Fair Tax Is Bad Tax Idea

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.

4 Comments on "Fair Tax Is Bad Tax Idea"

  1. So, let me get this straight…you think that a system which was designed by American Economists to help the American Economy, is comparable to a Mexican Tax system that was designed by a corrupt Mexican Government? Laughable!

    First, the FairTax is a Consumption Tax, not a sales tax.

    A few things…
    1) Under the [IVA] system, businesses must supply (but rarely do) other businesses with official sales receipt known as a “Factura”.

    I’ll assume you’re right about the “Factura” system (I don’t know). I DO know, however, that that more closely resembles the VAT (or, Value Added Tax). The FairTax, however, is nothing like the VAT.

    Under the FairTax, the Federal Government collects the tax from each of the 50 States. Each state collects the FairTax (much like they do now with their State Taxes) from businesses on a monthly basis (not quarterly, not annually). Businesses will “visibly” include the tax in the cost of their goods/services (unlike now where the costs are hidden).

    2) First, although designed to be the primary federal tax system, [IVA] is just one more form of tax applied by the federal government (so much for one and only tax plans).

    Again, the VAT! In most countries that employ a VAT, additional taxes are needed because the VAT is generally insufficient. The FairTax, however, was designed and studied for over 16 years before the rate was set. Very detailed numbers have been published showing exactly how much tax is needed to replace the taxes that are in effect today.

    Let me point out that our politician in Congress can implement, at any time, both a Sales and Income tax. The reason they don’t is “We The People”…Americans. They know if they did implement both types of taxes, they would be committing political suicide.

    Additionally, it is written into the FairTax to remove all forms of Income Taxes BEFORE the Consumption Tax is enacted.

    3) Most Mexican businesses silently opt out of the Factura system and work in the cash market instead.

    That’s because the “Factura” system allows them to do so.
    (from my blog)The FairTax reduces evasion in the US, this is very simple to understand:

    ~165,000,000 = Estimated Total # of Individual Taxpayers in the US.
    ~ 22,000,000 = Estimated Total # of Businesses in the US.
    ————
    ~187,000,000 = Estimated Total # of Tax Collection points. These are the entities who currently report the “total income” to the IRS.

    First, let’s assume that 100% of the Businesses sell New Goods and/or Services.

    Under the FairTax, consumers will no longer have to report taxes because we will simply pay taxes when we purchase new goods/services. It is the businesses who will have to report the income to their respective State. Therefore, the FairTax eliminates 165,000,000 points of collection (the Estimated Total # of Individual Taxpayers in the US).

    187,000,000 – 165,000,000 = 22,000,000
    22,000,000 / 187,000,000 = 11.76%
    100% – 11.76% = 88.24%

    However, we know that not all businesses sell new goods/services to retail consumers. Some of them only sell used goods (Used goods are not taxed under the FairTax), and many others only sell to other businesses (FairTax does not tax business to business transactions). Should we assume a conservative 90% sell new goods and/or services? How about a more liberal 75%?

    90% of 22,000,000 = 19,800,000
    75% of 22,000,000 = 16,500,000

    From the equation above:
    19,800,000 / 187,000,000 = 10.58%
    16,500,000 / 187,000,000 = 8.82%

    As you can see, the FairTax will reduce POTENTIAL Tax Evasion by at least 88.24% or by as much 91.18%.

    4) There is nothing stopping the federal government from installing additional federal tax systems to make up lost ground.

    As I alluded to above…What is stopping our Congress from implementing additional taxes today? Absolutely nothing. But again, as the FairTax is written, it will reduce the possibility of Congress adding additional taxes.

    Why? Simple. Today, all of our taxes are spread out so thin that we don’t see them. But we sure do feel them…in the cost of the good/services we pay for, and in lower wages because businesses are forced to pay these taxes that we cannot see. The FairTax, however, will eliminate those hidden taxes and put them all in one place so that EVERY person in the US who ever purchases anything will see them.

    5) 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)

    As pointed out above, the FairTax would abolish the IRS. There is no need for an IRS like agency. Follow this tax trail…

    Consumers —> Businesses (FairTax is included in price)
    Businesses –> State Gov’t
    States ——> Federal Gov’t

    As you can see, neither the State or Federal Governments have any contact with Consumers. States deal with businesses in their respective states (as 45/50 states do now). And the States pass taxes on to the Federal Government.

    I hope what I’ve written has helped you understand where you’re wrong. If you’d like more clarification, you have my email.

    • There are a great many false statements or assumptions being made about the Fair Tax in this comment. First, let’s acknowledge that most Americans want an end to “income taxes” (if not also the IRS). The issue of concern is how to get there. The Fair Tax system demands a one size fits all federal tax that applies across all states equally. It undermines state sovereignty and tax system choice. We support state choice. We support states collecting taxes as their citizens see fit and then paying a portion of the taxes collected to the federal government. We do not support federal taxation in any way (except through international application aspects, such as tariffs, etc.) because all current federal tax systems are 100% unconstitutional—you heard that correctly—all federal tax systems in place today are illegal, as would be the Fair Tax system (which we admit sounds far better on the surface than our current system but not in its fine-print details and realities of the market place as well as tax place). Constitutionally, Congress is suppose to ask for a bill to raise taxes for a single or set of purposes that have a pre-set amount—it is not allowed to raise taxes perpetually, hence run up a national debt. The only way to stop this crime and attack on American taxpayers is to stop ALL federal taxes and collections of taxes and make states responsible for tax collections. Let’s face it, we need some federal government institutions to remain and they must be paid for but instead of giving Congress an endless open purse, we need to take its taxation abilities away and hand them back to the states where they belong (and we need to dramatically shrink the size of the redundant systems, programs, agencies, etc. that over bloat our current federal government to lower its need for tax supports).

