More Thoughts on the so-called "FairTax"

I have discussed the so-called "FairTax" in this space before, and everything I've read about it seems to indicate that it is an overly simplistic idea that appeals because of its simplicity, but which would in fact not be nearly as simple or beneficial as its supporters suggest.

I've been reading over the FAQ page on FairTax.org and had a few more thoughts that I thought I'd write down.

The FAQ page says that corporations would not be taxed. The authors were quite incensed about the idea that a corporation was somehow a legal person and should pay taxes. So my question is what prevents me from setting up a personal corporation and doing all of my purchasing that way? What's to prevent retail establishments from offering their better customers deals whereby they'd simply report that the sales went to corporations, and then not charging the tax?

It doesn't even have to be a phony corporation, suppose someone like my wife, who manages several apartment buildings for a living, uses her corporation to purchase things for our home. It's not a phony or sham corporation, but should we be able to avoid paying our "FairTax" income taxation because we did the purchasing through our corporation?

Also, the "FairTax" is assessed on services as well as goods. That means that small business owners such as landlords who have never really been set up to deal with taxation (other than income, of course) from their businesses will now have to collect a 30% higher rent and file the taxes on those rents. Hardly a simplification for those who own rental properties.

The "FairTax" web site says that the interest and principal payments on mortgages would be exempt from taxation, which (it says) means that everyone would gain the full benefits of home ownership, not just those who itemize their deductions, and that even those who do would gain by using non-taxed dollars to pay the principal as well as the interest. This is disingenuous, though, because at purchase time, the price of the house is taxed at the "FairTax" rate of 30%. So let's imagine a home purchased for $100,000. Under today's system, under a 30 year mortgage at a 5% interest rate, the payments would be $536.83, and for the first three years, at least $400 of that is pre-tax interest payment and less than $137 is post-income-tax principal payment. Even assuming income taxation at the highest rate of 39%, that means the principal payment plus tax is around $225 for a total payment of about $625.

Now buy the house with a 30% "FairTax", so the purchase price is now $130,000. The same mortgage now has a payment of $697.87. You have to get almost 16 years into the mortgage in the first case, while earning income in the highest tax bracket, before you break even on that mortgage payment including the tax on the taxable portion. So much for "everyone benefitting". Statistically, few people keep a mortgage for more than 15 years, with moves, refinances and the like, mortgages that see their 15th year are quite rare.

Oh, and for those who say "But wait, you aren't calculating in the savings on Property Taxes", that's right, because Property Taxes are a state tax, not a federal tax, which means they would not be affected by the "FairTax". At best it would be revenue neutral, assuming states continued to tax the value of the house and not the value-plus-FairTax higher price paid. Those taxes would be paid with non-taxed dollars, just as they are today (interest paid is deductible on your federal income taxes).

I'm not a big fan of taxation, I don't know anyone who is, although I do believe that we need to pay for the things we buy, and if we can't reign in our government's spending, then paying taxes to support that spending is really the only reasonable option.

Still, this "FairTax" system really feels scary to me, because the people advocating it are clearly selling it with incomplete information, and whenever I can feel the sales job, the cynical part of my brain starts wondering what they aren't telling me.

By the way, if you want another view of some of what is wrong with the FairTax, check out this link.

Liam.