The FairTax Solution
Eliminating the terror that is April 15
By Steven Martinovich
When Mary Josephine Ray died this past March 7 at the age of 114 years and 294 days she had three remarkable achievements to her credit, though only two noted by the media. They dutifully reported that at the time of her passing Ms. Ray was the second oldest person in the world and the oldest in the United States. What they failed to mention was that she was one of seven or so Americans who could clearly remember the day when there was no federal income tax. It was a constitutional amendment ratified in 1913, when Ms. Ray was but 17 years old, which introduced a system that is universally despised by Americans today, one that will likely survive any supercenturians born today.
That is, unless Ken Hoagland fails in his attempt to overthrow the current regime. Hoagland is a proponent of what has been dubbed the "FairTax", a replacement for the federal income tax system that promises transparency and less pain for Americans. Outlined in his engaging effort The FairTax Solution: Financial Justice for all Americans, the FairTax is an idea that seems almost too good to be true, probably why most hearing about it their first time are understandably sceptical that such a simple scheme could replace the byzantine federal tax code, eliminate the IRS and boost the U.S. economy.
The core of the FairTax proposal as Hoagland tells it is quite simple. Instead of various withholdings on your paycheque, items like FICA and income tax, you take home your entire earnings – minus state taxes, of course. Instead, all goods are subject to a 23 per cent retail tax, a sum that Hoagland argues would make it a revenue neutral exercise. However, instead of punishing earning and inputs into the economy, the focus is shifted to leveraging consumption. It is a system he believes will boost American economic growth, attract foreign investment by the trillions of dollars and reduce corruption.
The obvious objection, of course, is the notion that the average American can withstand a 23 per cent retail sales tax but Hoagland has an answer: the prebate. Each month American families receive anywhere from hundreds to thousands of dollars, calculated on what they are likely to spend on basic necessities. After that, it's figured, that spending will be discretionary and Americans will be on their own. Since take-home pay will be higher, and discretionary spending is by its nature voluntary, most Americans would be better off under the FairTax then the current system.
The benefits don't stop there. Since the retail sales tax is obvious at the cash register, Americans will have a true sense at the cost of government – eliminating the distance between the people and Washington, D.C. The underground economy would be eliminated since its irrelevant how you earn your money since everyone has to spend it at some point, something even illegal immigrants, gamblers, prostitutes, drug dealers and organized crime must do. Domestic and foreign investment would explode as inputs to manufacturing would be tax free, something no nation on Earth can claim now, and all investors would enjoy tax free income, allowing more of it to be reinvested for growth.
Even corruption would be lessened, argues The FairTax Solution, as lobbyists wouldn't be able to pour money into Washington, D.C. to pay for access, politicians couldn't game the system to help their allies and private interests would be forced to play on a level playing ground. Economic growth would explode into the double digits in a few short years and Americans would see decades of prosperity as the shackles of the federal income tax are removed, enabling time and money to be used more productively. It's a system so good that one has to wonder what's wrong with it.
A careful reader will note, for example, that Hoagland fails to address what would happen if retail sales fall precipitously – as they did during the recent recession when they fell over 10 per cent year over year in 2009. Though federal taxes would disappear, there is still plenty of economy-distorting economic policy the federal government engages in that could cause another severe recession and putting pressure on lawmakers to make up for if the crunch lasts long enough. Nor does Hoagland investigate situations where high sales taxes already exist – and several states would have been good territory to explore – and whether that prompts more people to avoid compliance by moving to a shadow economy of cash.
As Hoagland argues, however, there is no perfect system, merely ones better than others. If those who had pushed for the income tax back in the 19th century as a class warfare gambit to soak the rich had an inkling of the unintended consequences of their actions, it's hard to believe they would have proceeded against the Founding Fathers' wishes against such a thing. Either way, holding the FairTax proposal to a higher standard than the current federal income tax system is hardly fair.
The chances of seeing a FairTax, despite Hoagland's optimism, are probably extraordinarily slim. Both Republican and Democrat lawmakers benefit from the current system in enhanced power and future careers as lobbyists. Conservative and liberal commentators attack the proposal for any number of reasons, sometimes to try and damage a campaign and other times to aid one. The media either distorts their coverage on the matter thanks to provided talking points or ignores it entirely. Explaining how the most Americans would benefit paying a 23 per cent sales tax versus the withholding that goes on now is probably a Sisyphean task, even with the support of the idea of a prebate.
Does The FairTax Solution make its case? Hoagland would probably be the first to argue that his book is merely an introduction to the topic and points readers to the web site of Americans for Fair Taxation for further information. Though it sometimes does gloss over some of the difficulties of instituting and maintaining a retail sales tax or needs to bring more proof to the table for some of his claims, Hoagland brings some powerful guns to bear in support of changing the current broken system. Millions of Americans probably would love for April 15 to be merely another spring day and if a retail sales tax can make that a reality then perhaps it's something worth taking a closer look at.
Steven Martinovich is the founder and editor in chief of Enter Stage Right.
Buy The FairTax Solution at Amazon.com for only $13.57 (32% off)
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