the fair tax

Responding on another post, Gink asked for my thoughts on the Fair Tax.  The Fair Tax is getting a lot of press as we approach April 15th, and its supporters held "tea parties" nationwide this weekend.

The principle behind the income tax is that it's desirable for each worker to produce as much as he can, but that it's necessary for a portion of what is produced to be used to fund government.  So you work for money, and then some of the money you get credit for earning is shaved off, to be spent by the state.  So that the state can use some of your purchasing power to obtain what it needs.  That's the principle.

But the reality is that you don't work for money; you work for the things money can buy.  You produce your daily output for the promise of a share of the goods and services produced by others.  And the government doesn't want your money either -- God knows it could just print money if that was all it wanted.  Like you, the government needs access to a share of the goods.

So with the income tax, you get credited $100 for producing $100 worth of value, but the government takes $20 of it.  You can then buy $80 worth of goods, and the state can buy $20 worth.

The Fair Tax works very similarly: You get the full $100 for producing $100 worth of value, but because of the tax your $100 can only buy $80 worth of goods.  The government uses its cut to buy the other $20 worth of what you produce.

The difference is about what happens to money you don't spend.  You see, someone figured out that all the things you can do with your money fall into two basic categories: consumption, and saving.  Of the two, only one -- consumption -- is really a "burden" on society.  When you buy something, you are claiming the product of someone else's labor.  It costs society nothing to have you walking around with the money -- it's only when you show up to claim your prize at the cash register that the pie gets smaller.  It's only after you buy a good that it becomes unavailable to everyone else.  It costs nothing to have you walking around with the full face value of your paycheck, as long as you don't actually spend it.

Unlike consumption, saving is not a burden on society.  In fact, it's very very good for the economy, which the government itself acknowledges when it makes a limited portion of your investments tax-deductible.  Since savings, like labor, is a factor of production (called capital), taxing savings is like taxing work -- and arguably just as counterproductive.  These are both things we want more of.

In a sense, Fair Taxers are arguing for full deductibility of savings.  Let's not tax contributions to the economy, let's tax the only the burdens.  Let's have a tax structure that raises the cost of taking from the economy without imposing a penalty on contributing to it.

It's pretty sound reasoning.  Not surprisingly, economists tend to like consumption taxes, favoring them over both flat and progressive income taxes, and I agree that I'd prefer the Fair Tax over our current tax code.  But only if the income tax went away -- completely.

That's a pretty big hurdle, because it involves repealing the sixteenth amendment.  Furthermore, the political class won't jump very high to get over such a hurdle, because the economy's biggest savers -- and thus the ones who stand to get the biggest tax break -- are the high earners.

Now, that's all theory, because it's based on a comparison of consumption taxes and our current income tax.  As written, the Fair Tax does little to reduce the size of government.  It could be argued that by growing the economy the Fair Tax would make government a smaller part of our lives, but the Fair Tax states, as one of its goals, preserving the current federal revenue stream.

For that reason, I am far less of a Fair Tax supporter than I was before I read this.

Shift taxes? Increase taxes? Tax the rich? Impose new taxes? Use the tax code to influence public policy? What kind of libertarian tax reform plan is this? How about reduce, cut, eliminate, and abolish taxes? Not deductions, not exemptions, not credits, not shelters, not loopholes — taxes.

Look, government at all levels takes a big, big chunk of everything we produce, and much of it only serves to make our lives harder.  We are supposed to be free people -- just how much government do we need?  How much government should we be forced to buy?

Finally, what is "fair" when it comes to taxes?  Well, for one thing, everyone benefits from government in one way or another.  Therefore, everyone could reasonably be asked to pay taxes.  And not just a token amount -- everyone should feel the tax burden equally.  Everyone.  If, as liberals tell us, government is so very damned important -- so very damned essential -- then it's damned well important enough for everyone to sacrifice for.

On a similar note, the Fair Tax, as written, seems to be about anesthesia.  I'd like to reduce the pain of big government, sure, but I'd much rather reduce the injury.  Let everyone pay taxes, and have government be something small enough that everyone can afford to pay for it.  And if you cut government down to the point where it only does what's important, you can damned sure feel fair asking everyone to pay for it.  No exceptions.

This country was founded on the protest of a disparity between taxation and representation.  As far as I'm concerned, there's nothing un-American about reserving the vote -- and representation -- for those who pay taxes.

Have a happy April 15th, everyone.  Only another year or so and you'll be working for yourself.  And don't give government too much credit for what you've accomplished with what's left of your freedom.  Trust me, you'd have accomplished even more -- not less -- with less government.

Comments

[Gink]

Thanks for addressing this, and for throwing in the link, a lot of good information there. Looks like once again the distance between ideas and how they would be executed is about a million miles of bloat.

I hadn't run across the "Equal" tax idea the article mentioned. So simple it had never occurred to me. All citizens of a society being responsible for an equal portion of the "operating cost" of their country. Maybe that at least would stir up some major awareness and outrage over our super-sized government.

Not that anything is ever that simple.