FairTax Redux

As I was wandering through the library the other day, I noticed a second book on the proposed FairTax that had the subtitle “Answering the Critics” so I figured I’d give it a read. Overall, the first section of the book was a remix of the first one and the second deals with specific objections. While many of these were answered with further rehashing, there were several points that I found significant. Were they enough to justify a new book? I’ll withhold my judgment because the same question will probably be asked of this post.

(Here comes the obligatory recap of FairTax for people who haven’t heard of it before…wait for it…)

FairTax basically proposes to eliminate all forms of federal taxation in favor of a single, 23% inclusive sales tax on all new goods AND services sold in the United States. The new plan would replace all existing taxes – not just income taxes, but payroll, social security, Medicare, capital gains, corporate, etc. and replace it just with just one. It also includes a “prebate,” or a check issues at the beginning of each month to each household to as a refund for the sales tax it will incur on purchases up to the poverty level. After reading the first book, two of my concerns about the FairTax were that sales taxes might not be stable enough support the government on a yearly basis because of fluctuations in purchases and that this tax break, even with the prebate – would primary benefit the rich at the expense of the poor.

First, the simpler one to answer. If you compare a graph of the quarterly percent change in state tax revenues from 1995-2007, the sales tax is clearly the more stable option. You can take my word or look on page 129 of the book. And this tax will better reflect the current makeup of our economy. When taxes were first enacted, goods made up the majority of the economy. Even up to 1950, two-thirds of the economy was goods-based rather than service based . It wasn’t until after 1980 that services made up a larger percentage of personal expenditures than goods, but now services account for 60% of the economy. What a waste! Why should a farmer be forced to increase the price of his goods because of taxes and a lawyer not have to because she provides a service?

Now to the fear of the FairTax overburdening the poor. As mentioned earlier, part of the plan includes a prebate to refund the sales tax up to the poverty level of purchases. So if you’re living below the poverty level, all other programs aside, just from the FairTax setup, you get more money in the prebate than you spend on sales tax.

If asked if the taxes system in the US today was progressive, just about everyone I know would say yes. And while it is true the income tax is clearly progressive, there are many other less well known taxes, and even parts of the income tax, that are not progressive, and potentially even regressive in nature. Most people would agree that the rich pay a larger percentage of taxes on their income than the middle class or lower class. However, many of the wealthiest escape the high income tax bracket because they earn most of their income from investments, which are taxed as capital gains at 15%. Don’t believe me? Ask Warren Buffett. In a speech given in 2007, he claimed he paid 17.7 percent of his income in taxes while his receptionist paid thirty percent! And that’s just based income tax.

Just based on income tax? Isn’t that the only major tax individuals are responsible for? If you think taxes are paid only on April 15th, then yes, that’s all. But imbedded in the cost of paying an employee are a number of other taxes. An employer doesn’t just look at the salary they pay an employee to determine how much that employee costs the company – there are payroll taxes, medicare, and social security taxes the company has to match as well – not to mention benefits. So while you might take home $30,000 – well, you would take it all home under FairTax – but you current only get whatever’s left after the government takes out its withholding.

Look at the social security tax. Supposedly its split evenly between wage earners and the company. Because of that extra approximately seven percent, you’re cost to the company to employ just jumped $2100. You might not realize it, but the company certainly does. The social security tax also has a cap so it only applies to the first $100,000 or so that you make. So for someone making $150,000, they pay the same in social security tax as someone making $100,000, which drops their effective tax rate. Sounds regressive to me. Take for example the payroll tax. It’s a flat rate for all wage earners, not a progressive rate, and the wealth who earn their incomes from investments don’t have to pay it.


With over 16,000 amendments to the tax code since 1986, who has time to read them all much less know which ones apply to them and how to take full advantage of them? People who get paid to do it (read: tax advisers). While I have nothing against tax advisers charging money for their services, they do, after all, put in long hours to understand and find niches and loopholes to save their clients money, the information they glean isn’t free to the general public. Who has the money to pay them? And who has the most to gain by legally exploiting the tax code? The people with the most money who pay the most in taxes! Even if a poorer person goes to a tax adviser and finds a way to save 20% on their $1500 tax bill, it would take one hundred of those people to make up for the wealthy person who is shown a way to save 5% on a $600,000 tax bill. Clearly, the more complex the tax code, the more it favors those with a bigger bill.

The FairTax proposal offers a simpler solution to the complex tax code. Is it perfect? Of course not. But it would be a whole lot better than what we’ve got today.