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A very bad idea

Be very, very skeptical when you see politicians push ideas like this.

Now that the dreaded deadline is past and the tax forms are in the mail, consider this question: Would you rather slog through a morass of paperwork every April to send Uncle Sam a chunk of your income or have the sales clerk take 23 cents in tax out of every dollar you spend?

U.S. House Majority Leader Tom DeLay, R-Sugar Land, and Republican U.S. Reps. Kevin Brady and John Culberson chose the perfect downtown stage Thursday to promote the second choice, which they call the FairTax.

As about 100 supporters, most of them members of the group Americans for Fair Taxation, rallied outside the Main Post Office at 401 Franklin, a steady stream of cars and trucks rolled through the driveway to drop off last-day tax returns.

Also on hand was Rep. John Linder, R-Georgia, sponsor of the FairTax bill, HR25. Linder said the campaign for the proposal, technically a consumption tax on retail sales, was launched in Houston by businessmen, including Leo Linbeck and Bob McNair.

Linder said Culberson’s predecessor, Bill Archer, supported the idea, which has gotten a big boost with DeLay on board.

“Now it’s time for Texans to get the president behind the bill,” he said.

DeLay described the Internal Revenue Code as “a 1.6-million-word, job-killing monstrosity … written by tax lawyers to be incomprehensible.”

The FairTax would not only be simpler, he said, but also would replace the personal income tax, corporate income tax, capital gains tax, inheritance and gift taxes and Social Security-Medicare taxes.

It would not replace state and local sales taxes, however.

So what’s wrong with this? Let’s count the ways.

Skeptics note, however, that a rich man’s purchase of a yacht and a widow’s winter coat would both be taxed at the same rate — about 23 percent at current federal revenue levels.

Food and medicine would be taxed, too. The only purchases exempted would be used goods, business expenses and the costs of education, which would be treated as an investment.

To ease the burden on the poor, each family — rich or poor — would get rebates equal to the federally defined poverty-level income, multiplied by the tax rate. At a rate of 23 cents per dollar, a single person living alone would receive $160 a month and a family of four with two children would get $431 a month.

Joe Barnes, a research fellow at Rice University’s Baker Institute for Public Policy, said junking the income tax for a simpler alternative is a tempting idea fraught with unknown consequences.

“I’m very sympathetic to consumption-based taxation, but I have profound misgivings about its workability,” Barnes said.

For one thing, he said, experience in Europe indicates that when similar taxes climb to about 20 percent, cheating becomes widespread. Because an enforcement mechanism will be needed, he said, “It will not lead to the abolition of the IRS.”

“I think it would lead to gigantic off-balance-sheet transactions,” Barnes said.

The tax would seldom be paid on personal services, he predicted, and there would be temptations to falsely claim purchases as business expenses.

Barnes said there also would be intense political pressure to exempt some expenses, such as medical care, food and housing, from the tax. For every exemption, he noted, the tax rate on other goods must increase to maintain the same revenue.

So let’s see: Would be extremely regressive, would strongly encourage cheating and thus would require a large bureaucracy much like the hated IRS to enforce it, and would still be subject to political pressure to favor one type of transaction over another. Yeah, that sounds like a winner to me.

UPDATE: Kevin Drum makes some very similar points plus a few that I didn’t think of.

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11 Comments

  1. Tim says:

    If you want to simplify the tax code, allow for some baseline exemptions and flatten things out a bit, why not just change the income tax to be a flat rate, with the first $X exempted for everyone, and get rid of the loopholes and deductions? Anyone who earns the same amount would pay the same tax.

    That would reduce the expenditures on compliance, be more enforceable than the sales tax and would not be regressive.

    Methinks we’d see a test of the power of that dreaded CPA lobby if that were ever tried.

  2. DeLay the Populist

    We mentioned earlier today Tom DeLay’s plan to scrap income and corporate taxes in favor of a national sales tax. Now it appears DeLay is taking it to the streets: HOUSTON — More than 100 people rallied Thursday in Houston…

  3. kevin whited says:

    Of course, there are analysts who have different opinions than Barnes on the merits and viability of a consumption tax. I’m not convinced that a consumption tax is the way to go, but I’m disinclined to dismiss that approach with sarcastic ridicule based on the opinion of an analyst quoted in the Comical. There’s more of a policy debate to be had than that on the merits/demerits of a consumption tax, and tax reform more broadly.

    I’d never expect it to come to pass regardless, because at the end of the day we LIKE our complicated tax code, because we are all special interests, and we like deductions targeted to us. They’re only loopholes and complications when WE as individuals can’t take advantage. 🙂

  4. I’d never expect it to come to pass regardless, because at the end of the day we LIKE our complicated tax code, because we are all special interests, and we like deductions targeted to us. They’re only loopholes and complications when WE as individuals can’t take advantage.

