FairTax 1

A discussion I’m involved in on the MENSA site had one member independently think up the idea of replacing the income tax with a sales tax. He and I are very far apart politically (something he noted during the discussion), but I agree with him on this. There has been a proposal that is continually refined to accomplish exactly this, and it would end the IRS for good. Here’s their website, FairTax.org.  And then the arguments started…

One commenter needed the IRS:

The idea of abolishing the IRS is simple and bad. No matter what tax system is implemented, someone will have to produce regulations, collect the revenue, audit for compliance, and enforce the law. Shifting the burden to the states, as some propose, is not constitutional.

I didn’t think so, and so I replied:

Most states already have a sales tax system, fully implemented, already being audited for compliance. The only change here is the rate. If this is not Constitutional, it is not obvious to me where the problem lies. Can you explain? (Edit: He never did.)

The prebate (a monthly rebate paid to every household to pay taxes incurred at an average low-income level) simplifies things, and takes advantage of the fact that Social Security would still exist and still track incomes; they are efficient (as government agencies go) in delivering many millions of bank deposits every month, so the prebate would not be burdensome.

There’s an aspect not yet mentioned. Unlike Spain for example, the United States does not have a tax on the wealthy. Though “tax the rich” is a common mantra, and reflected in Obama’s State of the Union speech and a thousand earlier ones, we do not do that here. Instead, we tax high income earners, including income earned from working capital, regardless of whether any of that income is left over at the end of the year. As a result, a wealthy person could have a large check from the IRS due to paper losses, especially with odd Co0ngressional schemes such as the Katrina GO-Zone. (That deal, Public Law 109-135, allowed people to get a check back from the IRS for nearly half the price of any rental property purchased in the affected states, and launched an entire industry to exploit it.)

The FairTax would change this “tax on income only,” in a subtle way. People with wealth can spend money independent of how much they made or lost. That spending would be taxed, in a way that requires no exemptions, loopholes, or special Congressional deals. So, the tax would be applied to accumulated wealth as it was spent.

And as an aside, it would put the multi-billion-dollar tax loophole business out of business, and people like Warren Buffett would no longer have to spend tens of millions of dollars per year seeking to avoid taxes. Most corporate subsidies are implemented through tax structures and special alterations of tax code; all of that would go away.

And overall, costs would drop, and people at all levels would be motivated to keep the government lean.

I’m for it.

For the next couple of days, I will post answers to questions and objections that came up; if taxes are of no interest to you, feel free to skip. But if you’ve got thoughts or questions, I’ll try to address them. I have no connection to FairTax.org; I simply read their site and a number of studies of their approach, as well as some alternatives.

==============/ Keith DeHavelle