In this political season there are many ideas being debated to jump start our economy. Reform of the tax system is a high priority with many alternatives competing for attention. The “Fair Tax” is a proposal to replace the existing income tax system in favor of a nationwide sales tax. Advocates tout the efficiency of the system, the economic benefit of not taxing investment, and abolition of the IRS. It may very well be a better system if you are starting a new country, and don’t have another system in place. Conversion to a sales tax from our current income tax based system seems be fraught with difficulties and calls into question the term “Fair”.
Supporters of the fair tax point to tout the fact that you will be able to withdraw funds from your IRA tax free. While that is true, what are the ramifications on the dollars currently in after-tax savings or Roth IRA’s? These savings have been built up over these people’s lifetimes, and have been saved after paying income taxes when earned. Institution of a sales tax will in effect cause all of these dollars to be double taxed, since they will now be taxed again when spent.
Another selling point of the “Fair Tax” is the abolition of the IRS. The thought that the government is out of our lives by eliminating the IRS is wishful thinking. Most European countries have instituted a similar tax, and have created large government bureaucracies to enforce these taxes. Politicians have also responded by handing out political favors in terms of exemptions much like our income tax deductions. Those who think this will not happen in the US are being naïve.
Replacing the income tax with a sales tax would require repeal of the 16th Amendment to avoid the problem of getting both an income and sales tax. In fact the replacement amendment would have to strictly prohibit an income tax. This would be required to eliminate some “enlightened” Supreme Court from discovering the power to levy an income tax in the pages of the constitution. Even with this necessary solution the process of debating and passing a Constitutional amendment is a long and difficult one. This can jeopardize the opportunity for change that is available now.
There needs to be serious debate on taxes, starting with how large a government we want. Advocating a wholesale replacement of our system with a plan that has unresolved issues seems to be a waste of time and resources. Those who advocate smaller government and a tax system that promotes growth, need to rally behind a simpler flatter version of our current system. A system that treats after-tax savings properly and is likely to pass seems to be the best alternative. These points make the “fair tax” an unrealistic and perhaps “unfair” idea.