My Thoughts on "Fair" Tax Plans

OK, as promised, here's some of why I don't like the "Fair/Flat" sales tax proposals that have been floated by various politicians in recent years. (If you haven't read my earlier post from today on the subject, please read that first, this sort of logically continues from that.)

First, it is much more heavily weighted towards the poor and middle classes than ever before. The poor spend a far greater percentage of their income than the rich do, so a much higher percentage of their money would be subject to the tax (obviously anything saved would not be taxed until it was later spent). Also, the rich are far more likely to be involved in international commerce, outside of the authority for the federal government to tax them. And if you tried to insist that foreign purchases be subject to the tax you'd have to have a much larger customs force, because every vehicle crossing the border would have to be searched. Each person leaving the country would have to have a detailed list of what they took out of the country, so that that list could be compared to what they brought back in, to allow the tax to be levied on all external purchases. If you didn't do that, you'd find anyone who lived within an hour's drive of the Canadian or Mexican border making regular trips across the border to buy items without paying the 30% premium. But regardless, much higher percentages of the income of poor people would be subject to taxation than that of rich people.

Say what you will, but I'm very fortunate to be where I am, and most people that I know of who are fiscally advantaged got there as much based on good fortune as on hard work. I guarantee I don't work harder than a lot of people earning much lower wages doing construction and other “blue collar” jobs. A small list of the things I have (through no credit to myself) that have helped me to get where I am:

• Fiscally responsible parents and grandparents who had the resources to send me to college and not leave me encumbered with lots of loans. They've also been a safety net, allowing me to over-extend myself financially, knowing they could give me a quick infusion of loaned cash if I needed it. To say nothing of the many gifts I've received. A car for college graduation from my grandparents, leaving me free from having to spend money early in my career on a car. Down payment money for my house, so I could get a better rate and not have to pay PMI. Various smallish loans which, when I went to repay them, were suddenly no longer due.
• A business savvy father, who gave me more than my share of good advice with regard to having a successful career.
• Above average intelligence (not meaning to brag, but it is an asset that I have that I can't really take any fair credit for).

I'm sure there are more. But the net result is that whenever I hear someone talk about how our present tax system “punishes” “hard work”, I have to look back and ask if it's humanly possible that the uber-rich CEO who makes 1000 times what his blue collar employees makes has worked 1000 times as hard. I don't like paying taxes any more than anyone else does, but I have no objection to paying a higher share of the burden than someone who is working a lot harder than I am for a lot less pay. (Sure, you can throw in welfare cheats as counter examples, but in my view welfare is a separate issue, needing reform but unrelated to the taxation issue).

Now, some proponents of this “fair tax” system say that some of the unfair influence on the poor would be offset by “prebates”, but in order to process the rebate system, you'd have to keep something like the IRS in place, and pretty soon you've not really simplified anything.

My second problem with the flat sales tax plan is how do you deal with middle-men? If you tax corporations on their spending then you raise the cost of their raw materials by at least 30%. Possibly more for corporations whose raw materials are parts processed by OTHER corporations from other raw materials, etc. One can quickly see prices of iPods spiraling out of control as follows:

1. The company that makes metal wire has to pay the mining company 30% in taxes on their purchase of raw ore and must raise their prices accordingly.
2. The electronic circuit manufacturer then has to pay 30% higher base prices and then the 30% tax for THEIR purchase, raising their prices accordingly.
3. Apple computer then buys the electronic components, which by this point have gone up 69% in cost, and pays the government their 30% sales tax, bringing their cost of materials up almost 120%.
4. Finally, you buy an iPod which today would cost $100 from Apple for $220 and pay your 30% sales tax, bringing your final cost on a $100 iPod to over $285. So much for a 30% tax! (And all of that is before your state and local sales tax, which of course would also be higher since it would be charged on $220 instead of $100)

The alternative to that, of course, is not to charge the tax to corporations, but then you need ever more taxes from individuals to make up for the tax corporations would no longer have to pay on their income. Plus, now you'd have to police the taxation process because the company that makes electronic circuit boards will have to charge the tax on circuits it sells to end-users at Radio Shack, but not to resellers who plan to put those circuits together into other purchasable goods.

My third problem with the flat sales tax plan is that it would very quickly make the current housing problems orders of magnitudes worse. According to the things I've read, in order for a 30% (or 23%, see my previous post on the subject) federal sales tax to bring in the same revenue as the current income tax, it would have to apply to things you might not expect, like houses and cars. Which means the cost of purchasing a house goes up by 30%, pricing large numbers of people out of the houses they'd currently qualify for. This would drop the demand for housing and thus drop the value of all of our houses until they reached a level where there was enough demand to buy them again. We'd lose significant core value in our houses and we'd lose any tax advantage to home ownership that we currently enjoy. It's already cost-prohibitive to move too often, because of the 6% (on average) real estate commission we have to pay when we sell a house. If that "lost money" on each transaction went up to 36% of the total paid, wouldn't most people do their level best to find ways to stay in the house they're in if at all possible?

Of course there are answers to all of these problems, but... each answer involves more regulation, more watchdogs to police the system, and more loopholes that those with connections and/or few scruples can slip through. Pretty soon, your tax is no more “fair” than today's system is and no easier to administer, just a whole lot of additional work to switch everyone over to the new system for little or no gain.

Something to think about.

Liam.