Friday, June 14, 2013

The Fair Tax Will Quickly Devolve into an Unfair Tax

The Fair Tax seeks to replace the current income tax with a national sales tax.

Proponents of the Fair Tax labor under the naïve assumption that a national sales tax will be flat. In this vision, the new national sales tax will be fair because all businesses would be taxed at the same rate.

But, let's assume for a moment that Washington is a place in which politics takes place.

Imagine for a moment that  we had a Congress populated with [gulp] professional politicians.

If Congress was an institution inhabited by politicians, the flat tax won't be flat for long.

Immediately after adopting a national sales tax, the political mind would begin the process of classifying  businesses and products. The political mind would begin classifying busineses and taxing businesses at different rates based on what the business sells, the structure of the business and even who owns the business.

I know for a fact that this will happen because it is what happens with State administered sales tax.

In the status quo, we have luxury taxes, sin taxes. There is a general consensus that food should be taxed at a lower rate than other items. In some states, you pay a tax if you sit at a table and no tax if you order to go.

When I was adding pizza listings to my directories, I discovered that the laws governing Take and Bake pizzas are different from those govern baked pizza. Papa Murphy's Pizza pays a different tax rate than Domino's!

Once we move from an income tax to a sales tax, the political machine will go into overdrive and break the flat tax into a highly differentiated tax.

Once we start seeing highly differentiated taxed based on the structure of business and what the businesses sell, we will enter into a nightmare in which business groups will have to double their lobbying efforts to protect their members.

Advocates of the Fair Tax labor under the assumption that a national sales tax would be flat. But a national sales tax will not remain flat for long.

Washington is a political town. It is the nature of politicians to meddle. The Fair Tax would only remain flat if a miracle occurred that changed the nature of the political mind.

Proponents of the Fair Tax believe that their tax will eliminate the IRS. But there will need to be a vast bureaucracy to collect the sales tax and to audit the tax on a business by business basis. (See The Difference between a Consumption Tax and Business Tax).

I don't know if any of you have noticed, but there is growing number of people who despise business (corporations).

The National Sales Tax will give the political machine tools to go after politically unpopular businesses as they have never gone after them before.

In the recent IRS Scandal, the IRS went after conservative groups filing for non-profit status. A non-profit corporation is a business. The IRS went after groups filing for a tax status.

With the Fair Tax, all businesses must apply for a tax status. This will increase the ability to engage in scandals like the IRS Scandal.

The Fair Tax might include a symbolic closing of the IRS. However, the Feds will need an organization to process the tax filings and audit business. BTW, auditing is not some bizarre torture device invented by the IRS. Auditing is a necessary part of accounting.

 There will need to be a tax authority that collects the tax and audits business.

I guarantee that shortly after passing the Fair Tax, there will be an IRS-like organization that audits business. Even worse, I guarantee that Congress will start passing a highly differentiated tax code with different rates for different types of business.

In conclusion. The Fair Tax is based on the naive assumption that nature of Congress will change and that the new taxing authority will be administered by saints.

The nature of Congress guarantees that the flat tax advocated by Fair Tax groups will quickly devolve into a highly differentiated tax. The authorities that collect the tax and audit businesses will be empowered as never before to go after businesses based on their structure and the political beliefs of their owners.

Passage of the Fair Tax will create a new political paradigm in which businesses will be forced to increase lobbying efforts. The lobbying efforts will just feed the frenzy and magnify inequities in the new tax code.

The nature of man guarantees that the Fair Tax will soon degenerate into an unfair tax.

I agree with the advocates of the Fair Tax that we should seek to replace our income tax with a consumption tax. That the advocates of the Fair Tax intend to pass a flat means bug squat. The intentions of the Flat Tax crowd are simply bricks that pave the road to ...


Anyway, the Tea Party needs a better tax reform proposal. I propose the The Object Tax. This tax is named for the Object Oriented Design process used in the smartphone and system engineering. It uses the same design techniques used in the iPhone and iPad to transition us from an income tax to an account based tax.

The Object Tax creates an abstract tax code that encapsulates the current income tax. It would allow financial institutions to implement the tax in financial products such as a tax aware bank account. Employers can continue the current income tax, or they could outsource the tax to financial institutions.

For example, a bank could have a tax aware account. You would have your entire paycheck deposited into your tax aware account. You pay a tax (at a personal progressive rate) when you withdraw your money.

So, lets say you had $1000 deposited in your tax aware account. When you withdraw the money, the account will check your tax rate. If your rate was 20%, you would pay a $200 tax and get $800 in cash.

Financial institutions will offer budgeting software along with the tax aware accounts. With the Object Tax, people will be encouraged to engage in a budgeting process. They will pay their taxes when they plan their budget.

Collecting taxes when people plan their budget will actually have a bigger impact than collecting taxes at the point of sales. People are more engaged with their personal finances in the budgeting process than they are at the point of sale.

The Fair Tax is a bad idea. The Object Tax uses the same engineering techniques used in the smart phone to create a better tax.

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