      The State to Federal Tax Act (STFTA) sets the amount of taxes a state must raise from within its borders, based on its GDP, and that is the amount it must remit to the federal government each year (whether paid out in installments weekly, monthly, quarterly, etc.) This is the only system that STOPS CONGRESS from not only raising taxes at will (such as using Fair Tax, then more taxing schemes on top of it, etc. or abusing the systems now in place). The current system allows Congress to increase the national debt toward an currently inevitable, full scale economic collapse of the country due to excess debt servicing costs alone.

      Simply saying a great many economist and other experts support the Fair Tax is ridiculous—look how many so called experts think global warming is created by humankind instead of a hotter sun cycle—people, even experts, will agree to just about anything these days—especially if they are part of a special interest group or on its payrolls in some way. We support STFTA over the Fair Tax initiative because of all the reasons stated in the article and here and because we believe the IRS has become too Draconian and dangerous to the American people and liberty–we firmly believe it needs to be abolished.

      STFTA eliminates the IRS and the one size fits all socialist mentality to put states back in charge of their sovereignty and methods of raising taxes from their citizens. And it pre-sets the percentage / amount the federal government will receive from the states yearly (e.g. sets the federal gross budget automatically—it forces the federal government to live within its means, whether it likes it or not.

      Remember, over 70% of what the current over-sized federal government does today is being duplicated in state governments—that means taxpayers are paying twice for the same (or similar or near same) service. It means we can cut or eliminate most federal agencies and their respective budgets, as well as their needs for tax supports and let states do the job (there is nothing wrong with Congress setting standards and guidelines and asking states to enforce them rather than having a massive out-of-control federal government do the work).

      States that smarter will implement better taxation systems that are more friendly to their citizens. The market will decide the winners over the losers. And perhaps at the state level, some states may try the Fair Tax system and may even find a way to make it work through trial and error. Eventually, some states will find the perfect system and others may adopt it—but it’s their choice, not the federal government’s.

      Under the Mexican IVA program, the government works very hard and uses very strong enforcement measures to ensure the tax system works. However, some estimates suggest that as much as 70% of commerce is being done in the “black market” even today because businesses want to avoid taxation and in many cases, must do so to survive or stay competitive (businesses, not consumers or people, are solely responsible for the black market activities). The same thing can and easily will happen in the US with the Fair Tax—suddenly business transactions that were on the books will start to fall off the books and the taxes for those transactions will be lost—and then Congress will be upset by the resulting shortfalls and once again they will make speeches and demand new tax bills and programs to “supplement the tax loses”—and we will all be right back where we started—but with a much bigger hidden tax now installed into the system.

      The Fair Tax, at the federal level, is a disaster waiting to happen (another Obamacare level debacle in the wings that will fail because too few people, again, did not fully understand the details and the big picture both). The initial concept reasoning behind the Fair Tax is partially because the sponsor nobly wants to eliminate income taxes and is seeking an alternative. However, the better alternative (if not STFTA) is to simply abolish personal income taxes altogether then let the government increase the tax rates on its other tax programs already in place to make up for the shortfalls—at least we would have one less tax program, not one more.

  2. The author of the piece describes a value added tax hidden in at each level of the chain of commerce and then calls it FAIRtax®. It is the equivalent of calling a cat a horse just because both happen to have fur and 4 legs. A value added tax is business to business and then transferred to the consumer in the final price imbedded in the price. Today our income tax system creates imbedded hidden taxes just like this value added tax would. The FAIRtax Plan® creates a true national retail sales tax collected ONCE at the point of sale on new goods and services that is offset or made progressive by a Family Consumption Allowance that rebates/prebates back the amount of tax paid by a household on goods and services essential to feed, clothe and house members of the household up to poverty level spending. This reduces the NET EFFECTIVE TAX RATE far below the nominal rate of 23% inclusive. I suggest the author read the 134 page bill H.R. 25 as it is fairly certain he will not and realistically cannot read the 74,000 pages of present day income tax code, regulations, interpretations and rulings. The FAIRtax® is efficient, visible, simple and transparent. It eliminates federal income, payroll, investment and death taxes and replaces them with a flat rate consumption tax. How simple is that.

    • We have read the Fair Tax bill proposal in its many iterations over time as well as the current version. The bottom line is it is a more flawed tax system than our current system and will create more of a nightmare than solve problems. It fails to recognize the basic underlying problems of our entire federal tax system and does not even begin to address any of the key issues. One such issue is our growing “national debt” that is caused by over taxation (to lower economic outputs, etc.) and overspending (too much borrowing)—these are caused by a Congress that acts unconstitutionally when it comes to raising taxes. There are far better ways to achieve what the Fair Tax system claims to seek so the question is—is a true solution being sought, or is it just a new Fair Tax law and way to raise taxes that is being sought—because they appear mutually exclusive from our point of view (this appears to be a political move or some form of power grab ploy but not a valid solution initiative designed to truly help American taxpayers. For more comments and details, refer to our reply to Robert William’s comment below.

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