Just to be clear, I'm against the Fair Tax proposal. Not that there's any danger of it coming up for a vote any time soon. But if I were working within the system, this is how I'd go about dismantling the Fair Tax.
This post was originally written c. 2008 and posted pre-blockchain. I intended to re-post it years ago, but it lived in my drafts folder instead. I even thought I had posted it already, so here it is, better late than never.
So what is the Fair Tax? It's a proposed national sales tax that would replace the Income Tax and abolish the IRS. The tax rate is 23% or 30% depending on how you figure.
Inclusively: $123 = $100.00 * 23% + $100.00
Exclusively: $123 = $94.62 * 30% + $94.62
I think it's rather silly to calculate the tax exclusively, but some people do in order to make the percentage look more scary. Either way in my example, you pay $123. If you'd like a more complete explanation, see the PDF below.
None of the above is why I'm against the Fair Tax. In fact, I believe the biggest selling point of the Fair Tax, which is that the "embedded" price of goods and services will go down, so this 23% or 30% percentage truly doesn't matter, as long as it doesn't change.
The Fair Tax relies heavily on Trickle Down Economics. I'm a big supporter of the this theory. In a nut-shell, trickle-down theory says that if you lower the price of doing business, by reducing or eliminating taxes for example, the lower price is passed along to the consumer.
If the price of labor goes down, the prices of goods and services that rely upon labor go down in lock step. That's the theory, anyway. I think there's plenty of evidence for this, but that's a topic for another article.
So after the Fair Tax removes the tax on labor, it places a tax on the final consumer goods and services at the point of sale. From Apples to Zigzags, if it's new, you pay the tax.
The Fair Tax was explicitly designed not to cut spending. The proposal was designed not to eliminate funding for entitlements like Social Security and Medicare. This approach is meant to allow all parties to support the change without objection. This is considered a feature, not a bug.
I believe the Fair Tax just hides the threat of violence entirely in the corporate layer of the monetary base because at least under the IRS, I have the "option" not to file. It's not every good option and not one I have personally taken yet. But it's there. We can opt out. If the Fair Tax is implemented, there is no way to opt out.
You might say that buying used goods is a form of opting out, sorry, it's not. I'll go into that below.
Also see: inclusive-exclusive.pdf
Does the Fair Tax pass constitutionality tests? I think in some ways it does and in some ways it does not. I'm not going to analyze that aspect in this article. There are plenty of reasons to be against the Fair Tax without getting into questions of the Constitution, especially since our so-called "representatives" mostly don't. I'll go into it another time.
All pro-government solutions have unintended consequences. Anything that makes the government bigger (or stay the same size) will have unintended consequences. Since the Fair Tax won't make the government smaller, it will also have unintended consequences.
The main way government causes unintended consequences is through price manipulation. Any interference in supply and demand will result in unintended consequences. This is true for rent control, cap and trade, as well as taxes. Even a tax like Fair Tax, which removed the embedded tax of goods, will cause interference in supply and demand.
For the moment, let's assume the Fair Tax is simply 23% of the base price. So if $100 is the base, the total comes to $123.
One of the big selling points of the Fair Tax is that the tax is only applied once. Basically, if you buy used property (be they used shoes or used houses), you don't pay the Fair Tax. So if you're interested in a new house, you pay an extra 23%, but if you buy a used house, you don't pay an extra 23% tax.
The Fair Tax supporters say that the house will cost less to build because the materials won't be taxed until the house is sold. The "embedded" tax will be removed, making the 23% not as bad as it sounds. I believe this part of the proposal, and it's important. The embedded tax is a real, so removing it will make things cheaper. The Fair Tax relies upon removing 23% from embedded taxes then adding 23% at the point of sale.
So far so good, right? Does that mean if you manage to always buy used, you don't pay any tax? Not so fast, Bubba.
What does that do to supply and demand? Wouldn't the possibility of buying property tax free increase the demand on such property?
The increased demand for used, tax-free goods will drive the price of these items up. These tax-free, used goods will become more expensive and in short supply, mark my words.
In fact, I think the price increase will be pegged roughly to whatever the tax is. If the Fair Tax ever changes up or down, tax-free, used goods will follow because their demand would be pegged indirectly to the Fair Tax.
The Prebate Is A Lie! The Prebate Is A Lie! The Prebate Is A Lie!
The prebate is probably the most popular part of the Fair Tax. It is a refund of all taxes paid into the national program up to the poverty line, whether or not you pay the tax. So really, in the proposal they call it a prebate, but it's really another back-door UBI. This part of the proposal is intended to answer the objection of the poor. It is assumed that the poor cannot afford the tax, so this prebate pays them back all of the money they spend based on a highly reliable government formula (the formula itself is based on the highly reliable Consumer Price Index, which itself doesn't take into account food or energy prices).
The prebate is issued to every man, woman, and child in the US (I assume only citizens, right?), regardless of their income.
So how is this a lie? Well, let's imagine the Fair Tax is signed into law and everyone starts getting a prebate. Lawmakers want to issue debit cards instead of cutting checks. Back when the Fair Tax was being written, there was some question as to whether or not a check could be issued. Now that we've had many many stimulus checks under our belts, they know this is a piece of cake (but we all know that cake is a lie). In order to make it even easier, they'll want to use debit cards.
