Reprinted with permission from an unnecessarily hostile editorial by
Matthew Holmes. Truth be told, his article did nothing to convince me that the tax
is a good thing. But it convinced me to wade through the full text of the legislation, and I’ve
decided that not only is the Fair Tax Act justifiable, it is the ideal
legislation for progressive Democrats. I’ll explain why.
I used the word progressive up there in my introduction. Exactly what
that term means can be a little shaky sometimes, but when we’re talking about tax
code, it has a pretty clear meaning: people with more money shoulder more of the
tax burden. Using this definition, sales taxes are usually something progressives
would avoid, since they often hit the poor the hardest. Most sales taxes make life
considerably harder for the impoverished, because they increase the cost of basic
necessities, making it harder for people to get by.
A National Luxury Tax
This proposal isn’t like that. The secret lies in Title II, Sections 301-303,
a provision called the family consumption allowance.? These provisions allow families
to purchase necessities without paying taxes on them. (”Family” means “1 or more
family members sharing a common residence”).
This exemption does something interesting: it means that the government
would only get taxes from the sales of nonessentials, things that the impoverished,
by definition, don’t buy. By allowing essential products to be purchased without
the tax, it turns the “national sales tax” into something more like a “national
In other words, people who spend most of their money on things like food,
clothing, and medicine end up paying almost none of the tax
burden, while people who spend a greater percentage of their income on luxuries
pay a greater percentage of the tax burden. People who don’t have very much money
almost uniformly fall into the former group, while people with lots of money almost
uniformly fall into the latter group. People with more money shoulder more of the
tax burden, it’s as progressive as it gets.
Helping the Needy
The family consumption allowance is a rebate, mailed monthly by the Social
Security Administration to families of 1 or more(?!?). According to II 301, the
amount of the rebate check is equal to the product of the tax rate and the poverty
Using this definition, families making (and thus spending) less
than the poverty level could conceivably receive more money
in their rebate check than the actual sales tax rate.
This is a similar concept to the Earned Income Tax Credit currently administered
by the IRS, with a few exceptions. Unlike the EITC, it the consumption allowance
can be claimed by the unemployed. The consumption allowance would also require a
lot less paperwork than the EITC just names, address, proof of citizenship, etc.
That’s a good thing for families who are especially time-constrained or people who
are poorly educated. And statistics show that such families are exactly
the ones who would need such a credit the most.
Of course, the Fair Tax Act would also virtually eliminate tax evasion.
Right now, companies can move their assets offshore and avoid paying U.S. taxes
on them. Some people, particularly business executives and accountants, consider
it to be good business.
I, along with most Democrats, consider this to be tax evasion. The Fair
Tax Act would put an end to it. The Act would mandate that anything sold
in the United States would incur U.S. taxes. There’s really no way to outsource
that. Businesses couldn’t get around it by moving production to China, or by moving
their income to Bermuda. If they want to sell their product in America (and they
all do), it will be taxed.
There are no less than a thousand articles out there that deal with the
tax evasion issue, so I won’t say much more about it, but corporate tax evasion
is contrary to the spirit of a progressive tax system. It’s currently legal in many
forms, thanks to loopholes in our indecipherably complex tax code. That’s bad, and
this would put an end to it.
The Act would also provide a serious new tool in the attempt to end illegal
immigration. It wouldn’t involve any weapons or border guards or checkpoints or
fences and it wouldn’t cost the government a single extra cent. Again, it has to
do with the consumption allowance that I talked about a few paragraphs back.
See, only citizens are eligible for the credit. That effectively increases
the cost of living for illegal aliens (okay, okay, “undocumented immigrants”) by
23% (assuming, of course, that they live under the ceiling for such a credit, which
I’m just guessing that most do.
Since the primary motivations for the border jumpers are economic, this
throws a wrench in the whole concept of entering the country
illegally. It gets at the reasons that illegal immigrants are
trying to come into America, which is exactly what a lot of Democrats have been saying
we should do all along.
Where Does All The Money Go?
The budget of the IRS is currently over ten
billion dollars per year, plus the equivalent
of a hundred thousand federal employees. Let’s think about that for a moment: ten
billion dollars and a hundred thousand people? what could we do with that?
