Monday, February 13, 2012

A Bad Idea to Fix a Worse One, Because I Can


The "Fair" Tax is a really, really bad idea (see here, here and here for more on why). But, one of this really, really bad idea's really, really bad effects is fixable.

I've mentioned the solution in passing before, but I figure it's worth elaborating on. That way if it gets used (I hope it doesn't, because I hope the tax never gets implemented), I can brag about how I reduced the damage or something; and if it doesn't get used (and the tax gets implemented without it), I can bellyache about how it could have been made not quite so really, really bad if anyone ever listened to me.

The really, really bad effect in question is the "Fair" Tax's impact on people with savings upon which income taxes have already been paid. Roth IRAs, for example. The holders of such accounts paid income tax on that money before they socked it away, and now under the "Fair" Tax, they'll take an additional 30% tax hit when they spend it.

The solution is something I'm calling the S-Dollar. The "s" is for "saved." It's a second currency, to be issued/created with implementation of the "Fair" Tax. Like this:

- A section gets added to the "Fair" Tax bill specifying that post-income-tax dollars in designated types of financial institution accounts (once again, Roth IRAs are first that come to mind) as of a date certain will automatically become "S-Dollars," which will thereafter have the same value as, and exchange equally for, regular US dollars.

- When these "S-Dollars" are spent, the "Fair" Tax is not levied on the purchases made with them -- but upon the first tax-free expenditure of an "S-Dollar," it thereafter becomes a regular dollar, once again subject to the "Fair" Tax.

Obviously some technical gimmickry will be required to implement the "S-Dollar."

I'm guessing it won't be too difficult to do when it comes to digital transactions -- just give account-holders a special debit card and set up a transaction in terminal software to handle it. When money leaves the debit account, no tax. But once it's in the merchant's account, it's "regular" money again.

If a physical cash solution is needed, special Federal Reserve Notes of a different color. The merchant knows not to charge tax on stuff bought with those; when he deposits them in his bank, they go into his account as "regular" dollars and the bank turns the notes in to the Treasury Department for destruction (it gets "regular" dollars in exchange too, of course). Eventually, the "S-Dollars" would all become "regular" dollars and the program would be shut down.

Presumably there'd be some schemes to re-use (or counterfeit!) the "S-notes," but that's just a cost of doing the tax business (and some of them would be caught -- no matter what guff the "Fair" Taxers throw out about "eliminating the IRS," there will still be revenue agencies).

Anyway, that's my little plan for letting people spend their pre-"Fair"-Tax, already-income-taxed savings without taking the extra 30% hit.

But, once again, I'd rather the stupid and evil "Fair" Tax scheme doesn't ever get implemented.

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