So everyone will have a debit card. Likely, they'll allow "head of household" and "joint" cards to simplify things so children won't need cards issued until they are 18, unless they want them. It's all about flexibility and choice, right?
So how is this a lie? Well, let's further imagine the initial amount of the prebate is $250 for each person, each month.
$250 x 303,824,640 = $75,956,160,000
$75,284,986,750 x 12 = $911,473,920,000
The US population was 301,139,947 as of the July 2008 estimate (that's when I originally wrote this article, ok?). So let's just imagine the prebate paid out on a yearly basis is a cool trillion. And where do you think the prebate trillion comes from? If you guessed the money comes from the proceeds of the national sales tax, I'd agree with you. It's a solvent system, after all.
So how is this a lie? Read your history books. Was Social Security solvent when it was first proposed and implemented? Was Medicare solvent? Are they solvent now?
The prebate will start out solvent but then become an entitlement just like Social Security and Medicare. That's why it's a lie.
How will this happen? The same way it always happens, Pinky. Congress will raid the fund. They always have, they always will. They're treacherous crooks! They won't let a cool trillion just sit there. They'll use it for something else, then pay the prebate out of credit which we'll have to pay interest on. The prebate will become another entitlement, mark my words.
In fact, it'll be the worst entitlement ever. If you think Social Security and Medicare are ponzi schemes, you ain't seen nothin' yet.
I cite the 1913 version of the Federal Reserve Act as originally proposed. It was proposed in such a way that the teeth of the bill had been removed. Although it was a bad bill in the first place, there were many good amendments that made it easier for the critics to accept.
The banking industry even pretended to be opposed to the amended bill. But after it was signed into law, the Federal Reserve Act has been amended to become what it was originally supposed to be: The Creature From Jekyll Island.
The Federal Reserve Act got through Congress as a trojan horse. The Fair Tax is also a trojan horse that will be tweaked and tweaked until it's true purpose is implemented.
The IRS was created in much the same way. Originally, it would only apply to the highest income earners. Do you really think it would have passed as its being implemented now? Hell no!
So the Fair Tax will go through the same tweaks. Everything you like about the Fair Tax will be minimized and everything you hate about it will be maximized, mark my words. For example, the percentage of the sales tax will probably go up, and those qualifying for the rebate will go down.
A quick flick of pen and pork will change it.
I have no doubt the rebate will be used to reward voters. If you vote a certain way, you'll get money. As I explained above, the logistics for getting the money to the voter can be very simple. A few strokes on the prebate computer and the prebate can go up instantly, it's the American way.
Also, as explained above, the government now has experience with stimulus packages. It makes perfect sense that the two would be combined. Instead of having two separate systems to distribute stimulus and prebates, just combine them.
I imagine a stimulus czar will be appointed. I've named him Sir Gives-a-lot. He'll probably have a white beard and a red hat and be featured prominently during the holidays. When the population is burdened by the next business cycle, Sir Gives-a-lot will swoop in and adjust the prebate up for some and down for others. Sir Gives-a-lot will be a very popular man, mark my words.
In fact, he will eventually be as powerful over consumer spending as the Federal Reserve Chairman is perceived to be over the financial sector. "Will the Fed key interest rate go down while the prebate goes up?" That's the question the talking heads and pundits will ask.
Having said all of the above, there's only one way to sell the Fair Tax to me. Even if I'm right and the Fair Tax is even worse than I've explained in this article, one thing would sell me on the proposal. If the Fair Tax proposal includes a constitutional amendment to repeal the 16th Amendment (the same mechanism where the 21st Amendment repealed the 18th Amendment), I would then shout support for the Fair Tax from the hilltops (for all the good that'll do).
But in order for me to support this amendment, the new amendment would have to be free of any and all strings. The amendment to repeal the 16th Amendment cannot itself introduce a new tax or anything else. There's no need. Just repeal the 16th Amendment and I'll be happy, but not before.
By the way, my full position on the 16th Amendment can be found on my really-really old blog. To summarize, regardless of the 16th Amendment's status as to its legitimacy, people think the 16th Amendment authorizes a tax on labor. We should repeal it no matter what, but especially if we're moving on to a national sales tax. I cannot and will not support a national sales tax while the 16th Amendment is in the US Constitution. Letting both on the books means one day we'll have both, mark my words. A sunset condition on the Fair Tax is not good enough. You think I was born yesterday? See Tweaks and Trojans (above). How do we know the sunset condition won't just be removed if repealing the 16th Amendment fails?
And if you think our so-called "representatives" will listen to anything we have to say, remember the Emergency Economic Stabilization Act of 2008, commonly referred to as the 'bailout' or 'rescue' bill of the U.S. financial system? The support for that unpopular bill was split 50/50: 50% said no, 50% said hell no.
If they won't listen to us regarding a matter of $700,000,000,000 (our money), what makes you think they'll listen to us for anything about keeping the Fair Tax from becoming yet another taxing and entitlement monstrosity?
What's my solution to this mess? Here it is: A five year emergency moratorium on all federal activity. Congress can meet to play backgammon during legislative sessions and that's it (to fulfill US Constitution Article 1, Section 4, Clause 2). Then, after five years, we'll see how much better off we are and start officially removing the stinking rotting carcass we call the Federal Government.
I ended up getting my tax return prepared at a local place by a really friendly pretrained neural net named Greg.