Friday, October 29, 2010
Public anxiety over rising taxes is helping Republicans in this midterm election—with one exception. Democrats are trying to turn the tables on the GOP over the so-called FAIR Tax, a tax reform idea that has bounced around conservative circles for years.
The proposal would end all current federal taxes, junk the Internal Revenue Service and impose in their place a 23% national sales tax. In 16 House and three Senate races so far, Democrats have blasted GOP candidates for at one point or another voicing an interest in the FAIR tax. ... FAIR tax proponents are right to say these Democratic attacks are unfair and don't mention the tax-cutting side of the proposal, but the attacks do seem to work. ...
This is a political reality that FAIR taxers need to face. ... No one supports tax reform more than we do, and in theory a consumption tax like the FAIR tax is preferable to an income tax because it doesn't punish the savings and investment that drive economic growth. If we were designing a tax code from scratch, the FAIR tax would be one consumption tax option worth debating.
But we live in a country that already has an income tax, and most states rely on sales taxes for a major part of their revenue. Unless the Sixteenth Amendment that allowed an income tax is repealed, voters rightly suspect that any new sales tax scheme will merely be piled on the current code. Adding a 23% federal sales tax on top of a 5% or more state sales tax levy would also be a huge additional tax on all purchases. The temptation to avoid such a tax by paying cash or via other means would be high, and collection might require the same army of auditors that the IRS now deploys. ...
Our advice to the FAIR taxers is that voters will start to take the idea seriously once the income tax is on the road to repeal. Until then, our advice to candidates would be to avoid the FAIR tax and focus on goals that are more achievable and less politically self-destructive.