The recent scandals at the IRS have caused many Americans to look for alternatives to the income tax as a means of funding the federal government. One of the most popular plans is the FairTax — a national sales tax collected at the retail level.
Unfortunately, the FairTax is not the panacea that its supporters claim. While a sales tax might be less egregious than an income tax, it is still a tax nonetheless. Instead of debating what form taxation takes, we should be considering the overall rate of taxation, as well as the resulting growth in the size of government.
For fiscal conservatives, the worst aspect of the FairTax is that it is a revenue-neutral tax. In other words, it does nothing to reduce the size of the federal government. Government grows in accordance with how much money it has to spend. Changing our tax system without reducing tax revenues is just like shuffling the deck chairs on the Titanic: it might look appealing, but it does nothing to address the real problem.
Milton Friedman believed that there was “only one way to cut the government down to size … the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes.”
Unfortunately, the FairTax leaves our wallets wide open for the spendthrift children in DC to pillage.
Another troubling aspect of the FairTax is the so-called prebate. The prebate is a government check that every American family would receive in advance of taxes paid at the cash register. The prebate amount is based on the size of the family and is structured so that everyone can consume up to the poverty level, tax free, by offsetting a specified amount of taxes.
While Fair Tax supporters claim that the prebate is not an entitlement, it is still a check from the federal government. You can bet that sooner or later, the prebate will become as much a political football as Social Security — jealously guarded as yet another permanent and untouchable part of big government.
Supporters of Social Security like to claim that it isn’t an entitlement because the recipients are supposed to have already paid into the system. Of course, the allure of handing out free money has caused politicians to expand Social Security well beyond its original scope. While we generally think of Social Security as old age insurance, the number of Social Security disability claims has exploded, especially since the financial crisis of 2008. Even the Social Security Administration itself is asking if Social Security disability is the new welfare.
By their nature, welfare programs are rife with fraud as people try to get something for nothing. We have witnessed this fact with Social Security disability as large swaths of questionably disabled people are suddenly making claims. Why should we think that any other program that sends out a government check, such as the FairTax’s prebate, would be different?
Finally, FairTax supporters claim that their tax is business friendly. In reality, the opposite is true. The FairTax would add another layer of regulation to businesses by making them tax collectors. Not only would the compliance costs to small business be crushing, the potential for abuse is frightening.
FairTax proponents paint a rosy picture of the procedure required for retailers to report, collect, and pay the tax, saying that it is just “an additional line on the current sales tax reporting form.” This is a fantasy.
The federal government will aggressively audit the books of retailers looking for any possible mistakes or discrepancies. The Fair Tax would unleash swarms of Treasury agents to harass business just like the IRS does to individuals and nonprofits. And we can be sure that these agents would concentrate on businesses owned by folks with political views that the federal government frowns upon.
A FairTax could end up becoming a political weapon just like the income tax is. Any genuinely conservative tax reform must necessarily include the actual reduction of taxes.
Instead of replacing one unfair tax with another, why don’t we concentrate on reducing and eliminating the taxes that already exist? Instead of simply reshaping big government, we should work toward putting the federal government back into the the small, constitutional box the Founders intended.