May be you think I am insane, or may be that you will say I am always so negative, but hear me out, please.
As a regular tax paying American, may be I just don't love IRS as I should and may be I also have a horror story or two to tell. But should we do away with the IRS today in favor of this new thing called the Fair Tax? Let's examine the fair tax first, before we throw the baby out with the bath water.
First of all, the fair tax by definition is the most regressive tax ever conceived. You don't know what a regressive tax is? It is a tax where you pay less total tax as a percentage of total income (unless your name is Mike Tyson, and you are predisposed to spending a hundred percent of what you make). If you make forty, fifty or sixty thousand dollars a year, you are likely to spend most of what you make, with scant savings. That means you will pay this fair tax on every dollar you earn. And we hope that you do or the economy will stop and the government will go broke. Now if you are one of those like Mr. Neal Boortz and get paid in millions, obviously you save most of what you make per year, for you fair tax will mean a big savings compared to the current tax system which probably takes away ten fifteen percent of his annual income, if he has good accountants. Lesson one; fair tax is great if you are a millionaire.
Secondly, if we have a recession and consumer spending goes down, so go down the government revenues unless an increase in the base fair tax is approved and made into law.
To be honest, we probably pay more on an item in hidden taxes than just the twenty three percent that is supposed to be the base by the proponents of fair tax. If you start with the supplier, to the manufacturer to wholesaler to the retailer, count in their transportation and handling and sales personnel , the fuel taxes, the property taxes income taxes employment taxes and the list could go on the two dollar loaf of bread is actually worth a mere forty cents. So either I don't know what I am talking about or may be someone else is being dishonest when they say that the fair tax is revenue neutral. The tax revenues will fall and may be cause government to eliminate, suspend or reduce many services.
Now then, we know that we all pay a lot in taxes under this current system, but as I have shown most of these taxes are taken out at different levels and a little bit at a time so the pain is not so great to an individual and the purchaser thinks that what he is paying is what the item is really worth.
A big problem here comes in when a small business may have to charge a higher price for an item compared to a large retailer, if the cost difference in the purchase of a given item today is ten dollars then under the fair tax law the price difference becomes twelve dollar thirty cents, thus indirectly hurting the small business.
Another lie of fair tax proponents is that it will tax the underground economy, now if you are to require the service of a prostitute or a preacher, or say purchase drugs on the street, do you assume they will pay tax on their service or the merchandise transferred? Only way they will be taxed is when they later go to spend that money at a legitimate store.
This fair tax idea is similar to the fantasy idea that reducing tax rates (cutting taxes) increases tax revenues, if it were true we could cut the tax rate to zero and the government could have infinite income.
There are a hundred other problems and more with this fair tax idea, from how it may make the IRS more intrusive instead of being doe away with. How it will cause more corruption, and make more people tax cheats, how it will increase bartering and reduce sales at individual levels.
By the way, people like Neal, or Sean or even Julia Roberts don't pay income taxes as their contracts take the tax consequences already into account and compensate them for it.