Countryman was kind enough to point out the section of the FairTax bill which deals with imports in response to my worries about offshore purchases. Now, I still think other nations may challenge this as a disguised tariff and try to have us punished under WTO rules, but I will handle that in another post. Instead I want to deal with how difficult this will be for customs to enforce, either making mistakes much more frequent or else placing exceptional new burdens on customs, and thus increasing costs in a way not foreseen in the FairTax proposals.

I have made no secret of my distaste for the way the FairTax distinguishes between retail and wholesale and new and used. The retail/wholsesale distinction is obviously handled in most state sales taxes, but that is partly because it is applied only to in state sales. (In theory it applies to all sales, but when was the last time anyone voluntarily remitted state sales tax on an out of state purchase?) Since that excludes almost all mail order, the state sales tax is almost always applied to point of sale purchases, mostly face to face, making it easier to enforce. When it is nationwide, it becomes much more of a headache. The state tax also does not apply to many categories, such as houses, where the FairTax would cause strange situations such as favoring investment homes over homes purchased as residences.

However, I think it is the lesser evil when compared to the new/used distinction. That distinction leads to huge economic distortions, such as stifling new home starts. But ignoring that, it also is at the base of many plans to avoid taxes. And, to be honest, the distinction is somewhat meaningless. Is a rebuilt engine new or used? How about an artifact freshly dug out of an archaeological site? It is the first sale, but hardly new. I think I could live with the retail/wholesale if the new/used distinction were dropped.

But that is not my point here, I am writing to talk about the effect of these rules on imports.

Most imports do not cross the border with their purchaser. They are shipped in by third parties and then delivered to their new owner. This is true of both retail and wholesale. Presently, duties are largely assessed on the category of good, not on distinctions such as retail/wholesale or new/used. So the job of customs is easy, they find out what is in the box, what it is worth, and calculate the duties due. If they see record they were paid, it goes through, if not, they collect the duties before releasing it. Very simple.

The FairTax makes that much harder. In addition to the traditional duties, now the customs agents have to decide if the purchase is retail or wholesale and if the goods are new or used. And these are not as easy to determine as everyone imagines.For example, two shrink wrapped DVDs being sent to an individual look like a new retail purchase. But they could have been rewrapped by a vendor, and thus used. Or the individual could take delivery, but for use in his video rental business, making it wholesale. It is not immediately evident from either the good themselves or the packaging or the recipient what sort of purchase this is.

Now, we could force all shippers to supply yet another document, but the lack of this document would cause ties ups, and it is also possible that fraudulent documents could be used, leading to a need for additional investigation. Obviously all of this could be overcome, but it would cost, and more than the FairTax advocates allow.

And that is really my point. The problems of the FairTax's distinctions are not impossible to solve, all of them can be solved, but it takes manpower and money, which the advocates claim they will not need. They claim collections can all be handled by state tax agencies, border collection can be handled by customs, and social security can handle the prebates. All with no additional cost. And that is a pipe dream. Not only will those agencies need massive increases in size, but there are other situations which none of the above can handle, as well as the task of coordinating all these agencies.

So, yes, the FairTax may eliminate the IRS, but they will still need a bureaucracy. It may be small, if they hide the staff increases in other departments and agencies, or it may be large. But the net change in bureaucracy will not be the massive decrease the advocates claim. And as "compliance costs" are where they intend to save money, the fact that the bureaucracy will be larger than they claim means savings will be much smaller, if they exist at all.

Now, I am sure the immediate response will be to claim that all of these functions will require no additional staff, which, to anyone who worked for a state or federal agency seems absolutely laughable. But, I think the best solution would be this. Let the FairTax advocates submit their full plan to an impartial agency, say the GAO, to estimate the costs of compliance. As the FairTax bill has been proposed, it should be possible to get the GAO to perform an analysis of the costs of the new proposal.

Admittedly the GAO may be a bit unfriendly to the proposal, but that may be a good thing. I know several experts have vetted the plan, but they all seem to be believers, so I am a bit leery. I would much rather have some skeptics bang on the numbers a bit to balance it out. If we had some competing figures, at least we could read both and see which seemed more believable.

As it is, we have only the testimony of believers, and the fact that they say it is a great idea does not carry as much weight as some think. It is kind of like the dedicated believer in some self-help scheme who tells you it must be true because his life is so much better. I don't doubt he believes it, but I want to hear from someone with less of a vested interest, and a bit more distant perspective, to tell me whether his life really improved or not before I jump on the bandwagon.

NOTE

As some of my complaints have been answered, a few have been shown to be invalid, and some new ones have been raised, I plan to put together a summary of the remaining valid questions, along with my new questions, as soon as I feel up to typing out a long essay.  As typing this took about three times what it usually would, that will probably not happen until tomorrow at the earliest.

ADDENDUM

Just to clarify the new/used problem a bit let me give two examples.

First, the sellers on Amazon who sell a mix of overstock and returns. They tend to sell them both at the same price. In the future, I suppose they would need to distinguish new and used. However, are overstocks new or used? And if overstocks are new, are overstocked items new if they were also sued as floor models?

Second, I worked in a record/tape warehouse (back when there were records). We would repackage returns and resell them as new. Hwoever, under the FairTax, would we have had to distinguish between the two?

Third, could companies claim wholesale goods as retail to save on taxes? For example, rather than buying materials wholesale and then building cabinets and selling them taxed as a new retail item, could I buy materials retail, then build the cabinets and sell them tax free as a combination of used goods? As the logic is only to tax things once, could this method be used to lessen tax burdens?

Actually, that does raise an interesting problem. The overstock resellers will probably lose quite a bit of business to the used good resellers in books, music and software, as the quality is almost equal, yet used has a 23%/30% price advantage. But that is just another of thsoe distoritons I mentioned earlier. The new/used distinction will cause the economy to reshape itself in ways we do not now anticipate. Which makes estimates of the impact of the FairTax somewhat suspect.

But, as I said, all fo that will be summarized next post.