Fair Tax Is Bad Tax Idea

Written on:December 15, 2014
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There is a lot of rumble in the air about installing a new tax system and the one that keeps popping up is the Fair Tax, which, on the surface, and without critical thought, appears truly fair and viable.

Here is an excerpt from the Fair Tax group’s website:

The FairTax Act (HR 25, S 13) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax  administered primarily by existing state sales tax authorities.

Mexico uses a similar tax system to Fair Tax called IVA. The Mexican federal government  applies a retail/wholesale business to business level sales tax. Under the system, businesses must supply (but rarely do) other businesses with official sales receipt known as a “Factura”, In addition to supplying a tax revenue to the government, the system allows the company paying the tax to write off the expense of the products or services for which the taxes are paid (to reduce year-end taxes).

The Factura system is flawed and corrupt in several ways. First, although designed to be the primary federal tax system, it is just one more form of tax applied by the federal government (so much for one and only tax plans). Secondly, the Factura system is rife with criminal exploitation by virtually all businesses across Mexico.

Most Mexican businesses silently opt out of the Factura system and work in the cash market instead. In other words, the tax is so high that it incentivizes much of the business population to find ways around paying it. The poor, the wealthy, everyone in between has a reason to try and avoid the IVA when possible and the only thing that keeps the entire system from falling apart is heavy policing by the government on select and well visible businesses. Yet for every business caught, 90% get away with tax fraud, which has the effect of depleting revenues from the Mexican Treasury and spiking policing costs out of control.

The Fair Tax system is not identical to the Fair Tax system proposal, but it has the same flaws and potentials for corruption and abuse. There is nothing stopping the federal government from installing additional federal tax systems to make up lost ground. And there could never be enough IRS agents to police the tax so most of the US economy would move underground (which would impact everything, including the US’s ability to borrow money on international markets)..

Not only is the Fair Tax idea not a good idea (for the reasons above), but it’s also an open invitation to the federal government to get its head in the tent on a national sales tax–it will use the new system to slowly ratchet the national sales tax until it’s out of reach. Today, the national sales tax rate may stand at say 10% but in ten years it could be 25% or more because when politicians get to raising taxes, 1% at a time, it adds up over time (the federal income tax was under 5% when it started, now it’s above 30% on average).

Therefore, while the concept of a national sales appears sound on the surface, it is clear the Fair Tax is a bad tax idea.

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