RSS Feed MenuSome days ago, I wrote an article itemizing the strengths and weaknesses of a Mike Huckabee candidacy. I praised the former governor’s intelligence and civility – but worried about his attraction to the bunkum idea of a Fair Tax. Gov Huckabee replied with a full-throated defense of the plan’s merits. Huckabee finished second in the delegate count in the 2008 nomination contest. He has to be considered a front-tier candidate for 2012. The merits (and demerits) of a Fair Tax thus remain unfortunately very relevant.
So we return to the debate with a series of four posts on the Fair Tax plan by a leading student of the tax system, Hirschel Adler. In my opinion, he leaves the concept a smoking ruin. Click here to read the entire series.
-David Frum
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We are told that the FairTax will close the doors of the Internal Revenue Service. Apparently, the thought is that closing the Internal Revenue Service will eliminate the $12 billion IRS budget. Let’s give the total administrative expenses to the federal government under the FairTax a bit of thought.
Our first administrative problem is the statutory cost of collection. The seller and the collecting authority each receive ¼ of one percent of the FairTax collected on the gross sale. This is an administrative cost of ½ of 1 percent of the FairTax collected on every retail sale. These two fees on a $10 trillion base represent total fees to the companies collecting the FairTax and the state administrating agencies of about $15 billion.
Undiscussed in the FairTax literature is the cost of setting up the systems to administer the FairTax. The recent census cost $13 billion and did not require verification of legal status or creating computer systems to maintain the lists of every registered family in the country. The setup cost of the FairTax with competent systems could be multiples of the cost of the census.
Our second administrative problem is Social Security. Currently, there is little fraud in Social Security from the benefit qualification side because gaining social security retirement benefits requires an employee to make and the employer to match social security contributions. For a self employed individual to qualify for Social Security, he must report taxable income. This relationship between payments and benefits goes away under the FairTax. Under the FairTax, it does not cost the employer a dollar to add a brother-in-law to his payroll reporting. Under the FairTax, the self employed taxpayer need only report a gross profit on taxable purchases to obtain Social Security benefits. Note, there will be filings necessary with respect to Social Security and with no Internal Revenue Service, Social Security will need to hire more than a bevy of individuals to audit all filings. Expensive.
The FairTax proponents will argue that the time (money) saved in no longer being required to file income and payroll tax returns more than offsets the increased costs of the FairTax to the government. The reader can make his own judgment here. The one certainty is that the cost of collection will increase dramatically for the government.
More to come…
sinz54 // Sep 1, 2010 at 11:33 am
Undiscussed in the FairTax literature is the cost of setting up the systems to administer the FairTax.
You would need a World Government to enforce it.
Because sellers will evade it by setting up websites in foreign countries to sell their goods.
Many of us already buy lots of stuff on the Internet, from a zillion different websites, both domestic and foreign. Just about anything is for sale: TV sets (e.g. Amazon.com); cars (e.g., Carmax.com). Try collecting the FairTax from all those sellers.
As it is, Internet shopping lets us evade state sales taxes. Theoretically we’re supposed to pay state sales taxes on anything we buy over the Internet from a state that has such a sales tax. But nobody enforces it, nobody.
And with Ebay.com and Craigslist.org, anybody–you, me, anybody–can sell something we have in our possession. How are you going to enforce the FairTax on all those transactions, especially those where the seller is overseas?
Worldwide Internet shopping makes a Fair Tax impossible to enforce.
Just like it has made the laws against porn impossible to enforce.
All the Fair Tax will end up doing, is killing “bricks and mortar” stores once and for all. Everybody will convert to Internet shopping.
ZombieTory // Sep 1, 2010 at 12:39 pm
I’ll echo what Sinz54 wrote. A neat little trick in avoiding sales tax is to buy from the UK. In Europe VATs are included in the listed price of most products and many companies have a tendency to make the listed price in different countries match roughly after exchange rates. Savvy online retailers in the UK have been using the VAT portion of a price to subsidize overseas shipping costs (VAT isn’t charged on overseas orders). So, if you can find such a retailer you can get your goods with free shipping an no sales tax.
Beefing up customs would be a big part of Fair Tax enforcement. However, all the customs agents in the world won’t be able to collect tax on electronic products such as e-books, music downloads, etc… In the “digital economy” that could be a big loss in revenue and an incentive for business to move offshore.
LFC // Sep 1, 2010 at 2:21 pm
The devil is always in the details, ain’t it?
