The Anti-Doughnut Party

FairTax – Fair or Welfare?

Posted on February 6, 2012 by JL

There has been a lot of talk about the Fair Tax in past years.  In the 2008 Republican Presidential primary, Governor Mike Huckabee and Representatives Tom Tancredo and Duncan Hunter all supported the FairTax.  In the 2012 Republican primary, fringe contender turned Libertarian candidate Gary Johnson has pushed the FairTax as his tax platform while once frontrunner, now dropout Herman Cain envisions the FairTax as the final phase of his multi-part tax reform plan.  So what is the FairTax?

You can read about it here in its entirety at the Americans For Fair Taxation website.  In essence, the FairTax is a consumption tax that would operate like a national sales tax by applying a tax once on all goods and services.  The more you buy, the more in taxes you pay.  And this consumption tax would replace all current income and payroll taxes.

Since consumption taxes are considered regressive, meaning they impact people at lower incomes more because the lower class has less income to spend, the FairTax has included in it a “prebate” of taxes paid up to the poverty level.  That means that the government would send a check every month to all taxpayers that would serve as an advance to a rebate for taxes paid up to the poverty level.  According to the Americans for Fair Taxation, the FairTax would be set at 23% in its first year and be adjusted automatically annually based on federal receipts in the previous fiscal year.

There has been much criticism over the 23% tax rate as many critics argue that in reality it would be a 30% tax.  This discrepancy comes from how you look at the tax.  As a tax-inclusive rate, the FairTax would be 23%, but if you looked at it as a tax-exclusive rate, it would be 30%.  So what does that mean?  Tax-inclusive means that the taxes are included in the price.  So if you paid $100 for a widget, under the FairTax, you would be paying $77 for the widget and $23 for the FairTax for a total of $100.  That would be looking at the FairTax in a tax-inclusive manner.  But a $23 in tax on a $77 widget means that the item is being taxed at 30%.  Hence the tax-exclusive number.

For most people, it would be easier to think of adding a 30% tax on everything you buy.  Everything.  That includes buying a house or renting an apartment or going to the doctor or hiring a dog walker.  Imagine paying 30% more on your rent.  That’s an extra $300 a month if you’re paying $1000 a month in rent.  Ouch.  Of course, proponents of the FairTax will argue that you will not have to pay income tax and that the government would send you a prebate check every month to offset your taxes paid up to the poverty level.  Let’s take a look at that argument.  Not paying income taxes would be great.  But since 46% of tax filers pay no income tax, according to the Tax Policy Center, this argument for the FairTax becomes irrelevant for many taxpayers.  These citizens who already pay no income tax would be faced with a 30% tax on their rent or home in addition to everything they buy.  Yikes.

But what about the prebate check?  Yes, that would help offset some expenses.

Supporters of the FairTax believe that this prebate will keep the FairTax from being a regressive tax system and makes it “fair”.  It would also be one of the largest, if not the largest, entitlement program the federal government would have ever created.  Getting a check from the government every month could easily lead to the prebate becoming a form of welfare.  Too many people could become dependent on their monthly government checks.  We, at the Anti-Doughnut Party, think this is a very bad idea.  Very bad.

There is also some concern about tax evasion and the enforcement of the FairTax.  A consumption tax of 30% could lead to an underground market of bartering for goods and services.  That could drastically affect tax revenues for the government.  Even without any cheating or gaming of the system, tax revenue would be difficult to predict as consumers/taxpayers’ spending habits can change according to how the economy is doing.  That’s why the FairTax includes a model for adjusting the tax rate each year to normalize tax revenue.  This could have the effect of raising taxes in times when spending is down.  If spending is down because the country is in a recession, this would be the equivalent of kicking someone when they are down.

There are some benefits to the FairTax.  The concept of a consumption tax that taxes on what you spend rather than what you earn is quite appealing.  However, the reality is not as rosy.  One great aspect of the FairTax would be that it would repeal the 16th Amendment and abolish the IRS.  That is something that would make everyone happy except politicians.

Another area that the FairTax shines is in providing a disincentive for illegal aliens.  Illegal immigrants would not be able to receive the prebate but would have to pay 30% more for all goods and services.  This may convince many of them to leave or not to come here in the first place.  But overall the bad outweighs the good and, while it would probably be better than the current convoluted tax code, there are better options and ideas in the conversation.  The Anti-Doughnut Party cannot with good conscience endorse the FairTax.