The fair tax is simply a national sales tax that would be collected by retailers. As with the flat tax, the fair tax would replace the income tax, estate tax, gift tax, and other taxes collected by the federal government. Proponents of the fair tax also cite numerous benefits:
- Progressive—Since the rich spend more, and each retail purchase is subject to the tax, the rich would pay more than the poor.
- Encourages savings—Because only consumption would be taxed, the “non-rich” would reduce consumption in order to build wealth.
- Those in the underground economy would pay.
- Tourists would pay.
How can the FairTax generate lower net tax rates for everyone and still pay for the same government expenditures? The answer is two-fold. Firstly, the tax base is dramatically widened by including consumer spending from the underground economy (estimated at $1.5 trillion annually), and by including illegal immigrants, that is, those who escape their fair share today through loopholes and gimmicks. In addition, 40 million foreign tourists a year will become American taxpayers as consumers here. Secondly, not everyone's average net tax burden falls. For households whose major economic resource is accumulated wealth, the FairTax will deliver a net tax hike compared to the current system.
Rather than combat the inherent injustice in coercive taxation, the fair tax seeks to expand the reach of the taxman. And because the cause of government spending is not addressed, the fair tax, like the flat tax, will be subject to continued political pressures to increase the taxed items, create loopholes or exceptions, and otherwise modify the code.
So long as government is in the business of redistributing wealth, regulating businesses, "protecting" the environment, providing health care and education, and every other rights-violating activity the government engages is, there will be pressure to manipulate the political process. And as we have seen countless times, politicians are more than willing to cave to political pressure.
The issue is not how government gets its money. (And that is why advocates of liberty are misguided to actively call for abolishing taxes at this time.) The issue is the proper role of government, and until that--along with its moral foundation--is understood, calls for tax reform are at best premature.
The fair tax is not tax reform in any meaningful sense, for it is nothing more than a continuation of the same fundamental premises as our current system.
Every individual has a moral right to enjoy the fruits of his labor without anyone--including government--taking his property. Indeed, it is government's sole purpose to protect that right. The advocates of the flat tax and the fair tax may have their "heart" in the right place, but until they get their head--and their morality--in the right place, their efforts are wasted.