Dubya Pretends to Go Along with “Fair Tax” Idea

A lot of pixels have been wasted in recent weeks over a proposal to “eliminate the IRS” and replace the federal income tax with a national sales tax. Now it’s my turn.

The fuss started when House Speaker Dennis Hastert released a book (Speaker: Lessons from Forty Years in Coaching and Politics) in which he advocated eliminating the IRS and enacting a flat tax, value-added tax or national sales tax. House Majority Leader Tom DeLay was already on-record supporting a national sales tax. This led to speculation that the Republicans would put such a proposal prominently in their legislative agenda in .

Soon after this news came out, at one of Dubya’s carefully-scripted and -vetted campaign appearances, an “average citizen like yourself” got up and asked Dubya a barely-coherent question about H.R. 25. Dubya was ready, and replied with an answer that was vague enough to leave him plenty of room for plausible deniability, but specific enough to send an encouraging message to national sales tax advocates:

Q (Inaudible) — I want you to take up, and it’s to make the world — that’s HR25 — (inaudible.) (Applause.)

THE PRESIDENT: All right, thank you. He’s talking about getting rid of the current tax system and replacing it with a national sales tax. It’s in interesting idea. You know, I’m not exactly sure how big the national sales tax is going to have to be, but it’s the kind of interesting idea that we ought to explore seriously. You know, we’re working to try to simplify the code. It is, no question, complex. The more simple it is the better it is for the American people. That’s certainly one idea. That’s an interesting idea that we ought to explore.

And the Senator and I — we’ll grill old Miller here on the bus to see if he can explain it all to us. (Laughter.)

(“Miller” is U.S. Representative Jeff Miller of Florida, a sponsor of H.R. 25.) Neal Boortz claims that Vice President Dick Cheney and Commerce Secretary Don Evans are supporters of the plan also.

John Kerry quickly ridiculed the national sales tax plan, and the Dubya campaign soon backed away from the idea, but Dubya’s campaign accomplished what it set out to do, which was to signal to the promoters of this idea that Dubya is open to it and, if the stars are right, someday, maybe, he might enact it into law.

Fat chance, but such flimsy things as these are what dreams are made of, and dreamers vote. And the Iraq War and the Medicare legislation show that this government is bold enough to screw things up on the biggest scale, so perhaps this isn’t so far-fetched after all.

H.R. 25 would repeal the federal income tax (individual and corporate), the payroll tax (FICA), and the estate and gift taxes. It would replace these with a national sales tax. (A competing bill is similar but keeps the payroll tax in place.)

Proponents of the plan suggest that the resulting sales tax would be in the 30% range, although they frequently use a weird sleight-of-hand to claim that it’s really more like 23%. If you buy a $1.00 bottle of apple juice and pay 30¢ in taxes — you think you’ve paid a 30% tax on your apple juice, don’t you? Well, the number-fudgers say that because what you spent represents $1.30 in earnings, only 30¢ of which was taxed away, your real tax rate is .30 ÷ 1.30 ≈ 23%. Keep this in mind when you hear national sales tax promoters tell you what the tax rate will be — they may not be talking about what you think they’re talking about.

Some critics say that a 30% sales tax is nowhere near enough to raise as much money as the taxes it replaces, and that the sales tax rate would have to be upwards of 60%.

But the total cost of things wouldn’t go up quite this much because the pre-tax cost of goods and services would drop under this plan (since the people who produce those goods and services won’t have to pay income tax or payroll tax, and will presumably pass on this savings to their customers). How much? It’s hard to say — the “wisdom of the market” will decide on a case-by-case basis, and all of the mathematical models are just guesswork operating in a very chaotic system. But certainly there would be some drop in pre-tax prices.

One of the first criticisms that national sales tax promoters hear is that such a tax will be “regressive“ when compared to the income tax — that is, it will hit poor people harder, because they spend a higher percentage of their money and a sales tax taxes expenditures, not income or savings.

The proponents of a national sales tax respond to this in three ways: One way is to engineer some progressivity into their tax proposal by giving everybody a rebate: “every taxpayer in this country will receive a check to cover the taxes you would be expected to pay on essential items. I heard one estimate of how much this check could be. For a family of 4 it would be considered that they would receive around $400+ per month. This is based on the poverty level of $25,000 per year times the sales tax rate of 23% which equals about $5700. Divide this by 12 to come up with about $470 that they would receive per month.” The second way is to note that a rich person who earns no income but just lives off of his or her savings is currently not taxed at all — under a national sales tax, that person would be taxed. Finally, they note that while the federal income tax is more-or-less progressive, the payroll tax (FICA) is regressive and it too would be eliminated by the national sales tax.

