Fair Tax Proposal

One of the things Americans should think about is the tax system. The current system is complex and has created an entire cottage industry related to federal income tax. It also is used as a instrument of social policy using various tax credits and exemptions to encourage certain activities, i.e. home ownership.

One proposal that has at least some momentum is the Fair Tax Organization. Without going into a tremendous amount of detail here (if you want detail visit the web site at www.fairtax.org ), it proposes to replace all or at least most federal taxes with a single consumption tax (either 23% or 30% depending on how you calculate it.) It includes prebates for low income Americans to assure they don't get a disproportionate impact.

If you assume that the system would be enforceable and not subject to rampant evasion, it would have the one great advantage of making sure all products whether foreign or domestic sold in this country paid the same tax. Actually, if foreign products were taxed in their home countries, it would actually provide an advantage to American products. Also, American products being exported would not carry a tax burden and potentially it might make production in this country more competitive.

It is difficult to find a downside, except of course it would make it difficult to use the tax system for social policy. I suppose certain items could be taxed at a lower rate (i.e. fuel efficient cars or energy saving home improvements) to implement desirable social behavior. The other question is the potential shock of higher prices. If cars, houses and other big ticket items suddenly seemed 23% more expensive, it would take a while for many to adjust. The fact that whatever tax is built into the current prices should disappear but it could have a major negative impact on housing since currently taxes are not a significant factor, especially on existing home resales.

One advantage could be in the visibility of tax increases and/or decreases. If you wanted to fund a new program, such as health care, it could easily be calculated as an increase of x cents over current rates. This is very understandable to most Americans as opposed to somewhat cryptic changes in income tax rates that get reflected as payroll taxes.

To be honest, I'm not expert enough on the Fair Tax proposal to really evaluate it. It is very seductive form the aspects of business competitiveness and simplification of tax collection. I would be concerned on evasion. Also, it would probably have a negative impact on things like tourist purchasing, since they might be able to get American products cheaper at home. Not sure that is very much of a factor.

It is fairly certain that since things like this can't be passed without going through the congress, that even if it was to become law, it would become more complex than currently proposed.