Since the FairTax has reappeared, both in Mike Adams' column and in the announcement of a second book I am sure advocates will insist I read, I figure it is time for me to revisit all those old posts and summarize exactly why I am opposed to this plan.

First, the claim that it will be revenue neutral is very speculative. There are so many assumptions built into the statement that it is laughable. The logic is that there is an average of 22% of "embedded" tax es on each good, so adding 23% in tax after removing those taxes will not raise prices. However, this confuses matters by thinking each good contains the average, while in reality taxes are hardly evenly distributed. By removing taxes and adding a uniform 23% we will be raising the price of some goods, dropping others, which will be very unlikely to have no effect on sales revenues as is assumed.

Nor is that the only reason it won't be revenue neutral. Whether it is good or bad, some goods are only produced domestically because of protective tariffs. If those tariffs are removed, the domestic industry will collapse. Now, as a free market advocate, I will say that is a good thing, but, in terms of the FairTax, destroying an industry can hardly be said to be revenue neutral.

Nor does the Fair Tax take into account tax avoidance schemes. I am not here talking about illegal plans (those will come later). Instead I am talking about foreign sellers and tax exempt groups such as Indian reservations, who will not have to add the 23% fair tax. It probably won't impact small purchases, but for big ticket items, those near a border will probably go out of country, while others will buy from Indian reservations whenever the 23% discount more than pays for shipping. For all these reasons, the FairTax will be very unlikely to end up being "revenue neutral".

Second, the claim that the Fair Tax will eliminate tax avoidance is just absurd. people in my home state drive to Delaware to save 5% (now 6%) sales tax, why wouldn't people take steps to save 23%? Though the advocates say people will not resort to criminality to avoid the tax, I think the fact that organized crime (including supporters of terrorism*) makes a lot of money off schemes to avoid cigarette taxes, and that we have to dye nautical fuel to prevent the illegal sale of it as auto fuel argues that they would. And, in the distinction between sued and new, the FairTax itself gives us a lot of room for tax avoidance schemes, not to mention the distinction between purchase for use or for production.

And it will be much harder to find tax cheats under this system. The current system ties taxes tot he individual, the new one will tie taxes to sales. So, if I open a fictional catering business, and never pay a dime in tax on any food, there will be no way to tell I never bought any food for consumption. There is no record of what taxes I paid, just records of the individual sales. The new tax scheme makes transactions anonymous, allowing fraud to proceed with little fear of being detected.

Third, the FairTax advocates claim that their plan will eliminate the IRS. It may be true there will be no IRS, but there will be a bureaucracy every bit as big. Just to administer the prebate will require a huge bureaucracy. The advocates claim that it will be a "simple" direct deposit, but having worked in social services, I can attest it will not be that simple. Every person who files will need to be validated, or else massive fraud will ensue. And there will also be strange cases requiring investigation, such as joint custody children, where the agency will need to determine which parent gets the check, and to make sure both do not claim the same child. It will take an agency the size of the IRS just to manage the prebate, investigate fraud, and validate new applications.

And that is not all. In addition to the prebate, the administration will need to collect the various taxes, deposit them, and investigate claims that retailers are not withholding the correct tax amounts. This will, again, mirror the activities of the IRS. One need only look at state sales tax enforcement and collection bureaus to see this will not be a small undertaking. Some argue that the states can handle this for the federal government, but I don't think that will work. First, not all states collect sales tax, and I doubt they want to add a new agency to just help out the federal government. And even if the states do handle it, the federal agency will still need to collect from the states, deposit the money, and audit the state agencies. So, there is still a substantial bureaucracy, even if they shift most of the work tot he states.

Finally, there are all the avoidance schemes I described in my older writing. As I said above, these schemes will be even harder to detect, so investigation will be harder. This will necessitate an even larger investigatory agency. As investigations is already a huge part of the IRS, I doubt the Fair Tax agency will be any smaller than the existing one. In fact, given the need for more elaborate investigations, and the difficulty of tying tax payments to individuals, I would argue the agency will be larger than the IRS, not smaller.

Which brings us to my fourth objection, the prebate. As I mentioned before, this will entail a massive bureaucracy and carries with it a huge risk of fraud, but those are not my primary objections. I object to the prebate on two related grounds. First, as with our current withholding system, the prebate runs the risk of making people think of the government as a disburser of checks rather than the group taking our money, and it also ends up effectively placing every family in the US on welfare. It just sends the wrong message to have the state sending a check to everyone. Second, I worry that the prebate could be manipulated by a clever politician into a welfare alternative, the way the EITC was in our current system.

Finally, I worry that the FairTax may end up not being our only tax, despite claims to the contrary. I know the current bill says it won't take effect until the 16th amendment is repealed, but that only means the law will never take effect. A future, more realistic version may omit that provision and end up becoming a tax in addition to income taxes. But even if it doesn't, what is to prevent the state from adding a VAT? Or a high tariff? Or any number of other taxes that are not income taxes? Considering the relatively outrageous tax rate required to make the FairTax supposedly revenue neutral, if we add another tax we could easily see over 50% of our income going to the state.

Now, whenever I oppose the FairTax, some supporter responds by saying "so you must love our current system?" But that is just a   foolish response. I do not have to like the current system to think replacing it with another flawed system is a bad idea. I am not saying the current system is perfect, or even good, just that the FairTax has enough problems that it is not worth the effort it would take to substitute it for the current system.

So, what is the solution? Ideally, I would like to see an end of federal taxes and the substitution of the original scheme of state funding. As I explained elsewhere, there would be incredible benefits to this, not the least of which would be 50 different tax schemes in 50 different states allowing us not just to choose our tax system by moving, but to see the comparative benefits of each scheme.

But, since that is unlikely to happen soon, I suppose the flat tax is the fairest proposal yet. Yes, politicians will eventually amend it until it becomes some mess like our current scheme, but for a time it would be fair, and that is probably the best we can get given our current environment.

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* See here for details.

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POSTSCRIPT

For those who are interested, links to all my FairTax articles can be found here.