The so-called Fair Tax has bounced around congress for almost 20 years, gathering presidential-level support when Mike Huckabee ran on it in the 2008 campaign. Then, as now, it suffers from a couple misconceptions.
The first is that consumer prices would rise by the amount of the tax. On the contrary, a $100 pair of shoes becoming a $128 pair of shoes (after the application of the 28% rate proposed by Governor Johnson) is NOT how it would work. In fact, after a period of adjustment, prices on average wouldn’t rise at all. That $100 pair of shoes would still cost you $100. Of all the costs the average company incurs to produce a final good, 28% is estimated to be the cost of paying taxes. That gets passed along to us, the consumer. It’s embedded in that $100 price tag. With the Fair Tax, all other taxes would be gone, replaced by one simple 28% rate paid at the register.
The second knock is that it’s regressive. Our current income tax code is progressive; the more you make, the higher marginal rate you pay. A sales tax applies to a product no matter who buys it. If Mary, who makes $10,000/year, pays the same $100 for a T.V. as Jane, who makes $100,000/year, the tax Mary pays would be higher proportional to her income. The mitigating factor however, is that it’s a voluntary tax; you don’t buy anything, you don’t pay taxes.
Another qualifying feature is a prebate. This would be a disbursement by the Social Security Administration to “lawful U.S. residents … based upon criteria related to family size and poverty guidelines”; almost $12,000/year for adults & $4,000 for children. This is similar to another idea making the rounds lately; a universal basic income. Expenditures for either would be in the trillions of dollars.
Would such prebates even be necessary?
For one, most Americans subject to state and/or local sales tax don’t pay it on the food they buy to eat at home. Why not make single-ingredient, non-processed food exempt from a national sales tax? How about having a national sales-tax-holiday every year for clothes, or maybe two to accommodate shopping for seasonal wardrobes? That’s something I imagine I would have taken advantage of when I was in college, living solely on less than $1000/month from two jobs.
Furthermore, some prices would likely settle lower than they were before, like the food & clothes where neither producer NOR buyer would now face taxes. Plus, the rate Governor Johnson is proposing is arguably too high. The same might even be said of the 23% rate in the congressional bill.
He claims it would be “revenue-neutral”. When you factor in the portion of our $18T GDP that is consumer expenditures (~68%, ~93% of which is non-food), plus that he says his first budget will be 20% smaller than the previous budget ($3.8T in 2015), in a static sense he’s probably in the ballpark. However, when you consider all that now will NOT be taxed, and the fact that we live in a dynamic society/economy, it’s hard to see how the economy doesn’t surge, increasing potential GDP. No more taxes on income. No more payroll taxes. No more taxes on investments. No more taxes at death. Billions of hours & dollars saved that would otherwise have gone to filing taxes. All that money will not merely be stuffed under the proverbial mattress. It will be spent. It will be invested. It will be converted from a deadweight loss to productive endeavors.
The only real obstacles would be rent seekers and the constitution.
A ‘rent seeker’ is roughly the technical, economic term for lobbyist. It’s someone who seeks to convert what is referred to as consumer surplus into their own economic profit (the aforementioned resources expended to do & pay taxes). Any sector that benefits from this feature or that in our current tax code is a rent seeker. These industries are populated by decent people. The tax professionals I know all realize that tax simplification could very well put them “out of a job”. But most of them also know the pros far outweigh the cons of doing so. One of them was quick to mention that he’d just redirect his attention to state & local tax issues.
Perhaps the biggest hurdle is the need for constitutional action. Unless we want both our purchases AND income taxed, the 16th amendment would have to be repealed. After previous efforts to tax income were rejected by the Supreme Court, a sufficient majority in congress and of state legislatures enshrined the ability in the constitution in 1913. This is probably one reason we hear more politicians propose a one-rate, no-deductions flat tax on income when talking of reform. That, and the fact that it’s more consistent with Adam Smith’s recommendation that citizens “ought to contribute … in proportion to the revenue which they respectively enjoy under the protection of the state.”
Either route of simplification would be far superior to the system we have today. Regardless, it’s imperative that all options are seen clearly, without the fog of misinformation, demagoguery or envy. Most people understand the need for some level of taxation. After all, who’ll build the roads??