Against the Fair Tax

Against the Fair Tax

The Fair Tax, as I understand, is pretty simple. All federal taxes would be collected exclusively through a sales tax. To ensure that no one pays taxes on the essentials, each family would be issued the amount they would have spent in taxes if they spent all the money made below the poverty line on taxable items.

The Fair Tax is not fair.

First, it increases incentive to become wealthy (taxing the poor at a higher rate) and/or decreases incentive to create wealth (taxing the rich at a higher rate). There is an inherent desire to gain wealth in all of us. Rich people can buy nice things and tour the world. That characteristic of property is just the result of ownership and non-coercive trading.

The Way Things Work -- In a relatively free market, lessening natural incentive to create wealth is detrimental. In such an economic environment, two or more parties decide to interact in ways that each party feels benefits them. The bigger the perceived benefit of the goods or services provided, the higher the price can be. The higher the perceived need relative to the availability for these goods or services, the higher the price can be. Therefore, in such a market, people are rewarded for their goods or services—the more the product is needed and the more useful it is, the more the producer is rewarded. This encourages people to be most productive, in order to receive payment.

Fair taxes neither substantially lessen incentives nor increase incentives to accumulating wealth.

Taxing the rich at a higher rate because they make more money is government-created lessening of incentive to create value. It lessens the incentive to do valuable work or create valuable things. If this results in fewer people doing valuable work or creating valuable things, prices will rise. If people only want to do useful thing X at their current rate of pay, they will stop doing it if their pay decreases. This makes it more difficult for everyone, especially the poor. The Fair Tax claims to avoid this because it uses the same sales tax for everyone, some say 23%.

On the other hand, government-added incentive to accumulate wealth is also unfair. The only way government treatment can add incentive to creating a higher amount of wealth is if the rich people’s treatment (not status, not economic position) is preferable, preferable over and above those creating less wealth. This is what the Fair Tax does, and this is part of why it is unfair. A 2011 family whose income is $35,000, for example, and spends all their money on taxed items (used items are not taxed) will be taxed on $12,750, the money spent above the poverty line. Another 2011 family, who brings in $100,000 can spend $50,000 and be taxed on $27,250, and save the other $50,000 without being taxed on that. And there are ways of making money with money, without buying anything. So it favors the rich, those who can afford to earn money with money. It adds incentive to become rich. This is not the worst thing imaginable, because it encourages good investment, savings, charity—untaxed activities—though it is still unfair and objectionable. Further, it encourages international vacations when Americans spend money in other countries, sending funds to other places. Instead of the British Pound being 1.6 dollars to 1 pound, the effective rate would be 1.33 dollars per pound because spending money in America has an added cost. It promotes other economies and creates disincentive to spend money here, in our own economy.

The Fair Tax not only affects classes differently, but it also affects markets unevenly. All taxes affect the market, obviously, because money is being moved around during taxation. But the Fair Tax changes the shapes of the markets differently, relative to each other, and it changes the levels of supply and demand. Gary Johnson, former Governor of New Mexico and 2012 presidential candidate, is one of the promoters of the Fair Tax. August 24^th, Gary Johnson mentioned that used cars would not be taxed. This shows an important feature of the Fair Tax. Only new cars would produce federal tax revenue. (This feature of the fair tax changes the shapes and levels of different markets differently because, e.g., all yams sold are new yams, so the fact that used products are not taxed does not affect the yams market, but it does affect the car market.) The Fair Tax would also change supply and demand, discouraging people from buying new cars. Remember this is a big sales tax, over 20%. If cars A and B are equally desirable, worth $20,000, but car A is new and car B is used, what does the Fair Tax do? It would make the seller of Car A earn less than the seller of Car B. Car A would have to be priced lower, while Car B could be priced at $20,000. Car A could disappear from the market. Cars could become scarcer, because fewer may be produced. Future used cars would probably be negatively affected by the need to produce the cars more cheaply than they are produced right now. Used cars could become more valuable because they are more cheaply made, and they could become too expensive for some who could afford them under a less disruptive tax system. The Fair Tax affects the markets in this undesirable way.

Finally, this is a nation where each person’s life and rights are to be equally respected, where there is justice for all! We all benefit from a good government and a good country. Government should not favor the wealthy in the tax system, and it should not substantially favor the poor. There is a financial burden that comes with the institution of government, and everyone benefits. President Obama expressed his disapproval of ‘free riders’ of the health insurance system. What about the free riders of government—who still benefit from the system (unlike free riders of the health insurance system)? In a tax system so complicated, it is nice to be able to know one thing for sure—it is not fair now. So what’s the answer?

A flat income tax is fairer than the Fair Tax. We can implement the same consideration for the poor as the Fair Tax by not taxing the first X amount of money each household makes per year, making sure that it is a sufficiently low amount. The flat tax would leave everyone with basically the same relative wealth. This tax could also be lower because all income is taxed, not just certain transactions. Jim the millionaire would have 75% of his earnings, and the Tim the sandwich artist would have 75% of his earnings. The value of money and the value of things would not be noticeably affected. A $2 Coke in the parallel universe without taxes (a world of angels) would be the equivalent price of that in the Flat Tax universe, $1.50. Everyone’s wealth and everything’s cost would move down the same, relative to each other. While the Fair Tax changes the shapes and levels of the markets in different ways, the Flat Tax changes the level of the economy as a whole—changing the level of each market in the same degree—and leaves the shapes of each market virtually the same as they would be without taxes. Thus, it involves lesser government preference for various groups in society.

Under the Flat Tax, (1) there would be virtually no adjustment to the natural incentives to create wealth. (2) Car companies and other such companies could run naturally. There would be (2a) no unnatural inflation in the cost of new products, (2b) no added pressure to create lower-quality goods, (2c) no increase in the profitability of selling used cars, and (2d) no future lessening of the quality of used goods. (3) There would not be added incentive to spend money overseas, taking money away from our economy. And there would be no disincentive for foreigners to spend their money here, adding to our economy, as there would be under the Fair Tax, (unless measures were taken to allow the reimbursement of taxes for visitors, and we are not going to put up with tourists turning in their receipts for gum and sodas at the airports, so it would have to be limited to bigger purchases).

A flat tax would much simpler—all income is taxable at one rate (above the poverty level). Tax evasion would be more difficult—there would be no legal loopholes, and the only way to evade paying the taxes would be to hide income. This is a great start to a truly fair tax system.