Some of it, of course, would go to the collection agencies established
in III 302, but not nearly the scale of the IRS. For one thing,
there’s a lot of administrative overhead that gets out of the way because the new
Federal Sales Tax Bureau would, for states that already implement sales tax, be
working with an infrastructure that is mostly already in place.
So let’s look at what we could do with the money, and with those employees.
Let’s assume that a high school can accommodate 2400 students for 3 million dollars
a year. That’s an average in some places it costs more, in some places less, but
it’s a fairly realistic estimate. $10 billion would cover the entire cost of operating
over three thousand high schools, that’s the total cost of educating 7,200,000 students.
And that doesn’t include the agency’s hundred thousand employees. Let’s
say we divided them evenly among the states and put them to work in DMV offices.
Anybody who has ever applied for a driver’s license can appreciate the notion of
having 2000 extra people in the DMV office. We could do that, in addition
to the school thing, for no more than we are already paying just to operate the
No Tax Cuts for the Rich
The income tax and payroll tax systems that HR25 would replace have not
been working out too well for progressives in the past four years. Why? Because
the systems we have in place are too obscure. How many people even know what it
means to “tighten the tax brackets?” How many people even realize that their income
is not all taxed at the same rate?
The simple fact is, George Bush’s “tax cuts for the rich” that were so
offensive to the idea of a progressive tax system were only possible
because the tax system is so unbelievably complex. Under the system that HR25 proposes,
targeting tax cuts at the top 1% of income earners would be not only politically
impossible, but literally impossible. Why? Because the system
inherently gets a greater percentage from those with more disposable
income. (See the section above, “A National Luxury Tax”).
Unlike the current system, the national sales tax would do this without
any disparity in the established rates. In other words, the only way that politicians
could shift the tax burden away from the rich would be to explicitly give
them a lower rate. That, my friends, sits in the dictionary as the cardinal
example of “political suicide.”
But Shouldn’t Businesses Pay Their Fair Share?
One of the more obvious questions that comes up when we talk about replacing
our entire tax system with a sales tax is whether it shifts too much of the burden
away from business. A few people go so far as to say it shifts the entire
burden away from business. And quite honestly, I cannot see how that is the case.
The argument that a sales tax shifts the burden away from businesses is
fallacious because it assumes that consumers have unlimited
disposable income. I will concede that if you are rich enough to believe that, you
should absolutely oppose HR25. Most people I know do not have
an unlimited supply of money.
If consumers had unlimited spending money, then the businesses could go
on as usual. They’d hang on to their existing margins, pass the entire cost of the
tax on to consumers, and the price of everything would go up
by 23%. Again, that’s assuming that every customer has unlimited money.
In the real world, if the price of almost anything
were to actually go up by 23%, they would price almost all
of their existing customers out of the market. We’re talking a serious hit to their
sales. So, we can expect most of them to change things to keep their numbers up to
decrease margins in exchange for increased sales. They don’t have
to, but those who don’t will find that most of their customers can’t afford their
products. No customers=No income=No business.
There is actually an exception to this. Businesses that cater almost exclusively
to the indescribably wealthy could conceivably pass the entire cost of the tax to
customers, but keep in mind that that is a relatively small market (and will remain
that way), simply because so few consumers fall into the “indescribably wealthy”
It’s kind of hard to believe that I’m finishing up an 1900-word analysis
of the tax code. I mean, who am I to evaluate the complex intricacies of tax law?
Ordinarily I’d defer to the accountants on an issue like this. After all,
they’ve studied economics and spent years of their life working with and around
the tax code. They know taxes like some people know their way
home from work. I, by comparison, am a rank amateur.
But this is an issue where deferring to accountants is profoundly dumb.
The accountants, as people who make their living off of a tax code so complex that
only trained professionals can understand it, are inherently biased against a tax
code so simple that garbage men can understand it.
And so I don’t, in this case, trust the people who I would usually look
to for analysis. Instead I’ve done my own analysis, and I’m liking the prospect
of a tax code that even I am able to analyze. Pretty cool.
Like most progressive Democrats, I’ve learned to be pretty averse to sales
taxes. But in this case, we have a proposition that actually bolsters everything
that progressives fight for in a tax code. I don’t believe that any progressive
worthy of the cause can oppose HR25, and those who give any thought to it should
wholeheartedly support it.
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