Do you think the current tax code should be scrapped? If so, what would you replace it with -- a flat tax or the FairTax, which is essentially a national sales tax. Democrats don't like such talk at all, and the Republicans seem to be sort or circling around the FairTax. The idea has its critics, including a former deputy Treasury secretary writing in The Wall Street Journal:
For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.
Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.
In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other (This is called the tax-exclusive rate.)
The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.
This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.
His critcism of the FairTax seem too harsh to me, but there are plenty of passionate advocates who can and will answer him. I think there are things to recommend either a sales tax or a flat tax, if we were just considering them in isolation. But we can't -- we also have to take into account the fact that the government isn't capable of being "revenue neutral," even if a reform were to start that way. So the question is: With which replacement tax would we be worse off once the government decides it isn't getting enough revenue from it?
With a flat tax, the danger is that the brackets will start to creep back in as politicians and lobbyists start carving out exceptions again. With every favor granted, somebody else will have to take up the slack. With the sales tax, the danger is that the government will eventually realize it can have a sales tax and an income tax, as most states do. So I'll go with the flat tax for now -- the worst that can happen is that we eventually end up back where we started. With the FairTax, we could end up with onre more thax than we already have.
It's all moot anyway, I suppose. The tax code isn't just about money. Too many people are too invested in the opportunities for manipulation built into it. No way they're going to give it up.