    Very true, and I believe that’s very much Professor Barnes’ point when he said there’d be pressure to exempt certain things like food and housing, which as you know are treated as special cases already in the tax code.

    If you want to simplify the tax code, allow for some baseline exemptions and flatten things out a bit, why not just change the income tax to be a flat rate, with the first $X exempted for everyone, and get rid of the loopholes and deductions? Anyone who earns the same amount would pay the same tax.

    As long as we’re clear on what “earnings” are in this context. Capital gains? Interest? Stock options? Dividends? My main fear of this kind of proposal has always been that certain things which are now rightly taxed would not fall under the definition of “income” any more.

  5. Charles M says:

    The only purchases exempted would be … business expenses….

    Hey John/Tom, there’s nothing a business spends which isn’t a business expense.

    Just another try at eliminating the corporate income tax.

  6. Angry Bear says:

    It was the consumption tax proposals in the 2003 Economic Report of the President that lead to me starting my blog. For anyone who’s re interested, see the five part series of posts on the subject at my blog (under “Topics” in the left side bar.)

    Or, save yourself a lot of time and just take Kuffner’s word for it. Consumption taxes need not be regressive, but I’m pretty sure any consumption tax the current crew would vote for would be. And the simplicity argument fails pretty quickly, particularly if you (1) try to make it progressive and (2) have to monitor the certain cheating.

    Also note that various plans that exempt or would exempt savings from taxation (IRAs, Health Savings Accounts, College accounts) are tantamount to consumption taxes. Not that those exemptions are necessarily bad, but proposals to implement or expand exemptions should be viewed accurately

    AB

  7. Steve says:

    Well…that is rather dishonest. Pointing to Kevin Drum’s comments on the flat rate tax and then applying them to a consumption tax.

    A flat rate income tax with large standard deductions is rather different than a consumption tax. To present the two as if they are similar is what is dishonest.

    As long as we’re clear on what “earnings” are in this context. Capital gains? Interest? Stock options? Dividends? My main fear of this kind of proposal has always been that certain things which are now rightly taxed would not fall under the definition of “income” any more.

    This is deceptive. There are lots of things that could be taxed but aren’t. There is no such thing as something that “should be taxed”. For example, why aren’t medical benefits taxed? It clearly has value, and most employers know exactly how much it costs. How come the imputed rental value of an owner occupied house is not taxed?

    The taxing of interest income has effects and some of these effects might cost more than the tax revenue generated. Did anybody here stop to consider that or to look into these things? For example, without tax on interest income and removing the mortgage income deduction interest rates would come down.

  8. James Emerson says:

    I would agree that if we have to pay income taxes, we should be able to fill out the necessary paperwork on a postcard sized form in no more than five minutes.

    Consumption taxes are generally regressive, but I suppose one could be configured to hold harmless the third quintile, with a net rebate increasing as one goes down the income ladder. But such a tax doesn’t address the payroll tax, which is extremely regressive. I would be more in favor of a comsumption tax if the payroll tax included all earned income, and maybe some investment income as well.

    If I had to select a taxation regime, it would be a form of income tax that would eliminate taxation entirely from the bottom quintile (that means no payroll tax, but would still include a SS benefit upon retirement), and progressively steepen up the income ladder, with all forms of income being included. I would allow a family deduction based on the size of the family, an educational credit, and a homeowners credit, and little else.

    Oh yes, and don’t forget a steep carbon tax. The proceeds from which would be used to eliminate our dependence on Middle Eastern oil. I’m so very tired of paying good money to bad people who use it to build Madrassas that teach innocent children to hate America. A carbon tax to replace the death tax now levied on middle class American families with kids fighting wars in the Middle East. Yeah, that’s one tax I’ll gladly pay!

  9. Mathwiz says:

    Did you catch the hidden subsidy for private schools within this tax proposal?

    The only purchases exempted would be used goods, business expenses and the costs of education, which would be treated as an investment.

    I’m pretty certain DeLay & Co. aren’t just referring to college expenses here.

  10. Mathwiz says:

    …A carbon tax to replace the death tax now levied on middle class American families….

    A carbon tax is a good idea, but what’s this about a “death tax now levied on middle class American families?”

    If, perchance, you are referring to the Federal estate tax, it is currently levied only on estates valued in excess of $3,500,000.00. American families with that kind of net worth are generally considered “millionaires,” which is not in most people’s definition of “middle class.”