Posted by
Andrews on Thursday, December 06, 2007 3:44:55 PM
I still have to write the long post on the FairTax I promised a while ago, but until then a thought on the FairTax and some perverse incentives it creates:
First, some background:
Right now, in my home state of Maryland there is only a 5% sales tax. Yet people go every day to Delaware to save that 5%. Likewise there are buses leaving every day to North Carolina so people can buy tax free furniture. Since our cigarette tax went up to (approximately) 20% of the cost, there has been millions of dollars in smuggling from neighboring states. And I have heard tales of people flooding form Maine to New Hampshire to buy alcohol and cigarettes to avoid the state of Maine's taxes. Lastly, everyone is aware of the fortune made by Indian tribe selling mail order cigarettes free of taxes.
Now, let's think about the FairTax.
Ok, if I live in Kentucky, I probably won't drive to Canada to save 30% (which they call 23% "embedded") on most purchases. But on a car or a large appliance, I still might. But think of Maine, or North Dakota, or Texas. US goods, free of the 30% tax, are shipped to Canada and Mexico every day. If I live in Laredo, it may be worth a 10 minute drive to save 30% of the cost of everything I buy. Same in Maine. So, that 30% tax may very well destroy the economies of our border states.
But there is worse. I doubt our treaties allow us to impose the FairTax on Indian tribes, and I doubt they will volunteer to do it. So we have a bunch of little nations inside our borders happy to sell items "imported" from the US without the 30% tax, and skilled from internet cigarette sales, they will probably be quite skilled at marketing tax free items to the rest of the US. So I see a big hit on non-reservation retails from this FairTax.
Will it be enough to bankrupt anyone? The reservations alone probably won't. Nor will cross border sales, excepting in some border states, but it will definitely hurt. And as the FairTax advocates keep promising that their plan is a miraculous way to universal prosperity, I think we need to ask them how they account for all of this loss of sales to other nations and to the Indian reservations.
When time allows, I do promise to write the full comment I have been promising.