Tuesday, April 19, 2011

Why the Fairtax is Foul

Conservatives are often a fount of bad ideas. One particularly bad idea in the news is a thing called "The Fair Tax." This tax replaces the income tax with a national sales tax.

The goal of the tax is to replace our income tax with a consumption tax (which is a good idea).

The Fairtax would have the sales tax collected at the point of sale. To make the progressive, the government will send checks to people called "prebates."

Both of these things are really bad.

The prebate is bad for several reasons. The first problem is that one has to collect taxes to pay the prebates. If you are going to pay out a hundred billion dollars in prebates, then you must collect an extra hundred billion in taxes ... taxes which distorts the pricing mechanism. The prebate system will create an extra entitlement in a system drowing in entitlements. Finally, this system where the government writes out rebate checks from money taken from businesses re-inforces the notion that government is good and business is bad.

The really big problem with the Fair Tax is that it turns America's small businesses into the tax collectors. Small businesses already have enough problems. Lumping the responsibility of tax collection on their shoulders will break many small businesses.

Collecting payment is the hardest task of any small business. Making small businesses collect taxes along with their payments is untenable.

FairTax.org defends turning small business into tax collectors with the weak jusification:

"80 percent of all retail sales now occur at large retail chains like Wal-Mart. The point is oversight will still reside under the Treasury Department but the government's responsibility will be over a far smaller "universe" of tax collection points making compliance oversight far less costly and far more effective than the current system."

The fact that chains have taken over 80% of retail does not eliminate the fact that the tax adds prohibitive costs to the remaining 20% of small business.

As FairTax points out, the compliance costs for collecting taxes from enormous chains is significantly lower than an small mom-and-pop store. The mom-and-pop store will have to absorb this additional burden and will no longer be able to exist.

The fact that gigantic firms already dominates retail does not justify a tax law that will utterly destroy all other stores and small businesses.

The Fairtax will immediately destroy half or more of the remaining independent small businesses in this nation. The cost of complying with the new law will be three to four times higher for a mom-and-pop store than the beloved Wal-Mart. These stores are already marginal. The Fairtax creates a paradigm where they simply cannot exist.

The sales tax system that currently exist in each state already favors big retailers over small.

It once was possible for Americans to start their own little store. This idea that we will turn small business into the nation's tax collector will destroy this dream.

The Fairtax is correct that transitioning from a income tax to a consumption tax is a possitive direction. There are better ways to do this. (Which will be the next post).

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