Prior to the full FairTax article, I would like to restate two of my earliest objections (with some new material as well) and three newer objection. These two were the first objections I ever raised on FairTax articles here on Townhall:

1. the prebate: I just don't understand why anyone would want a tax scheme that involves making everyone essentially a welfare recipient. My main objection to the withholding scheme is that it makes people see the government as people who send out checks on April 15 rather than a leech taking almost 1/3 of our income. How much worse is the prebate that makes us all welfare cases? Not to mention my worry that it could become the new Earned Income Tax Credit, allowing the state to use the prebate as a new vehicle for welfare payments, or payoffs to any favored group.

I am a bit embarassed to admit, the possibility of fraud escaped my notice at first, but others have done more than enough to discuss that, so I will skip it for now. However, I will point out one other problem with the prebate. The proponents say the FairTax will eliminate the IRS and that "big bureaucracy", yet fail to see how administering the prebate (not to mention running a massive sales tax program) will create its own massive bureaucracy at least as big as the current IRS. Imagine the fraud enforcement branch alone.

2 retail/wholesale distinction: This one is hard for states now which have sales taxes. How much harder will it be when both nationwide and using taxes which are "embedded" and, thus harder to remove. (With a non-embedded tax, you just don't add it, to remove an embedded tax, the registers have to be able to remove the tax from the list price, a change required in their software). Also, how do we define retail/wholesale, and how do we prevent fraud? If I am a chef, I can say my purchases are for a catering job, and avoid taxes, but what is to prevent me from doing that for my own consumer needs as well? Or to prevent someone else from opening a "catering" business just to get tax relief? Also, how can this be monitored? With taxes no longer tied to individuals, such patterns of fraud would be VERY hard to spot. Lastly, doesn't this favor wholesale buyers over retail, such as investment home buyers who get a huge discount over people buying a residence? Wouldn't we see the rental buyers gobbling up most of the housing market, making home ownership much less common than now? (A similar unintended consequence is the new/used distinction which heavily favors resale over purchase of new goods.)

3. embedded tax: The idea of "embedding" the tax into the list price is a bad one, for the same reasons as my first point. If we don't see the tax being added on to the expected price (even if it appears on the receipt) we get too used to ignoring the tax, and too comfortable with the government's cut. It is far better to see an item list at $1 and have to pay $1.30, than see an item just list for $1.30, with $1 appearing nowhere but on the receipt.

4. foreign travelers: I know the removal of 22% embedded taxes is supposed to offset entirely this new 30% tax (that they call 23%), but I have my doubts, as expressed in a post earlier this week. Assuming the new taxes are not entirely offset, that makes US consumer goods more expensive relative to other nations. I know many scoff, but the cost of goods in a nation does effect tourist traffic. If food and lodging and gifts are expensive in a nation, tourism drops to one degree or another. And if we are more pricey than other nations, or just more pricey with the FairTax than we are now, then we will lose tourism dollars. And if our economy is reduced, then this is not "revenue neutral".

5. black markets: The proponents claim there will be no black markets, saying there are no known markets existing solely for tax avoidance. Well, hate to disabuse them of that, but I know of at least two. First, there is a considerable criminal class that makes a living relabeling nautical and other lower taxed fuels for auto sales. That is one of the reason non automotive fuels are often dyed, to try to thwart such schemes. Second, though the proponents denied it before the tax rose, the increase in the Maryland cigarette tax led to millions of dollars in smuggling, some by people sending money to terrorist groups. (Check the news archives for this one; talk about "unintended consequences"! Wonder if the legislature ever thought they would fund terrorism with their bill?) So there are plenty of schemes out there to avoid taxes far less onerous than the 30% FairTax, leaving me with no doubt that black markets would spring up very quickly to avoid such a heavy tax.

Afterword

I said it before, but I will repeat: I am not a fan of our current tax scheme, and would welcome a reform, but the Fair Tax isn't it.  Before we dive into a new tax scheme we need to analyze it fully to avoid trading one bad scheme for another, or even worse, and it appears the FairTax people have just not considered all the implications, and have made some simple mistakes to boot. So I am not proposing we stick with our current tax system, I am just saying we need a reform better than the FairTax as proposed.

Also, though I think we need a better tax system, I do not think any tax scheme will be the panacea the FairTax believers seem to suggest their plan is. No scheme of taxation will make everyone wealthier while leaving government revenues untouched. Nor would I want that. I think cutting spending by the state is far more important than our tax system. I would rather see our current tax scheme with a 50% reduction in federal spending than see the FairTax, or any other plan, implemented with spending remaining unchanged.