Flawed Tax

So what is the so-called “FairTax”? It’s a proposed national sales tax that would, in theory, replace all other federal taxes. Advocates of the plan argue that it would “simplify” the tax code by getting rid of the estate tax, personal income tax, payroll tax, corporate income taxes and the IRS itself.

The FairTax, however, would only replace one government agency with another, while shifting the tax burden onto middle- and low-income families.

The 50% Sales Tax
The plan is rife with distortions. For example, supporters claim the FairTax is a 23% sales tax. That claim, however, uses misleading math. For example, if you bought a $100 item, and a $30 tax were added to the price of that item, you would incur a 30% tax, right? That’s certainly the way every other sales tax in the nation is calculated. In FairTax math, it would be a 23% tax, since 23% of the final price ($30/$130 = 23%) is the tax.

That’s only the beginning. In calculating how much of a sales tax it would take to replace all other federal taxes, the crafters of the FairTax included purchases made by the government itself. So, if the government buys a bomber, it would pay itself a tax. If the government builds a school, it would pay itself a little more. The problem here is that the government paying itself does not actually raise revenue. When this type of circular math and other distortions are taken out of the tax equation, it would take a sales tax of over a 50% to replace current federal taxes. Imagine paying a 50% sales tax on the next house you buy (Yes, it would apply to new homes)!

Even the Bush Administration’s tax reform panel recognized these gross miscalculations and chose not to endorse the national sales tax idea. The panel noted that the tax rate would have to be between 34 and 49 percent just to replace the federal income tax, let alone every other federal tax.

Another Tax Break for the Rich
On top of the distortions, the FairTax would shift taxes onto middle and lower-income families. Like Tennessee’s sales tax, it would not apply to purchases, such as stocks and bonds, savings and private school tuition, typically made by higher income families. At the same time, applying it to such things as medical expenses and hospitalization, would essentially kick people when they’re down. Since these medical expenses could easily surpass families’ income during a crisis, the FairTax would force them to pay much higher taxes as a portion of their income in bad years.

In the end, what progressive features our federal tax system has left, after years of tax breaks for the rich, would be replaced with a tax system where the more you make, the less you would pay.

Proponents of the plan attempt to blunt this fairness argument by offering rebates for the amount of sales tax paid on family purchases up to the poverty level. Even with the rebates, low-income families would still lose, as would most families. A state-by-state analysis from the Institute on Taxation and Economic Policy (ITEP) found that under the FairTax plan, taxes would rise an average of $3,260 a year for the bottom 80 percent of Tennessee taxpayers. Only the top 5% would actually save, while the richest 1% of Tennesseans would get an annual tax cut of $162,000 each. See table.