Why would the Fair Tax Act not work?

Question

If you can refute it with data, I would appreciate it.

Answer 1

The first 2 answers do a good job of hitting on some issues, but MUCH more prominent than either of them are the implementation issues. Basically, as soon as the fair tax is implemented, you have everyone paying tax all over again on any pre-taxed savings or investments they have.

Consider, if you earn $100,000 and paid $30,000 income tax (thus your net pay was $70k...just using round numbers) and out of that $70k, you invested or saved $20k...that is $20k that you can do whatever you want with. Now consider the fair tax is implemented, now you have to pay 23% MORE on that $20k? How is that fair?

Now of course this is only an implementation issue because once it is implemented and you earn $100k, of course then you keep the $100k and no problem. But when you consider how many people have savings, investments, and retirement nest eggs built with pre-taxed dollars you really get an idea how bad just the implementation of this would be, let alone some of the aforementioned issues.

I know you asked for data but you do not need data to understand this very simple concept.

Answer 2

First off, a sales tax is a regressive tax. It makes no differentiation of the taxpayer's ability to pay the tax. The working poor would be decimated by such a tax. Consider this:

A single working mother with 2 kids. Deadbeat dad pays no child support and quits any job as soon as the wage garnishments start. She pulls in $16k a year as a bank teller or a head cashier at the local Wal-Mart. She doesn't pay any income tax due to her income and 2 kids. The paycheck isn't enough to cover all the bills and by tax time she's 2 mortgage payments behind and the mortgage company is threatening foreclosure. The $4k EITC she gets on her tax return brings the mortgage current, fixes the kids teeth, and puts a set of tires on her 12 year old car which thankfully has held up fairly well but is looking more tired by the day. They survive, but only just.

OK, now with a 25% national sales tax, let's look at the picture. Of her total $20k annual cash flow, about $12k goes for taxable goods and services. She now has to shell out $4k in sales tax. She has also lost the EITC so her cash flow is now down to $12k from $20k with the sales tax bite. Sometime in July or August of the first year of the "new and improved tax" she loses her home to foreclosure and she and her kids are now on the street. Her home wasn't much but it was hers. Unfortunately rents are higher than her mortgage payment was so instead of a modest 3 bedroom home they now have to cram into a 1 bedroom apartment in a crappy area.

I have 2 friends in exactly this situation. Our current system does need repair, but an insanely high sales tax is NOT the answer.

That's only the beginning of it. Now we need another layer of government involved in ALL commercial transactions to ensure that the tax is collected and rendered. Business has enough trouble keeping up with payroll and other taxes. Adding another sales tax to track won't save any money, either for business or the government.

Whenever you levy a high tax on goods, people will look for ways to avoid the taxes. Look at what happened with luxury yachts back in the 80s. A high "luxury" tax was levied on them. All it did was drive the buyers to the Caymans and Bahamas for their purchases. The only loser was the US based retailers. And look at the black-marketing activities in states with high tobacco and alcohol taxes. Most of that activity is run by organized crime and gangs. Nice folks to do business with, and that's exactly where the poor will be going.

Answer 3

I just replaces one government agency with another.

The fairtax people say that "poor" people would get a pre-bate every month to offset the 30% tax on goods. Who would determine who got this pre-bate? Would a return have to be filed every year? every month? There would still have to be W2s and 1099s and the like for people to prove their income.

The government would have hire thousands of new auditors for compliance purposes. Some of the biggest tax cheats I have seen are small retailers who cheat on their sales tax collection. An extra 30% tax collected would be just to much temptation for some people.

Also, the fairtax people say that the states would do the collecting and forward it on to the feds. What about the states that don't have a sales tax? How would they collect it? The certainly wouldn't do it for free.

Lastly, it would create a huge black market for goods. A $10,000 item would now cost $13,000 and, if you could get it for $9000 on the street with no tax, who wouldn't?

The fairtax theory did exactly want it was designed to do. Sell lots of books. As far as being a legimate tax collection process, there are just too many unanswered questions and variables that have not been addressed.