PracticalGirl // Sep 1, 2010 at 4:00 pm
Fair Tax or Flat Tax, each has its own merits and pitfalls. But don’t we also need to measure the “costs” of either program in terms of jobs? How many jobs in the IRS alone would go away without the complicated tax codes we have? How many ancillary support professionals (tax accountants and lawyers and their staffs) will be shaved from payrolls as their utility to clients goes down? Far too many American incomes rely on the tax codes, as written and getting more complicated, for a simplification (if either actually does this) to be easily adopted.
Also not discussed is the IRS’ potential role in administrating the new health care laws. Isn’t the agency in charge of some of that? Honestly, because of the high rhetoric involved, I have lost the details. But if the IRS is supposed to play a role, then what agency does its work if it is severely cut or goes away entirely?
drdredel // Sep 1, 2010 at 4:31 pm
@PracticalGirl
I agree with your intent, but I think your argument is flawed. Obviously it’s best when everyone is employed, but if it can be shown that the IRS is an outmoded or unnecessary agency (and I’m not saying it is, I’m just following your train of thought) then I don’t think the argument for keeping it should be “but it gives people something to do”. If that were the case we’d never have gone through the industrial revolution.
PracticalGirl // Sep 1, 2010 at 5:06 pm
drdredel:
The argument I present isnt’ necessarily my personal view. But can your imagine the fight in this country if a new, more simple tax code is seriously proposed? The tax attorneys and CPA lobbies have been filling their war chests in anticipation of this possibility. Also, I hear what you’re saying about outmoded/unnecessary agencies employing people just for employment’s sake, but that doesn’t necessarily mean that “We, the People” won’t demand that the governement keep the jobs intact. Some strange stuff going on out there. Never forget: In the health care debate, the medical/insurance lobbies plus the loudest so-called conservatives convinced a large segment of Americans to fight for things that are essentially against their best interest.
Just saying the fight would be huge.
Claude // Sep 1, 2010 at 6:07 pm
It’s a dubious assumption that sellers and states would be willing to collect all that money and send it to Washington, given the tiny percent they would get to keep for their trouble. It would be awfully tempting, wouldn’t it, to please customers and constituents by making sure that enforcement was somewhere between lackluster and nonexistent?
Claude // Sep 1, 2010 at 6:13 pm
PracticalGirl,
Don’t assume that accountants are obstacles in a campaign to simplify the tax system. Accountants view complexity the way firefighters view arson or dentists view cavities. It may generate work, but they recognize that the world would be a better place if the work weren’t necessary.
What the Fair Tax Really Costs | FrumForum | Tax Attorney State // Sep 2, 2010 at 3:32 am
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wnettles // Sep 6, 2010 at 1:06 pm
Ok, if you don’t understand or like the idea of the FairTax, then, at least, just abolish the income tax. Let the federal government do with less. They can. They have in the past. They can in the future. Of course, the loss of income from not fleecing of the citizenry would result in huge cuts and the elimination of a number of socialist programs that have crept into our nation like a plague of cancers over the last hundred years or so. I will not weep for them. I will still do my part as an American to help the poor, to teach our young, and to defend our nation. But I will not weep for the loss of socialist, tyrannical programs of wealth redistribution.
So, either replace the income tax with the FairTax, or, do without all the socialist programs that you have become so accustomed to. As for me and my family, we will exist in our freedom and liberty centered environment and exclude the socialism from our lives as best we can. If it does not exist, we will not miss it at all.
wnettles // Sep 6, 2010 at 1:16 pm
@PracticalGirl Just a note for the record, we currently have a Flat Tax right now. It has been amended approximately 17,000 times since it was enacted in 1986. How’s that working out for you?
The problem with the Flat tax is that it taxes income and not consumption. This limits it’s tax base to about 1/6 of the amount that would be subject to a consumption tax. Let’s see now….
6 times the tax base, well, I dunno, but, I would say that a consumption tax would be much more stable, even in times of economic challenge, than, say, an income based system of revenue collection. When the unemployment rate hits double digits and climbs, what happens to the tax revenue collected on all of those jobs that no longer exist? It goes away.
Under a consumption tax system, even if folks don’t have a job, they still buy things and would pay tax on the new items and services, thus stimulating economic growth and jobs. The prebate function of the FairTax would allow even unemployed to continue to “churn” the economy and stimulate economic growth, thus enabling job growth.
It is the most fair system of revenue collection ever conceived. However, if you have a new idea to create wealth out of something else besides income or consumption, please share with the Congress. They certainly need some new ideas. The old ones are not working anymore.