Sunday, November 30, 2008

A Case Against the "Fair Tax" - Part 1

There are some people in the US who want to impose a new 23% sales tax on every thing and service you buy. They expect that this tax will replace the progressive income tax system and close the IRS doors. Some of the advocates of this fairy tale tax are among the richest in America, although not everyone who supports this new tax is rich.

No tax is fair to everyone. The term, "fair tax" is an obvious oxymoron. There is no way to structure a tax system that is "fair" to everyone, at least in each payer's mind. For me, the "fair tax" would not be fair at all. I would pay more tax as I explain below. However, I not only oppose this tax based for its negative effect on me personally, but I also oppose it on philosophical grounds.

I favor a progressive graduated and simplified income tax system. Sure the rich pay more under such a system and many probably don't like it, but does it keep them from continuing to make more money? Not a chance. I believe that our American system has given entrepreneurs the chance to become rich. Paying more tax than the middle class and the poor is the price they pay for the opportunity to be rich.

To characterize this tax plan as a "fair tax" is just a sales job that its advocates use to win converts among people who will end up working against their own financial interests. Its advocates do cross party lines, although in recent years, the plan seems to be a favorite of conservative Republicans. No surprise there.

The first attempt to pass a VAT tax in Congress failed in 1940. Starting in the 1960s, there was renewed interest in a VAT tax. Former Sen. Fritz Hollings (D-SC) introduced a VAT-type tax bill, but it never came to a vote.
In 1988, Senator Ernest Hollings from South Carolina introduced a bill calling for a five percent VAT to supplement the income tax. The tax would have become effective in 1990. Half of its revenues would be set aside to reduce the federal deficit. Food, housing, and health care would be exempt from the tax. [Trebby]
However, the current legislation before Congress is meant to totally replace the income tax, unlike Sen. Hollings' proposal.

I am a single filer in the 25% income tax bracket. After deductions, exemptions, etc., my effective tax rate is more like 13%, according to the TurboTax calculation on last year's return. In a few years, I will pay far less as a percentage and in actual dollars. I will get a senior exemption at age 65. My Social Security income will not be taxed, even by the state of Georgia. If Obama follows through on a campaign promise, retirees earning under $50K a year will pay no federal tax, then my tax bill would be at or about $0.

So, why should I want to pay a 23% sales tax on everything? "Splain it to me, Lucy." When I retire, I will probably spend every penny I earn as income and I would not qualify for any poverty-level rebate under the legislation.

Now, I agree that we can make the form and rules easier, plug the loopholes, and lower the tax rates for middle and low income filers. I hope Obama will work to make the forms easier for most folks, although TurboTax is low cost and works fine for me.