(The proponents of a national sales tax are usually also opponents of big government. I have a hard time imagining a small, limited government that writes a check to every American head-of-household every month. And imagine the campaign-season bidding wars over who will increase this monthly freebie the most! Note also that this “prebate” amount is based on the poverty level for the type of household, so that a married couple would get significantly less than two single people who are roommates. Talk about a marriage penalty!)

Under the proposed national sales tax, only the final retail sale of an item would be taxed. In this way taxes would not cascade — in other words, a car manufacturer wouldn’t be taxed for buying tires and paint and car stereo parts, but only the eventual seller of the car would be taxed on the car as a whole when it is sold to the person who drives it off the lot. Used items would not be taxed, so, for instance, the person who bought the car and paid the tax on it would not have to pay tax if he turned around and sold it to someone else as a used car.

National sales tax promoters promise that the tax will be a simple one, but I think they’re using wishful thinking when they say things like: “Exemptions are the work of special interests and their Gucci-shod lobbyists. The FairTax has no exemptions…” Sure it doesn’t have any exemptions now when it’s just an unamended bill on some congressman’s desk. But if it gets closer to being law, you can bet that it will get more and more complicated.

“What do you mean the tax is the same for bibles as it is for pornography? Are you saying that someone buying good, wholesome Iowa corn has to pay the same tax as someone who buys French wine? A poor family pays the same sales tax on baby food that a rich bachelor spends on his sports car?” and before you can say “Gucci-shod lobbyists,” there are a thousand pages of regulations describing which sales tax rates apply to which items.

And then there are little complications like this one:

Consider a 65-year-old who retires the day that a sales tax takes effect. While she worked, her income exceeded her consumption and she paid income taxes. Now in retirement — when her consumption will exceed income — she will be asked to pay consumption taxes… Giving such people tax relief on their accumulated assets would raise the sales tax rate considerably and reduce growth, but not giving tax relief seems unfair. Politically, some sort of relief seems almost a certainty.

Many states have simplified income tax forms that push off some of their complexity on the federal tax system (for instance, my California income tax form starts by asking me to fill in the Adjusted Gross Income value from my federal tax form). Because of this, if the federal income tax is eliminated, state income tax laws will have to absorb all of this complexity. For this reason, some conclude that the states would be likely to follow the federal lead and eliminate their income taxes in favor of sales taxes as well.

If you combine the state and federal sales tax rates, you end up with a pretty significant number — significant enough that tax evasion starts to look like a pretty profitable activity. The relative prices of things (like narcotics) that are already in the underground economy drop (without cutting into the profits at all — so for a drug dealer it’s like being able to offer a big price cut that costs you nothing), and anything else you purchase in the underground economy you can expect to buy at a large discount. Suddenly new big-ticket items start falling off the back of trucks en masse and appearing for sale at “used” goods retailers.

Who’s going to stop this rampant tax evasion? Hard to say, since the national sales tax promoters promise to eliminate the IRS in one fell swoop.

So the underground economy is one way tax avoiders like myself would be able to work such a system. The other way is simply to keep expenditures low. I’d be able to earn as much as I’d like to (tax-free) in such a system, and as long as I didn’t spend much (on new items in the above-ground economy) I’d be draining the government with my monthly “prebate” check without giving back. So, as Dubya likes to say, “Bring It On!”

G. Simon Harak and Jim Haber of the War Resisters League note that “The nonviolent march to Najaf [led by Grand Ayatollah al-Sistani] achieved what more than three weeks of relentless ground and aerial attacks by the occupiers could not.”

The immensely positive development in Najaf needs to be seen in the context of many such mass nonviolent uprisings over the last 50 years, nonviolent actions that have effectively addressed the grievances of the people who march. All of us pledged to nonviolence must not lose this opportunity to renew our strength by joining with our fellow satyagrahis in Iraq — each in our own, non-acquiescent way. We need to undertake public fasts and prayer, stage walkouts, renounce honors, boycott events and products, hold marches — even invent whole new ways of nonviolence to oppose those who oppress in our name.