There are two things that I hate when it comes to business and decision making: wasted resources and needless complication. Take wedding planning for instance. The Sheconomist is a stickler for details and has spent hours figuring out which photographer would be best for our wedding. I’d rather simply pick one, and move on to something I consider more productive. You could consider The Sheconomist is wasting resources better spent on something else. Now that just isn’t the case in wedding planning, as someone needs to be involved in every detail. Perhaps I should be more involved. So that’s fine in wedding planning. But in the business world, wasting resources and complicating matters for no good reason are big pet peeves of mine.
I find both the VAT and Income Tax include needless complication. ’Needless’ here is based on my personal beliefs of government involvement and what taxes should be used for. Currently in the US we use the tax system as both a source of income, and a method to influence commerce. To support agriculture we might impose high tariffs on imported grain. This makes American grain cheaper for Americans to consume. This directly influences commerce, though perhaps for the perceived greater good of the American economy. The government also uses tax breaks to encourage certain behaviors over others. This is why hybrids get tax breaks, charitable giving is tax deductible, and why your employer is usually willing to make a contribution to your 401(k).
The argument for this is just. The government will have to spend less money if more people take advantage of these behaviors. Everyone wins because the flow of money through the economy does become more efficient, in theory at least. But I do not support this structure at all. The government’s tax system is simply a form of collecting money from the tax payers. It shouldn’t be used for anything else but collecting money.
The simplest and most efficient way to just collect taxes is the fair tax. But in the form I described above there are some serious setbacks that must be addressed. The first issue is the advertised rate of 23% has to be dropped. The actual rate when it looks like a sales tax is 30%, they use 23% because of a calculation trick. Don’t play number games and then call it a fair tax.
Secondly, the Fair Tax is regressive. In short, regressive taxes favor the rich more than the poor and middle class. This is because the rich spend a fraction of their incomes where as the other classes spend most or all of it. I have a solution for the regressiveness. A program will be implemented allowing the lower and middle classes to purchase basic goods and services at reduced rates. Basic items, (food, insurance, and housing) will be taxed at reduced rates. This is in addition to the prebate system the current fair tax legislation includes. Normal items like furniture, clothes, iPods etc will be taxed at the standard fair tax rate. This will encourage lower classes to seek the cheapest goods. Consumer goods normally reserved for the wealthy will be taxed at a greater rate. This could be vehicles costing more than $30,000 or with engines displacing more than 3.0 liters or something. A second home that is not intended to be rented would be subject to the luxury tax. The program would require tweaking, but this should get them started.
Finally, the name. The fair tax in its current form is only fair in the eyes of the wealthy, so it isn’t really fair. The program should be called the National Sales Tax (NST). The basic items rate might be called the Simple Tax, or Economy Tax. The luxury tax would be most appropriately named the Luxury Tax.
This doesn’t solve the problem of the expected reduced income to the government created by the fair tax. You’re right. I’m of the opinion more government control should be localized, and each state and municipality can create income in the way they see fit. Federal programs can supplement income by increased fees for their services ($1.00 stamps, raised penalties by the SEC to brokerage companies etc) and reduce costs by using cheap labor (DOT should totally use prisoners to build roads).
I could devote an entire blog to making this system work, but you get the idea.
Bringing this back to the topic of simplicity, the fair tax won’t remove the IRS altogether, but it would greatly reduce its presence. We wouldn’t need to document 
every cent we make and go through the painful process of taxes each April. No need for a 401(k) or IRA, just an investment account that you can pull out whenever you want. The big accounting firms would go out of business surely, but I fully support a program to re-train and assist in job placement.
All in all the Fair Tax is the best way to go to accomplish my primary goals of destroying all the problems associated with our current tax code and giving more power back to the states. Now do I think we’ll actually ever get to a fair tax of some kind as a replacement of the income tax? No I don’t. Our best chance is a slow move towards a VAT, which is still better than the income tax.
 By The Weakonomist |
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Said,
Another great post about the fair tax, and once again I would be in agreement that it’s a much simpler proposition that dealing with the IRS each year. Certainly, there are hurdles to cross and criticisms to resolve, and as you point out – it will probably never happen.
If people educate themselves and knowingly choose the current income tax system over the fair tax with full disclosure and knowledge, then so be it. But it’s good to at least know what we’re choosing and the alternatives available. Thanks for presenting them.