News and views from the award-winning author of the Class H Trilogy: AMERICA LIBRE, HOUSE DIVIDED and PANCHO LAND

Monday, December 24, 2007

It’s a Fed Tax—not a Fair Tax

With several presidential candidates expressing support for the so-called Fair Tax, it’s time to shed some light on the repercussions of this naive proposal. Because the Fair Tax is not just a bottle of snake oil—it’s a supertanker full.

A ruse by any other name

Fair Tax? Give us a break. The proponents of this scheme are afraid to call it what it really is: a federal sales tax. Fed-taxers believe the federal government should tax everything you buy—at a rate somewhere between 20-30%. (They haven’t quite agreed on that yet.) And that’s on top of any state sales tax you are already paying.

“Ah, but you see,” fed-taxers argue, “you’ll no longer have to pay any federal income tax! So your employer will start giving you all the money being deducted from your paycheck for federal taxes.” What the fed-taxers conveniently leave out of their pitch is that you’ll still have payroll deductions for Social Security, local income tax, retirement programs and medical insurance. So taking home 100% of your pay is a pipe dream. In addition, employers will not be relieved of the financial burden of managing payroll deductions. But the down-side of a federal sales tax don’t end there.

Timing is everything

One of the biggest dangers of a fed-tax is the timing of its implementation. Let’s assume for a moment the fed-tax proponents are right and you are suddenly earning 30% more (although this figure is widely discredited by many economists). The increase in your income takes place a paycheck at a time. The price of everything you buy goes up 30% immediately. When will you ever catch up? As scary as this sounds, it gets worse.

The cure is worse than the disease

Making a radical overnight change to the rules of a financial system nearly a century in the making is a prescription for disaster. Consumer spending accounts for 70% of the U.S. economy. The shock of an instant price increase of over 30% would radically curtail consumer spending and most likely send the economy into death spiral.

The biggest bureaucracy of all time

Fed-taxers acknowledge their system would hit the low income households hardest. (Our poorest citizens spend the largest percentage of their income for necessities.) Not to worry, though. The fed-taxers have a solution. To cope with the sudden increase in prices, they propose creating a national entitlement organization that would determine which households would be deemed “poor enough” to be eligible for government payments. Think our current welfare system is bad? Imagine a new bureaucracy double or triple that size handing out cash. All for that elusive “fair” tax plan.

Loophole free? Not likely.

Our current tax system is riddled with loopholes created by the lobbying of special interests. Why should a fed-tax be any different? Even if passed exactly as proposed—which is highly unlikely—in only a few years the lobbyist will have carved out huge chunks of pork for their well-heeled constituencies. And don’t be surprised if some form of federal income tax creeps back into the picture. After all, somebody will have to eventually pick up the tab for a federal budget deficit that will dwarf anything we’ve known.

Out of the frying pan

Few would argue that our current federal income tax system is fair. But adopting a federal sales tax would create a disaster of such magnitude, we’d look back wistfully at our current problems as the good old days. Everyone agrees that our economy is fat and out of shape. But to tone up our financial system with a massive federal sales tax is like going on a weight loss plan that wires your jaw shut and feeds you intravenously. You’ll be too weak to do anything useful—and it might even kill you. Does that sound like a fair solution?

Raul Ramos y Sanchez