What about true tax reform? How much must pretax prices go down before you're comfortable paying an additional 30% on your home purchase, kid's tuition and doctor appointments? Increasing the cost of buying a home by 30% would not stimulate the housing market. On a house currently selling for $200,000, a 30% tax means you have to borrow $60,000 more just to get in the door. That doesn't make a lot of sense. Arguments that the Fair Tax would eliminate the underground economy are less than persuasive. Add a 30% federal hit to a 6% state sales tax, and you have created a golden opportunity for smuggling. Look at what happened to cigarettes when states increased their prices with higher sales taxes. They're now marketed out of the trunks of cars. Those cheating on their income taxes would cheat on their sales taxes. Just substitute the term "black market" for underground economy.The idea that the Fair Tax would eliminate complexity in the tax code also fails to recognize reality. Special interests would almost certainly hire lobbyists to propose exemptions for such things as home purchases, medical services and education. I spent some time in Washington, D.C., and I never met a lawmaker who wanted to run for re-election on the platform of hitting housing, medical services and education with a 30% tax.Bush administration economists have projected that the Fair Tax would actually increase taxes for those making more than $30,000 and less than $200,000. That's because a flat 30% rate on their gross consumption would suck more dollars than a graduated rate on taxable income, after deductions, exemptions and the like. Taxpayers in that range would lose the benefit of the 10%, 15%, 25% and 28% rates on their taxable income.Transition rules -- the rules that would apply as one shuttered income taxes and started up the Fair Tax -- would cause chaos. Consider your Roth IRA account. You've already paid income taxes on those dollars. You wouldn't be happy when you spent the money and had to pay a tax again. Somebody would have to enforce the sales tax law or it would have no teeth. So, in practical effect, the plan would not eliminate the IRS. The plan would just convert its function from income-tax compliance to sales-tax compliance. Some agency would have to step in.Would the national sales tax be enough to raise as much revenue as our current system? Yes, if the rate was high enough, no if it wasn't. I'd bet everything I have that the rate wouldn't remain fixed.The poor would be paying a much higher percentage of their earnings in taxes, which would be a regressive tax system. |