A comment I left over at OTB this morning prompted a very short response from Pete Burgess:
I did check it out, and HR-25 is a version of the so-called "Fair Tax". I use scare quotes for a reason, because I believe this tax plan to be anything but fair. I also believe it to be completely politically untenable. Most of all, it doesn't solve a single one of what I see as the most important problems in our tax code. But a complete response as to why I believe all of these things requires a much more in-depth answer than a blog comment, and also would sidetrack the discussion in James' post.
To take all of my points above out of order...
First of all, Mr. Burgess was responding to my own comment that the tax code is due for another major round of simplification. The implication is that the Fair Tax would be simpler. I know far too much about human psychology to ever believe that. It might - might - start out simpler. It won't stay that way. Look at the history of our income tax code. It was very simple initially as well. I don't have to tell anybody what it's morphed into.
This isn't an inherent problem of income tax vs. sales tax. It's not an inherent problem of our system of government. It's not even an inherent problem in government. It's a problem that's inherent in out people interact with each other. As long as the tax code is influenced by multiple people (which means pretty much always throughout human history and future), people are going to start meddling with it. They're going to provide sterner taxes for things (or people) they don't like and give breaks for things (or people) they do like.
Look also at the sales taxes we already have at the state levels. They are most definitely not simple. They just appear that way to the average taxpayer because somebody else does all the paperwork for you. In the city of Huntsville, Alabama, where I have operated more than one extremely small business, the sales tax rate is 8%.
But wait... 4% of that is for the state. 3.5% is for the city. 0.5% is for the county. A small business has to file forms and payment separately for all three of these, and track them separately.
But wait... that's also not a fixed sales tax that applies equally to everything. Automobiles are taxed at a different rate. So are farm equipment, manufacturing machinery, vending, and amusement. Lodging tax is another rate. Until the mid 1990s, computer software was excempt from sales tax altogether because of a loophole. And let's not forget alcohol and tobacco, which have their own tax rates almost everywhere. Many states exempt food from sales tax to avoid being "regressive". Some states go even better and exempt groceries but not restaurants.
Adding another layer of federal tax forms on top of all this state paperwork is supposed to make it better? I don't think so. Give the feds time and they'll make all of this look like a joke. There is nothing inherently simpler about a sales tax, and over the long term it will do little or nothing to simplify our tax code.
Second, I believe the "fair tax" is unfair because it disproportionately shifts the tax burden to poorer or lower class citizens. Poorer people spend a greater percentage of their income and save less for the obvious reason that they need more of their income just to make ends meet. Therefore, a sales tax hits them proportionately harder.
I've seen versions of the "fair tax" that provide exemptions for those with less income, in the form of "tax exempt" ID cards and other proposals. See my first point. We've started complicating the tax code all over again, and defeated what I see as the entire purpose.
Third, if we're going to have a complicated tax code, it's better that it apply to the common voter. That provides a built in check on the system. If it gets too complicated, the voters revolt and it gets simplified again (this has happened at least twice in recent history under Presidents Kennedy and Reagan). If we implement a nationwide sales tax and shift the burden to business owners, the average voter will lose all reason to care about the complexity of the code. It's somebody else's problem.
The cynical part of me looks at this and sees a lot of big business support behind this plan and concludes that it's a ploy to make things even harder for their smaller competitors. Shifting to a fair tax is a minor nuisance for a large corporation - they already have armies of accountants on hand, they just need to retrain them. For a small business, especially a "micro-business", this is a real problem. Small businesses are already drowning in paperwork, and I can't bring myself to support anything that makes that worse.
Fourth, the fair tax will never pass in our current political environment. The forces that have made our tax code the beast that it is can be fought one by one with some degree of success. We can repeal a number of specific tax exemptions or burdens. But if we threaten them all at once, too many special interests are going to crop up and destroy the bill. This fact will pretty much remain true as long as special interests remain in politics, which is pretty much the same as saying "forever".
In theory, I'm a fan of a relatively flat tax that has a generous standard deduction, a small number of progressive tax rates, and absolutely no specific deductions. In reality, I acknowledge that this plan also will never pass. The best I think we can hope for is a new round of simplification every decade or two, and I believe it's time for another round.
I also use this opportunity to once again present the Russell Newquist Tax Plan:
Pass that plan and our tax code will simplify overnight. Alas, it's yet another pipe dream plan that will never get through our political system.
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