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August 07, 2005

The Fair Tax

I highly recommend this Michael Kinsley article on the Fair Tax. A few things: He's right when he says it is impossible for everyone to pay lower taxes. Not unless we massively cut government spending, which this Republican Congress and President has shown isn't happening any time soon.

One of the arguments I hear quite frequently from fair tax proponents (including maybe President Bush) is that the rich don't pay their taxes anyway. That's a good populist critique of the current system, and in many cases it's true -- the rich don't pay their fair share in taxes. The trick (so far) of the fair taxers is that under their fair tax, the rich on average will pay much less in taxes than they do now. A few bad apples pay almost nothing in income taxes due to creative accounting, but the majority of the rich pay about 30% of their income in taxes. Some guy that makes $10 million a year doesn't spend it all, he sticks most of it in savings to pass on to his heirs. Maybe he spends $4 million in a big year -- he'd pay 30% on that $4 million instead of 30% on the whole $10 million. The point is, he'd be paying about $1.2 million in taxes in a year when he spends a lot of his income. Even with tax aversion, the average wealthy American is paying substantially more than 12% of their income in taxes now. Way to make the rich pay their taxes!

A few other things about the fair tax. In DeKalb County, when I buy something that costs $1, I pay 7 cents in tax. I call that 7%. The "Fair" taxers call that 6.5%. That's because they're using dishonest math. Here's a more extreme and relevant example.

They say the Fair Tax would be 23%. That means, when your total is $1.30, the merchant would pass on 23% of that cost as tax. 23% of $1.30 is 30 cents. But that's really like buying something that costs $1 today and paying a 30% tax and getting to $1.30. It would not suprise me if they are using similarly dishonest math to calculate the current tax burden of Americans in their book.

Now let me address another of the arguments of the fair tax -- that it would encourage saving. The savings rate in the United States is anemic. It's lower really than it's ever been, especially during a time of such relative prosperity. And yet, nobody saves. Well, the fair taxers envision a world where a tax on spending means that people would wisely not spend so much. But there's no proof this would happen. What's worse is that people who spend more than they earn would literally be taxed to death. If you think credit card borrowing is bad now, imagine tacking 30% onto every purchase. Someone that makes $20,000 and spends all of their money (on rent and living expenses) and goes into debt by an extra $10,000 that year would effectively pay a 35% income tax rate -- higher than even the rich pay now.

If you really want to encourage savings, there are plenty of good ideas out there. One good one is a tax credit for savings. At the end of the year, you report how much money you saved. It's easy to calculate -- how much money did you have in your bank accounts the year before and how much do you have now. If you saved money, and you fall below certain income thresholds (contrary to Republican talking points, the Paris Hiltons of the world don't need any help from the government putting aside a few million bucks) you get a tax credit you can put towards a savings account or IRA. Better yet, if conservatives are so worried about Ameicans saving money, force them to through withholding. I'd probably be against that idea on principle, but again, if they're so concerned, it's not like it's out of their means to do so.

And speaking of withholding, I think I'll finish on that. If the fair taxers think tax cheating is bad now, they should study the history of tax collection before automatic withholding was initiated. Mandated withholding is the only way to discourage widespread cheating, because lets face it when someone is taking up to 30% of your money the incentive to cheat is so great that even otherwise honest people will succumb to it.

Back to the rich -- remember when our friend Dennis Kozlowski had some expensive paintings shipped to a different address so he wouldn't have to pay taxes on them? Just imagine what kind of trickery Kozlowski and his ilk will be up to once the fair tax gets passed. Why do you ask that? Because one huge loophole that will aid those wily rich people who don't pay taxes now is this: "Businesses that sell to other businesses would have virtually no compliance costs since intermediate business-to-business sales are not taxed under the FairTax plan."

Hmm, so lets say that I'm the President of a large corporation. Right now I make $5 million a year and spend about $2 million on average on houses, cars, paintings, vacations, etc. I also pay about $1.5 million in taxes. I know -- I'll sign an agreement with my company. Instead of making $5 million in cash, I'll take $3 million in cash and $2 million in other forms of compensation. I'll have my company buy my house and cars (from other companies) and anything else I need to buy -- and because only transactions between retailers and individuals are taxed, my company will never pay taxes on the luxury goods I buy and neither will I.

So, you see, the fair tax is anything but fair. For the vast majority of us, we'll still pay either about the same that we already pay or maybe a little more or little less. And since most of us use the 1040EZ form, which takes about 2 hours a year to fill out and mail, it will hardly be any "fairer" or even easier. And as you can see, the wealthy will effectivelly pay no taxes. All they have to do is get their employer to purchase things for them in lieu of monetary compensation, and if they're not employed, they can merely incorporate and never pay taxes again. Does that sound fair to you?

Posted by Chris at August 7, 2005 11:35 PM

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