for working class Americans to earn more in order to create more disposable income — which is the absolute name of the game for economic prosperity.
A 10% flat tax would surely make more fiscal sense, allowing the taxpayer to fill out their income taxes on a postcard, thus eliminating the need for an IRS. A fair tax sadly does not unencumber the American taxpayer from legions of government bureaucrats, as the tax will still have to be collected from small businesses, mom-and-pop retailers, dealerships, manufacturers, and innovators. In fact, the IRS problem becomes worse if folks begin dodging the massive 23% markup — creating the very real necessity of more intensive and invasive auditing from the federales in Washington, D.C.
The single greatest argument against a national sales tax? Alabama in the 1990s.
The State of Alabama shifted its entire tax collection mechanism to a state sales tax of 9%. At the time, it was a fair tax solution — no income taxes and a total reliance upon the performance of the economy, a bubble that burst in the early naughties with the Dot Com Bubble. Alabama Democrats, seeing the cuts to government and all the pet projects a roaring economy subsidized, came over the wall and imposed an income tax while maintaining the enormously high sales taxes that crushed working class Alabamans caught in the middle.
Economic downturns aside, there are other reasons to reject a 23% sales tax. Disproportionately, a regressive sales tax impacts the working poor most of all — increasing the cost of basic essentials such as food, clothing, and other items. Income taxes by their nature are far less regressive, and even if a flat tax imposes some degree of regression, it is simply not the depth of regression a 23% sales tax would create.
As black markets were mentioned earlier, there’s another market that the fair tax would not touch, one that would absolutely wreck the 23% mechanism in favor of federal tax intervention policies elsewhere. That is the worldwide economy, with rates that are either far more competitive than an artificial 23% sales spike would afford, or state capitalist ventures willing to subsidize American markets with cheaper goods and services. Such systems would allow those wealthy enough to evade America’s tax racket the opportunity to purchase goods, services, and products at a far lower rate than middle and working class Americans, thus eroding the American economy at a rate not seen since the Jefferson Embargo Act of 1807.
Tucker is absolutely correct about the Keynesian argument of spending more during a recession in order to revive the economy by government fiat. The 1920 economic crisis correctly identifed that sharp drops correspond with sharp recoveries, and that Keynesian interventions create sharp drops with prolonged recoveries plus sagging and enormous debt. Unfortunately, we live in a Keynesian universe, and until the greenback (or some other stable monetary unit that cannot be merely willed into existence) or some other stable currency replaces the US$D, we are left at the fraying edges trying to find some sort of middle ground that will help those of us who are Austrian free-marketeers arrive at a better solution for the next generation of Americans.
The fair tax is a noble thought experiment, but it is disastrous policy in implementation. A flat tax that makes every American equal co-investors in their government does more than give every American a stake and a share in the nation’s future — as opposed to the mere 50% of Americans who pay taxes into the system today. The flat tax allows for a stable bedrock and red line for government function that is more resistant to economic downturn, and gives the Keynesians less room to maneuver.
More than this, a flat tax makes the argument for core services while turning an entire group of working class Americans into taxpayers, with equal interest as to how the heavy hand of government effects not only their family’s pocketbook, but their future economic prosperity and America’s path forward. A 23% sales tax is checkers compared to a 21st century economy demanding chess.
