How Would the Fair Tax Impact the Economy?
Thursday February 7, 2008
The Mike Huckabee economic platform calls for replacing the income tax with a sales tax. This is also known as the Fair Tax plan. With tax time coming up, eliminating the IRS seems like a great idea.
There has been a great deal of research on the plan, and the numbers conflict. For every point made by one side, the opposing side has numbers to prove them wrong.
Therefore, my opinion is that a change on such a grand scale would need to be further researched, and the results shared openly so the work can be checked. Perhaps the plan could be test marketed in a small area, or perhaps a gradual shift from income tax to sales tax could be made over time. However, the U.S. economy is so complex that if the plan were implemented today without further research the results could be disastrous. To read more about the pro’s and con’s, see Fair Tax.
Comments
Fiscal Folly?
The progressive federal income tax was an good idea about ninety years ago, but is it still serving us well in a global economy? Right now, all taxes on wage earners and investors in America must be passed on to consumers of American goods and services. That is where the money comes from to run our country. Where the money comes from might just be more important than who pays the taxes.
If a job is out-sourced our government does not benefit with income taxes or with funds going into Social Security. Imported items have the taxes of the truck drivers and store clerks built into their prices, but no American taxes from the workers that produced the items.
There is enough money out there to save Social Security, Medicare and provide a multitude of social services, but it is in the wrong places.
Businesses that are not labor intensive generate little tax revenue. Yet they create huge profits and can pay enormous salaries. Movies, TV, sports, software, CD’s and drugs are all in this category. Consider Bill Gates. He has much of his software written in India and has a machine put it on a disk and so far little has gone into American taxes or Social Security.
American businesses would be much more competitive worldwide if they did not have to include the expenses of their workers’ taxes, Social Security and healthcare in their prices.
There is a bill, (Fair Tax) currently cosponsored by about sixty congressmen, that contains ideas that should interest both liberals and conservatives. These ideas could remedy many of our nation’s problems. The bill is touted as a progressive sales tax and would eliminate the IRS and other taxes including Social Security taxes. It is progressive in that every person or family unit receives a monthly check to cover all taxes up to the poverty level. So only nonessentials are taxed. These ideas deserve serious consideration. The bill, as presently written, has some major flaws.
A 30% sales tax would force sellers to lower their prices to attract buyers. This would be somewhat offset by lower labor costs and taxes. Imported goods would be taxed as well as our own and income would be derived from products produced by outsourced jobs
The American government would become a partner in every business.
All industries would then start contributing their share of the costs of our infrastructure, from which they benefit and owe their existence. Even thieves, prostitutes and undocumented workers and visitors to the US would now contribute.
Our government would get its funds off the top and there would be less money available to pay outlandish salaries to athletes, rock stars and CEO’s, who can hire CPA’s and tax lawyers to exploit loopholes. Social Security and Medicare would be saved and maybe even health care could be funded.
An added benefit would be the elimination of the IRS. Imagine, no more tax forms. The tens of thousands of regulations and IRS audits would be no more. Think about the hours and dollars that are now wasted. Our lives would be so much simpler.
Early in our nations history states were not allowed to put tariffs on goods produced in another state. So all could enjoy the benefits of free trade. Most states then wisely resorted to sales taxes to receive benefit from the sale of goods purchased in their state. Perhaps it is time, in a global economy, for our nation to do the same.
In our present economic circumstances we should consider these ideas that increase funding from imported items, outsourced jobs and non-labor intensive industries. They may enable us to fund our entitlement programs and needed infrastructure improvements, while enjoying life without the IRS. Does it make any sense at all to tax our own products and not tax things produced elsewhere?
Hi Richard,
You raise some excellent and well-thought out points that make a lot of sense. I agree that the FairTax bill as currently written needs more review. I hope my article conveyed the point that this plan needs more open discussion and analysis before being launched.
Kimberly
Kimberly–
I am a FairTax supporter, a congressional district director for the FairTax and a speaker to explain the FairTax to groups and organizations.
I agree that the FairTax needs more review but perhaps for a different reason. So few people in this country fully understand the FairTax that I believe could only be overcome by a national debate. I believe that if the majority of Americans understood the FairTax, it would become law immediately.
