How Fair is the FairTax?
This meme below is making the rounds about the FairTax Act of 2015, courtesy of Oklahoma Congressman Jim Bridenstine. After seeing it pop up in my feed a couple times I decided a more thorough look was in order, so let’s see what the FairTax Act does and look at how it would actually affect the economic well being of Americans.
The FairTax act of 2015, A.K.A House Resolution 25 or the FTA, was introduced in January of this year by Georgia Rep. Rob Woodall and has been sitting in the House Ways and Means Committee since then. The bill has 72 co-sponsors, all Republican, including Virginia’s own Dave Brat, Scott Rigell, my own Congressman, as well as two others from the Commonwealth. The FTA has been floating around Congress since 1999 and was the subject of a book co-authored by talk-radio’s Neil Boortz in 2005 (from whom I first learned of it) and was the subject of discussion during the 2008 Presidential campaign. The bill has never made it out of committee, but gets reintroduced with each new Congress, waiting in legislative limbo until President Mike Huckabee can sign it into law.
According to the bill’s summary, it would create a 23 percent “national sales tax on the use or consumption […] of taxable property or services” and do away with “current income and corporate income tax, employment and self-employment taxes, and estate and gift taxes”, and would create exemptions “for used and intangible property, for property or services purchased for business, export, or investment purposes, and for state government functions.”
One of my usually reactions to the concept of a sales-tax only system is that most Americans rely on some form of deduction or rebate on their taxable income, which a sales tax couldn’t account for, but the authors of HR25 would offer a monthly sales tax rebate called a Family Consumption Allowance based upon family size and poverty rates. There’s also the question of those in poverty or on welfare or retirement income that don’t make enough money to pay income taxes, but we’ll get to that shortly.
The bill would defund the IRS after 2019, and, in what is perhaps the most initially perplexing part of the bill, would self-terminate “if the Sixteenth Amendment to the Constitution (authorizing an income tax) is not repealed within seven years. ” Apparently this clause is here since the Supreme Court has rules that Congress has the power to enact income taxes without the permission of the amendment, and only an “aggressive repeal” would eliminate the possibility that an income tax would return.
Proponents of the bill like to point to the US’s complex tax code as proof that the system needs reform, and trot out the FairTax as the solution for economic efficiency. Rather than the complexity of the current system which favors those that can afford accountants and tax professionals, the FTA would throw the whole thing out. The States would collect the sales tax for the Federal government and families would be issued a “prebate” on purchases up to the poverty level. According to the Wall Street Journal, this rebate would leave low-income households with a zero net tax burden and have a lower effective impact on middle-class wages.
The Brookings Institute points out that the FTA would shift our tax base from income to consumption, and that while we have a somewhat progressive income tax system currently, a consumption-based one would be flat. They also argue that State efforts at sales tax collection aren’t exactly a model success to be emulated at the Federal level. Many goods, such as food and medicine are exempt from sales taxes, and services are taxed poorly, if at all. The fair tax would exempt business “property or services purchased for businesses” as well, which aren’t retail sales, but account for 20–40 percent of state sales tax revenues. And most states don’t tax their own government purchases, which HR 25 specifically calls for. Also, a vast number of deductions, exemptions and credits exist in the current system, such as mortgage deduction credits, childcare and dependent rebates, and non-profit contributions, to name a few. All of these would be eliminated under a FairTax. The Brookings report also points out the (high) number of big ifs regarding the reported 23 percent tax, pointing to evasion rates of 15 to 20 percent as a signal that the adjusted rate would need to be around 35 percent to get anywhere near a comparable base to current income levels. (When even Forbes magazine says that too many people would dodge it to be effective, you know you’ve got a problem.) Then add on current sales taxes from the states, which would also have to boost their tax rates to make up for the reduction in federal income taxes; the prebates, which would reduce the effective haul; exemptions on food and health would reduce the base. So instead of 23 percent, you’re actually looking at double or almost triple that. And as the bill’s text states that it “will promote savings and investment”, it will also have the effect of reducing consumption, driving revenues even lower. Sounds like a great idea.
So does a national sales tax “promote fairness”, as HR 25 claims it will? Not really. If you’re in the top 1 of income earners, you might see a tax cut of $75,000, while the bottom 90 percent would see a net increase. Married couples would face a penalty based on the way the poverty line is calculated, costing them over $1500 at a 30 percent rate, and even more as the rate rises. And you know those dependent exemptions, child, child care and education credits that we all love so much? Kiss that shit goodbye under a ‘FairTax’. And don’t forget that families with children spend more that relative to their income, so a sales tax would hurt them when they most need the money.
And corporations would really love to see the FTA pass. No longer bound to corporate taxation, proponents like former Federal Reserve Chairman Alan Greenspan believe that we would see repatriation of the estimated 11 trillion dollars corporations are holding in offshore accounts, ushering in a flood of capital and economic development. What’s more likely however, is that the FairTax would burden consumers with the responsibility for supporting government, siphoning meager government sales tax income off from average Americans while funneling untaxed profits to the Fortune 500 and rewarding the top earners with their obscene salaries and bonuses. And since corporate expenditures would be effectively exempt from practically any form of taxation, America’s working class would starve while corporations fattened up, enriching their stock valuations while straining the wallets of low- and middle-income consumers.
Whether or not the underlying goal of the FTA is class warfare, this FairTax is anything but. Consumption taxes disproportionately affect the poor, who spend most of their income on necessities and thus wind up paying a higher percentage of their income to taxes. Likewise, the affluent make out like bandits with these types of plans, since they spend a lower percent on their day-to-day necessities and can let their money grow in bank accounts or the stock market. Exemptions for investment and savings would allow the rich to get richer because they would avoid paying their fair share through corporate personhood perks such as company cars; this would transfer the responsibility of supporting public services to those least equipped to pay.
So while the idea of the FairTax Act of 2015 may seem attractive to some at first glance, it doesn’t hold up to further examination. What good is it to keep your entire paycheck if you’re making only minimum wage or you are in the middle class and you lose the numerous tax deductions you currently enjoy? Who really benefits under a system where tax is paid on what you spend, when you spend most of what you earn, and the rich continue to hoard their wealth and spend it in ways that evades the system? “Everyone pays their fair share” seems like one of those disingenuous phrases Orwell warned us about, and saying that the FTA “promotes fairness” is meaningless.
By any sensible metric, the FairTax is anything but fair; rather, it is just the type of one-percenter bullshit that should drive the rest of us mad that they would even have the audacity to suggest it.