Wednesday, March 22, 2006
FairTaxers pitch a fiscal fantasy
Christian Trejbal
Recent columns
- Making sense of local elections
- Voters have only themselves to blame
- Money flows freely to local candidates
- Candidates contemplate a little big-box store
From the RoundTable blog
As tax day approaches, anguish over the monolithic federal tax code swells, creating fertile ground for crackpot ideas like the FairyTax.
No, it's not a tax on fairies. Technically, its supporters call their plan to replace current federal taxes with a national sales tax "the FairTax," but one would have to be the sort who believes in elves repairing shoes, gnomes managing Zurich banks and pixies dancing under the full moon to buy into it.
Besides, calling it the unFairTax is too easy.
The FairyTax's two chief prophets are Neal Boortz and Rep. John Linder, R-Ga., who coauthored "The FairTax Book" published last year. Boortz also spreads the bad word on his syndicated conservative radio talk show, while Linder has introduced it into Congress as HR 25, which has 52 gullible cosponsors.
The idea is deceptively simple.
The federal government would first eliminate its existing taxes. Goodbye income, corporate, payroll, capital gains, estate and all the other taxes. No more 1040s, paycheck deductions, accountants or IRS.
Then it would levy a 23 percent tax-inclusive sales tax on all retail purchases and services. That rate, Fairy-Taxers say, would provide the federal government with the same funding it now receives.
Finally, a monthly "prebate" check sent to every household would offset any disproportionate effect on the poor.
Once in place, the new system would eliminate tax season headaches, boost the economy, bring jobs back to America, end tax evasion, reduce the costs of goods, give everyone a virtual raise in the absence of payroll taxes and probably cure cancer.
OK, maybe not cure cancer, but Boortz and Linder could have included that in their book, and it would have fit right in with the rest of the litany.
It sounds sweet, at least until anti-tax exultation gives way to rational analysis.
For starters, the prebate system would be a dismayingly large welfare program. Every household would depend on monthly federal payments. Sure, the IRS might be gone, but some comparable agency would have to handle the prebates, not to mention enforcement.
Moreover, the national poverty measure is hopelessly outdated and does not reflect regional variations. Prepare for a flood of poor families moving to rural, low-cost communities.
Then there's that misleading 23 percent rate.
Say you buy a $100 iPod shuffle. Under the FairyTax plan, you'd pay $130 for it. The retailer would get $100 and the government $30.
FairyTaxers count that as a 23 percent "tax inclusive" rate because $30 is 23 percent of $130.
But that's not how people usually talk about sales taxes. Thirty dollars on top of $100 is a 30 percent tax.
FairyTaxers prefer the tax-inclusive formula because it lets them directly compare their tax to income taxes, which people do think about tax inclusively. Fair enough. It's probably just a coincidence that the smaller number makes selling their plan easier.
Not that 30 percent -- 23 percent tax inclusive -- would be revenue neutral anyway.
The same dislike of taxes that sparked the FairyTax will lead to black markets and shopping in Canada to avoid the tax. Tax cheats, despite what Linder and Boortz claim, will not disappear. They will find new ways to cheat.
Even more unlikely, FairyTaxers believe Congress could resist the temptation to use tax breaks for social engineering. The tax would apply to every service and new good, including health care and homes. Americans would give up mortgage deductions, religious exemptions and family bonuses.
Right. That would happen.
The Treasury Department calculates that with modest black market evasion and tax breaks comparable to those available in most states, the sales tax would need to be 64 percent to replace just the income tax -- not even all of the other lost taxes under the FairyTax.
Other economists who have looked at the idea share the Treasury Department's pessimism and predict similarly high rates.
So how has such an inane idea gained traction? It helps that wealthy donors are pumping millions of dollars into a group called Americans for Fair Taxation to pay for research and propaganda. Their money will be well spent if the FairyTax becomes reality because it would represent a massive shift of the tax burden from the rich to the middle class.
Households earning $30,000 to $200,000 would all pay more under the FairyTax, while those earning more than $200,000 would pay less, turning the spirit of a progressive tax system on its head.
Even President Bush's advisory panel on federal tax reform, a group hardly averse to lightening the tax load on the rich, could not stomach moving so much tax burden from the rich to the rest.
The current tax system has problems, headaches and annoyances, but the FairyTax would replace them with something far worse.
