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After reading the book, he’s still against change to ‘Fair’Tue, 07/11/2006 - 5:05pm
By: Letters to the ...
After writing a letter to the editor about the Fair Tax two weeks ago, I have received a lot of “feedback” from my Fair-Tax-supporting friends (at least I hope they are still my friends). One even showed up at my door with the Fair Tax book as a gift (thanks, Dave). I had to admit to my friends that I had not read the book before writing the letter two weeks ago. Now I have read the book. Did it change my mind about the Fair Tax? No. But, it did give me a better idea why so many support the idea. The claims made by the book would convince anyone that the Fair Tax is a great idea; that is, if you believe them. Unfortunately, many of these claims are not true. Some of the major false claims of the book are: 1. The Fair Tax would solve the problem of the tax gap because tax cheaters would be taxed on their consumption. 2. There is a 22 percent (on average) “embedded tax” in the purchase price of items we purchase under our current tax system, and no such “embedded tax” would be present under the Fair Tax. 3. The price we would pay for taxable items under the Fair Tax system would be the same as we pay today, because the “embedded tax” would be removed, offsetting the Fair Tax imposed. 4. People would be more aware of tax they are paying under the Fair Tax than they are under the income tax. To understand how the different tax systems might work, it helps to look at the how the flow of currency in circulation is taxed. For example, assume I charged a client $1 for tax consulting services, and then used the dollar to buy a hot dog at a hot dog stand. Under an income tax system, the hot dog stand owner and I would each have $1 in taxable income. Under the Fair Tax, my client and I would each pay tax on our $1 purchases. In both cases tax is paid on each of the two transactions, only it is shifted from the seller to the buyer with the Fair Tax. Now, to illustrate how the tax gap might work, assume the hot dog stand owner decides not to report the $1 on his tax return. Under the income tax, I still pay my income tax, but the hot dog stand owner does not. Now, let’s look at the Fair Tax. Do you think the hot dog stand owner (or a prostitute or a drug dealer) is any more likely to report cash income on a Fair Tax return than on an income tax return? I doubt it. So, the tax would go uncollected on the hot dog purchase. Again, the tax is paid on one transaction, but not on the other. This does not solve the tax gap. If I were to use the same type of logic the authors of the book used, I could claim that the Fair Tax would actually cause a tax gap that does not exist now. When an illegal drug user purchases drugs under the Fair Tax, he or she would escape taxation on the purchase, causing a tax gap. Under the income tax, we now tax their income when they earn it, so this tax gap does not exist. One hint as to why the “embedded tax” argument is flawed comes from the old adage: If it sounds too good to be true, it probably is. The book paints the picture that there is no real economic cost of the Fair Tax to anybody. When a consumer goes to make a purchase, the cost of the item including the Fair Tax would supposedly be the same as pre-Fair Tax prices. So, the tax really costs them nothing. All other taxes are gone, so in effect nobody feels any tax bite. Yet, the government still collects the same amount of tax. This is voodoo economics. This “embedded tax” does exist in our current tax system; however, there is also “embedded tax” in goods and services under the Fair Tax plan. When an employee is paid by a proverbial “widget” maker, there are payroll and income taxes paid under our current system. Although these taxes are primarily incurred by the employee, they are reflected in the cost of making the widget because the employee loses buying power. But, under the Fair Tax, the employee also loses buying power because of the tax that will be imposed when he or she spends the compensation. I was surprised the authors of the book even tried to argue the fourth point above. I certainly have no idea how much sales tax I paid last year. And that is with an exclusive sales tax that is added to my bill. An inclusive sales tax like the Fair Tax is even more hidden. Do you have any idea how much federal gas tax you paid last year? There are some real differences between the Fair Tax and our current tax system. On the plus side, the Fair Tax would be simpler to administer than our current system (although not as simple as the authors would have you believe), and the Social Security tax, a tax that is regressive and harmful to start-up businesses, would be replaced. However, these pluses are far outweighed by the increase in tax burden that the middle class would see under the Fair Tax. Unfortunately, the authors choose not to truthfully analyze these real differences. Instead, they painted a rosy picture of the Fair Tax that does not reflect reality. Ed Outlaw 
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