What’s fair about the fair tax? Nothing! Even the authors know that, so they had to add a payment to the poor in order to be able to sell it. Even with that, there are many problems with Fair Tax. It just isn’t fair.

Fair Tax is an inclusive tax. Unlike the taxes most of us are used to, it is not added on at the cash register, it is already in the price.

The authors will tell you that Fair Tax is a straight 23% in order to cover all the taxes that are charged today to all individuals and businesses including SSAN and Medicare. It would be revenue neutral, in other words - It would bring in the same amount of revenue to the Federal government as it is now collecting. However, experts say that it would be much more like 56 percent needed to cover all the taxes.

In order to calculate an inclusive tax, you actually have to add 30% onto the price of an item to be able to take away 23%.

$100 + $30 = $130. (30%); $130 – 23% = $100.

Therefore, the 23% figure is misleading to most of us.

The authors claim that the average American pays 33% of household income to the federal government. However, the Congressional Budget Office study estimated that the figure is really 20.7% . That is a big discrepancy. 

The authors claim that workers would be taking home 100% of their checks. There is no allowance for, or consideration of, state taxes in this proposal. Workers would still have to pay state taxes. Also, there is not consideration of the fact that there is sales tax added onto most items already. How would that be handled? States will still need their revenues. If states try to go to the Fair Tax on top of the Federal Fair Tax, the burden of collecting and accounting for the tax will become even greater.

There will be no taxes on businesses or its dividends and interest. There will be no taxes on income, only on spending. 

Only new goods will be taxed, i.e., new cars, not used cars. 

Fair Tax is a sales tax, paid at the cash register on everything you buy. But Fair Tax will also be charged on all services such as rent, dental and medical.

Fair Tax is based on the assumption that since businesses will not be paying any income taxes, they will lower their prices so that what you actually pay in the way of price would be lowered. Then the inclusive tax would be added on to bring the total price back up to “normal.”

If this were true, then we would not need the transfer payments to the poor that are built into the Fair Tax system.  This depends on the benevolence of businesses to lower the basic prices to account for the decreases in taxes to them. Can you see businesses or doctors doing this? 

The authors say that the Fair Tax would eliminate the need for the IRS (and tax accountants and H & R Block). They propose that the businesses that collect the taxes and the state government would get a fee of 1% for the added burden collecting and accounting for these taxes would create.

However, who is going to monitor the collection of taxes to ensure that it is being done fairly and accurately? There will still have to be auditors at both the state and local levels. 


Problems with the theory.

Businesses will pay no taxes. This is a great way for business owners to shelter income, because everything they buy for the business would not be taxed.

For example, when ordinary people buy cars, they would be paying a 23% inclusive tax on them. When businesses buy cars for their personnel, they would not. Businesses would be huge tax shelters for the rich because they could buy many products through the business that the rest of us could not.

The idea that this “sales tax” would be revenue neutral is based on the idea that people will spend as they always do. However, when unemployment is up, revenue will go down. 

There is going to be a psychological impact of the tax being added onto the existing prices. The idea that businesses will lower their prices is unlikely in the case of American made goods, and impossible in the case of foreign made goods. Think about what percentage of foreign made goods we buy each day, each year. Those prices would go up 30%, at least. People of middle income brackets would get no support checks to help with the increased costs, and while their paychecks might be bigger, they mentally would have a hard time buying many items that are suddenly 30% more expensive. The Fair Tax might create a downturn in the economy, and correcting for it will be slow. 

Medical care would become more expensive by 30%. This is not what we need. And doctors and other professionals are not going to want to have to add more accountants to their staffs in order to calculate and collect and account for the burden of collecting these taxes.

Even with a transfer payment to the poor, this system puts a greater burden of paying for our government on the poor and middle class because they will not be able to shelter themselves from the Fair Tax. It will be on every item and every service they buy.  

And who uses government services that increase our costs? Businesses use our courts to settle their disputes (the biggest users). They are users of many government services in the way of inspectors and others who ensure safety and health standards.

Here is an example. The government runs the FDA, which regulates medicines. It costs nearly $1.9 Billion (FY-06) to run this agency that tests and studies every drug that we put in our bodies and every food that is developed by industries to ensure its safety. Yet the primary beneficiaries, meaning the drug and food companies, would not pay any taxes to cover the costs of the very agency that allows them to be in business!

You will also lose the deduction for your home mortgage interest and the deductions for your kids and spouse.

Here is how I envision the Fair Tax through this example. The rich people are on their way into a fancy restaurant for a big meal. They grab the nearest poor person on the street and demand that the poor person pay the bill. Now we all know that’s not fair. And that, in my mind, is what the Fair Tax does.

The Fair Tax is only fair to the rich, who would pay little or no taxes.

Resources: 

• The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS, Neal Boortz and John Linder. (both of these guys are big in real estate and have a lot to gain from the Fair Tax!)

• CNN, Fox interviewers left unchallenged Linder and Boortz's misinformation on sales tax proposal, Media Matters for America , 8/8/05.

Contact RuthE Levy