Hi Duane,
I think a national debate and additional research would both be beneficial. Right now, there is not enough information to determine why the existing research disagrees so radically. A debate between the two head researchers would be really interesting!
Kimberly
Kimberly,
At some point you just have to accept the word of so many of the best minds in economics that worked on the FairTax. The FairTax has already been tested quite a bit with econometric models without actually implementing it.
Congress held a symposium back in 1997 where many economists showed results of testing several different tax ideas with several different models. Consumptions taxes won hands down for economic growth with all models.
It really bothers me that congress, both sides of the aisle, failed to act and have deprived us of this great growth for over 10 years. Where would we all be today if we had 5%, 10% maybe even 15% growth for the last 10 years? Apparently it was more important for our politicians to take care of themselves and not the country.
We can’t allow this any longer. We must grow the economy to be able to afford the unfunded liabilities of the entitlement programs or we are going to have to cut benefits that our citizens have paid for all their lives.
You can get bogged down in all the details of the FairTax if you want and I’m sure you’ll find something to worry about. The biggest mistake people make is using static analysis and ignoring the effect of growing the economy. Louis R. Woodhill who is on the Leadership Council of the Club for Growth shows us what can happen with even a little bit more growth:
http://www.realclearmarkets.com/articles/2007/12/the_fair_tax_is_about_economic.html
You can find rebuttals to Bartlett, Gale and the President’s Panel on Tax reform at FairTax.org. They all appear to have an agenda and have cause a lot of misinformation to be spread on the internet.
Personally, I’d like to just switch to the FairTax as soon as possible. I’m sure things will work out just fine. You see I believe in liberty and thus the freer free markets of the FairTax. After all the forums and blogs I’ve participated in, I don’t think you’ll find all the security that you apparently want. You’re going to end up having to decide between security or liberty.
Thanks for the additional resources. I will check it out and post my findings. Kimberly
For goodness sake, read the book before jumping. Fairtax.org is a great place for info too. Let’s go for it. In Oklahoma, we only have one rep still not on board and we’ll work on him, or vote him out.
Hi John,
I agree with you that Fairtax.org is a great place for info…that’s where I did most of my research. I can’t just take their work at face value when opposing research shows different conclusions.
I would like to see more open discussion and analysis before we spring this on an economy that is already challenged by an unprecedented debt burden.
Kimberly
Kimberly,
I am a fair tax supporter. With the internet sites like the US census, a good math background and commen since I have been able to rule out 90% of the opposition. Most arguments are ignorant.
Most of the ignorance is not based with understanding the fair tax which is relatively easy. It has to do with the understanding of our existing tax code. LETS HAVE A DEBATE ON HOW STUPID OUR EXISTING CODE IS.
Most negitive people on the fair tax, forget one thing, the current system does not handle the problems wither. The current “Black Market” is 1-3 trillion dollars.
Research: US CENSUS, Texas exports 1.5 X Calfornia and New york. Texas has only sales tax. Texas also has a GDP/PER PERSON that is also 131% that of California and New York. Florida, Is about the same as both CA and NY, The population number I used included all the retirees.
Give me a fast internet connection and a couple of hours I can prove most of the fair tax correct. IE the tax rate will be between 20-26% (inclusive), but can defenatly rule out 30 (inclusive).
It real quick and easy to see whos math did not match up.
With the Fair Tax all the illegal aliens, drug dealers and everyone else that doesn’t pay income taxes will be paying their fair share. It’s about time us hardworking people get a break from carrying the burden of supporting people who don’t make legitimate money.
Hi Lori,
You raise an interesting point…I wonder if the Fair Tax would just make the drug dealers expand their business to sell luxury items so they won’t have to pay the sales tax on anything!
Kimberly
Actually, drug dealers and illegal aliens would pay more than their fair share because they would not be applying for the probate. The probate is what makes the FairTax progressive vs regressive.
You mentioned luxury items. They would be taxed. Only used items are not taxable. An exception is made with tuition, which the FairTax considers to be investment, and investment is never taxed.