More FairTax slight of hand

Because of the length of Ian’s comment on the FairTax I felt it deserved a post to fully refute it’s misconceptions.

• Point 1) The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces.

The goal is not to allow the government to confiscate more money.  We need reduce the amount of money that government gets not make it easier to get it.

• Point 2) The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan.

This doesn’t make it right.  A rate of 23% is still much too high and it’s taxation of everything is wrong.

• Point 3) Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

This is not accurate, you make assumptions about the costs of goods going down that will not happen in year  1 and may only begin to happen in year 5.

• Point 4) Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

The assumption that consumption will grow in year 1 is ludicrous. You are looking at this from the perspective of theory and mathematics but you apply no logic to it.  When you start taxing everything at 23% people are going to stop spending.

• Point 5) On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base.

This is not going to happen, states that have sales tax will never change there systems.

The bottom line is that this plan puts out theory and attempts to support it with mathematics that aren’t real and it makes assumptions that are not going to happen.  The cost of goods isn’t going to drop overnight, people aren’t going to wake up one morning with 1.7% more disposable income.  However if this plan goes through people will wake up one morning and have less money to spend because they are paying 23% on top of the original cost of goods.

There will be less spending, which will be followed by job cuts, to be followed by businesses closing, followed by increased inflation.  This will have a horrible effect on the economy for the first 3-5 years.  Yes we may actually get to the numbers you suggest by year 10 but we will have gone through a depression to get there where we will be facing 15-20% unemployment.

This plan doesn’t repeal the 16th amendment so in all likelihood this will be a 23% in addition to all the state sales, and income taxes that we pay today.

This plan does nothing to reduce government spending.  95% of the problem with taxation is that the government keeps spending money like drunken sailors. 

I am not opposed to a complete change to a consumption based tax system but only under certain conditions:

1. Repeal the 16th amendment
2. Mandatory defense spending of 50% of the federal budget.
3. Reduce entitlement spending to 15% or less of the federal budget.
4. Tax rate of 15%
5. Exempts food and medicine as most state sales taxes do today.
6. Includes no prebate where the government continues to confiscate large amounts of income and then decides to dole out small amounts of it back to the people.

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