FairTax: a Shifty Attempt to Raise Taxes

FairTax: a Shifty Attempt to Raise Taxes

The so-called FairTax legislation before Congress was recently brought to my attention. You can read their website, http://www.fairtax.org for the details of what supporters of this bill are proposing, but in a nutshell the bill calls for the elimination of Federal Income Tax, to be replaced by a national sales tax on all new goods and services. Business to business transactions would be exempt from the tax, and the federal government would rebate a portion of the tax to each citizen in order to lessen its regressive effects on the poorest people.

In principle, I like the idea of a tax on consumption. I think Americans are too materialistic and don't save enough for retirement. Hopefully a high tax on consumption would encourage savings and deter excess spending. Plus I like the idea of getting a "tax break" for living frugally, regardless of how much money I make. Yet I have major concerns over just how "fair" the new proposed tax would be. After reflecting on these concerns I think the tax would be more aptly named the "ShiftyTax."

Unfair to the Middle Class

This proposal can't help but raise taxes for ordinary Americans. This is obvious if you read the proposal carefully. The ShiftyTax folks say that their plan will bring in as much revenue as the existing system. Yet under the existing system both businesses and individuals pay income tax. Under ShiftyTax, only individuals pay. If the same amount of revenue is to be brought in, obviously the portion formerly paid by business has to shift over to individuals. While the poorest people will get the full amount of the tax rebated to them, the middle class will bear the brunt of the new system every time they go to the grocery store, pay their mortgage, buy health insurance, or purchase new clothes. How fair is that?

Unfair to Churches and Non-profit Groups

Churches and other non-profits have as much to lose under ShiftyTax as individuals do. Charities are currently tax-exempt, but under ShiftyTax it will automatically cost them 20-30% more to serve the public good every time they need to buy something. Under the present tax system individuals have an extra financial incentive to donate to charity versus spending the money on something else. If I spend $10,000 on a luxury vacation, I get a nice relaxing vacation. If I donate $10,000 to charity I get the good feeling of having helped others PLUS I owe thousands less in taxes. This incentive to give is gone under ShiftyTax.

Wondering just how much an incentive like this matters in the real world, I asked a friend who happens to head up a small non-profit organization in his spare time. "What do you think the impact on contributions would be if businesses didn't have to pay taxes, and the tax write off for charitable donations was eliminated?" He quickly explained to me that individual contributions would dip, but corporate contributions would come to a quick end because the deduction is more important to business. How fair is that?

One Big Loophole

Finally, ShiftyTax's biggest weakness is its biggest loophole: business doesn't have to pay. I can tell you right now what I'd do if ShiftyTax ever became law. I'd start a business the very next day. I'd employ my family in order to make as many of my unavoidable expenses as possible BUSINESS EXPENSES and hence tax free. I'm sure many others would do so as well. ShiftyTax would fail to generate the revenues expected and the government would either have to reinstate the income tax, make the legislation more complicated, or raise the rates. Either way my accounting would become much more complicated, probably even more complicated than filling out a 1040 IRS tax form each year.

How fair is that?

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