Thursday, February 25, 2016

The FairTax Is No Fantasy

The editorial below was published originally in The Roanoke Times, April 10, 2006. With all the presidential candidates laying out their ideas for tax reform, one wonders why none of them are proposing the FairTax.

The FairTax Is No Fantasy

By David L. Kendall

Kendall is professor of economics and finance at the University of Virginia's College at Wise.

Some critics of the FairTax, HR 25, such as Christian Trejbal in his March 22 column, "FairTaxers pitch a fiscal fantasy," call it a fantasy and a crackpot idea. But benefits of the FairTax are no fantasy.

If enacted as written, HR 25 would eliminate all federal income taxes for individuals and corporations. It would eliminate oppressively regressive payroll withholding taxes, now the cruelest burden on the working poor. The FairTax would replace all federal income and payroll taxes with a simple, progressive and efficient national retail sales tax.

Because the FairTax would eliminate all individual tax returns, April 15 would be just another pleasant spring day. HR 25 would eliminate the Internal Revenue Service and its annual abuse of our Fourth and 14th Amendment rights. A small federal agency would be needed to administer the FairTax, but the IRS as we know it would be abolished.

The FairTax would collect federal sales tax from every retail consumer in the country, including foreign visitors and even underground criminals, greatly enlarging the federal tax base. With a larger base, the average tax rate paid would go down, while the U.S. Treasury Department collects the same federal revenue.

The monthly prebate paid to all households under the FairTax would not be a new entitlement program. The prebate would simply keep income in the hands of the people who earned it. The HR 25 prebate is to the FairTax what the personal exemption is to the income tax, just sooner and fairer.

Recent studies estimate that the underground economy is about $1 trillion per year, all of it untaxed. That's tax evasion on a scale that simply could not happen with the FairTax. Significant evasion of the FairTax would require retailers like Wal-Mart, Kroger and your local dentist to help consumers avoid the sales tax; very unlikely. Potential tax evasion with the FairTax pales compared to the massive income tax evasion already happening.

The FairTax would bring greater accountability and visibility to federal tax collection. All Americans would understand clearly how much federal taxes they pay. People could even plan for taxes they would pay in the future, removing the mystery we face now.

With the FairTax, Congress would be compelled to be up front about tax increases. That's not the case now. When Congress changes tax law now, it takes years to sort out who won, who lost and how tax revenues changed.

The FairTax offers still more. Eliminating the federal income tax would attract more foreign investment to the United States. It would also give U.S. firms incentives to keep new manufacturing capacity in the United States. That means more jobs and faster economic growth.

Our federal tax code gives corporations enormous incentives to export jobs, money and manufacturing off shore. Studies suggest that replacing the federal income tax with a national retail sales tax could cause as much as $10 trillion to flow back into our economy from abroad to finance new plant and equipment. The long-run economic benefits for our children are obvious.

Businesses and other organizations spend more than 6 billion hours each year complying with the federal tax code. That's time and expense wasted. Economists estimate that compliance costs top $250 billion annually. Although out of sight and mind, those costs are real, and consumers are paying them now.

Through competition, the FairTax would compel businesses to lower retail prices. For corporations, taxes and compliance costs are like any other cost of doing business; they must be recovered in prices. With the FairTax, consumers would see retail prices drop by 20 percent to 25 percent.

So, if the national sales tax were 30 percent, the retail cost of the $100 iPod shuffle plus tax would not be $130. Instead, it would be more like $80 plus a $24 sales tax. Because consumers would have their whole paycheck to spend, instead of their "after withholding" paycheck, the $104 iPod, including tax, looks pretty reasonable.

The current federal income tax code is widely regarded by just about everyone as unfair, wasteful and mind-numbingly complex. It's time for dramatic, real change. It's time we demand that Congress pass HR 25.