This Ain't Your Daddy's Tax Reform

Americans are slowly opening their eyes to the fact that our tax system needs sweeping reforms in order to both improve our quality of life and to maintain a competitive edge on the surging economies of China and India.

Most of the grassroots campaigning for reform are coming from two separate camps: the FairTax crowd, led by Neal Boortz and Congressman John Linder, and the Flat Tax crowd, led by Steve Forbes. While both camps recognize that the complexity of our current tax system wastes valuable resources and contributes to the outsourcing of capital, they differ significantly in their views on how to simplify the code.

The trendy solution offered up by “Boortz Libertarians”* is an across-the-board 23% sales tax. Proponents of the FairTax argue that by removing all corporate taxes, market forces would drive the price of goods down by approximately 22%, perhaps even more. The 23% sales tax would then be applied to new goods and consumers would be more than willing to pay for it because they would have more take-home pay.

As a hedge against opponents who would claim that this tax will hurt the poor, a monthly allowance of several hundred dollars (the amount varies upon eligibility) would be paid to EVERY citizen to allow for the purchase of necessities. FairTaxers claim that government revenues would soar due to the decreased likelihood of fraud. Illegal immigrants, tourists, and undocumented workers would all be forced to pay a tax, which means a greatly expanded revenue base. No IRS, no complex tax code, and no more lobbyists.

This all sounds excellent, and the FairTax crowd is on the right path, but there are a few problems with this proposal. First and foremost, the issue of what constitutes a “new good” will come under scrutiny. Consider the barely regulated internet with sites like E-Bay, which serves as a base of operations for various small businesses. I personally bought 4 or 5 new t-shirts last year on the internet without paying state or federal sales tax. Expect two things to happen if the FairTax were to pass: 1. a large black market (or shadow economy), and 2. more complex codes in response to the fraud. Now, just who would enforce these codes if not the IRS? There would still have to be some bureaucracy in place whose sole purpose would be tax enforcement.

Second, the angle that the FairTax would all but eliminate lobbying as a force in Washington, D.C. is off-base. This is largely due to the monthly necessities allowance clause attached to the tax. What constitutes a necessity? Lobbyists would jump at the chance to answer that question for congress on behalf of their clients. Can’t you just see Starbucks lobbyists arguing that their coffee jumpstarts our economy’s productivity every morning? It could easily be said that the necessities list will be capped at bread, milk, toiletries, etc., but human nature being what it is, and politicians being who they are, do you honestly believe that it would stay that way for long?

The third and final problem with the FairTax is the implementation itself. In a perfect world, we could enact this tax quickly and efficiently and no one would attempt to exploit it. In the real world, this tax would represent a massive shift in the way our country operates, and that uncertainty will ultimately be the reason for this idea’s demise. The FairTax is better than the current system, but not as good as the other option--The Forbes Flat Tax. It is time to focus our energies on the more feasible option.

I'll tell you exactly why in my next post.

*Read: Conservative Republicans