Thursday, April 15, 2010

The Fair Tax: Creating More Victims

Yesterday I looked at the flat tax, one of the proposals to make the federal tax system simpler and more equitable. Today I will look at another such proposal--the fair tax.

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.
As with the flat tax, the fair tax accepts the idea that government can properly take our money by force. Unlike the flat tax, expanding the number of victims is a central part of the argument for the fair tax:

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.


infallible said...

You're absolutely right. But just as our freedoms have been chipped away over time, getting them back will also be an incremental process. So while neither the flat tax nor the Fair Tax is an ideal solution, I'd take either of them over the mess that we have now. At least under the Fair Tax, the income tax would be repealed, which I think is a step in the right direction.

The state has no valid claims to any of our property, but that doesn't mean we shouldn't look to improve our bad lot with a, for lack of a better term, less bad lot.

Brian Phillips said...

If I had to choose between the flat tax/ fair tax and our current system, I would certainly take either the flat tax or fair tax. (I haven't given much thought as to which I might prefer.)

I agree that getting out of the current cesspool will require time and a gradual process. But if enacted in isolation--that is, without a broader agenda of slashing government spending and limiting its powers--neither proposal will have any significant long-term impact.

Mo said...

between the two I prefer the flat tax, for the simple reason that lobbying efforts to exempt certain goods or services would put great pressure on a sales tax or VAT.

As long as government has the power to tax different products at different rates, competitors who offer substitute products have the incentive to lobby for a higher rate on those substitute products or for an exemption for their own products.

Do we really want their to be legislative hearings to determine whether the sales tax on butter should be higher or lower than the sales tax on margerine? If the government has that amount of power, how can you not expect to see the lobbyist culture thrive under a sales tax or VAT?

of course thats assuming that government spending is reduced to its bare functions

Brian Phillips said...

Mo--I agree that political pressure could be used to manipulate the tax code under the fair tax. But the same is true of the flat tax. Pressure could be exerted to exempt certain income, or give certain deductions or credits, etc.

If someone said, "I want to eliminate taxation, and as a step in that direction, the flat tax (or fair tax) is the best way", I would be far more supportive. But the advocates of the two taxes don't do that--they think tax reform is the solution to what is ultimately an issue of morality.

Jack said...

Sadly, there are certain costs that need to be borne by society. Therefore, taxation will be a necessity. You are correct that ultimately it is a decision of morality, fairness, and efficiency.
You are also correct that any tax system can be manipulated. That is why we currently suffer under the current extremely complex tax code. Personally, I would like to see a Constitutional Amendment imposing a Flat Tax that would only allow Congress to set the rate and stop trying to shower favoritism on one group or other.

Brian Phillips said...

You are equating that which is a metaphysical fact of reality—such as death—with that which is open to man’s choice—such as taxation. Anything open to man’s choice can be different—“choice” means that two or more alternatives exist. To claim that taxation is a “necessity” is to claim that we have no choice. Both the existence of taxation and its implementation are a matter of choice.