Friday, September 01, 2006

The "Fair" Tax redux


My interest in the "Fair" Tax started out as an interest in the "omnipresent government" aspect of it -- the massive welfare scheme entailed by the "prebate." To me, that was enough to reject the whole idea. However, as I continue to read up on the proposal, more and more negatives pop up.

- The transition period is going to be an economy-buster. And no, I'm not over-reacting. Let's take one example: Cars.

The "Fair" Tax is applied to new, but not used, cars. Even today, a lot of people choose to buy recent-model used cars because the price of a new car drops dramatically as soon as it leaves the dealership. Now ... add 30% to the price of new cars, but not to the price of used cars, and see what happens to the auto industry. The effect of that differential will persist to some degree until the existing pre-"Fair" Tax fleet is in the junkyard -- by which time it's a reasonable bet that at least two of America's "Big Three" auto manufacturers will no longer be in business, and that the real (i.e. inflation-adjusted) price of used automobiles will be higher than the price of new ones is today.

Now, apply that same effect to pretty much every durable/resaleable consumer good in existence. Go ahead. I dare you. Danny Fontana opined on the radio earlier, in reply to my description of this scenario, that "that's just the market at work." I disagree. The government topping off the price of one product, but not the other, with a 30% tax is most manifestly not "the market."

- The transition period is going to re-tax anyone who has invested or saved in the past and is now ready to spend his or her money. Let's take a hypothetical young worker in the late 70s or early 80s. He worked hard. He paid income tax on what he earned. He wanted to make money and was willing to take risks to do so, so he bought some shares in a young, growing company called Wal-Mart. Then, in the 1990s, as he began to think more in terms of stability and risk reduction, he sold that stock, paid capital gains taxes on his earnings, and put the money away in a Roth IRA ("no income tax when you withdraw!") or a savings account, or whatever. Well, guess what? When he withdraws that money and spends it, he gets hit a third time, for another 30%. We're talking about a full generation of getting screwed in transition here, folks.

- And speaking of 30%, yes, that's the real rate. Sales taxes have always been described "tax-exclusively." If you buy a product at the store for a dollar and the total comes to $1.10, you're paying a 10% tax. The "Fair" Taxers do some fancy footwork by describing their proposal "tax-inclusively." If you buy a product at the store for a dollar, the total will come to $1.30 ... but oh, it's only a 23% tax rate if we pretend that the tax itself is part of the price rather than a government gratuity heaped on top of that price. This little piece of legerdemain allows the "Fair" Taxers to make nearly a quarter of the tax magically disappear from view. Now you see it, now you don't. But believe me, you'll feel it. Right in the wallet.

- Let's talk about enforcement. The "Fair" Taxers hold out the prospect of "eliminating the IRS." That may be technically true. Instead, we'll have 50 mini-IRSes -- one in each state, collecting the tax, monitoring business compliance, and trying to keep a lid on the black markets.

And, of course, we'll have a federal bureaucracy, too. Someone has to send the welfare checks out. But there's more to it than that. Who's going to monitor the state IRSes and ensure that Nebraska isn't raking off a little more than it's supposed to? Who's going to track down the welfare cheats who keep collecting the "prebate" after Grandpa dies or little Billy moves to Australia? Who's going to investigate interstate evasion of the tax?

On that last, let me throw another hypothetical at you:

The "Fair" Tax passes. The price of, say, new computers, goes up by 30% at the cash register. So, I start a computer business. I buy the computers wholesale (no tax) for re-sale. Then I cut open the boxes, take the machines out, turn them on, turn them off (or, if I'm really crafty, stick a CD in their drives which loads the machine up with on-the-fly-generated "personal information" to create the illusion that they are pre-owned). Finally I re-sell them "for resale" (no tax) to another business I own (or have an arrangement with) in the next state over, which stocks them on its shelves as "used" -- at the same price as Best Buy's "new" machines, but without the 30% tax on top. Best Buy isn't going to be happy. Neither is the Department of the Treasury. But ...

In the first state, I'm legit. I bought the machines for re-sale (no tax), I sold them for re-sale (no tax). In the second state, it's going to be difficult to prove that they're not "used" (no tax -- I may need to keep two sets of differing invoices/receipts, one in each state, but that's not a big deal). It's going to take a federal agency to catch me at it. Does it really matter whether we call it the "IRS" or the "'Fair' Tax Enforcement Bureau?"

If something sounds too good to be true, it usually is. The "Fair" Tax just doesn't stand up to scrutiny. It's a welfare scam at one end and economic damnfoolishness at the other. Libertarians should be saying so, instead of falling for it.

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