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Thursday, December 13, 2007
The Fair Tax:
Talk show host Neal Boortz has been championing the Fair Tax for quite some time now. For those that are unfamiliar with the concept, the Fair Tax is conceived as a way to tax consumption (instead of income), eliminating deductions and credits as well as the IRS itself. Heck, the whole taxation cottage industry would be eliminated or largely reduced. Presidential candidate Mike Huckabee has adopted the Fair Tax as one of his campaign platforms. Thus, it has crept into the national spotlight recently.
Now, you would expect self-styled progressives to frown upon this new method of taxation, but most of the pounding lately has come from the right. The Wall Street Journal's James Taranto, no fan of exorbitant taxation, is apparently even more leery of the Fair Tax. Both Boortz and Taranto have thrown around various arguments this week on their respective websites regarding the Fair Tax. I've found the discussion interesting.
What I've found frustrating though is that Taranto's tone has been very condescending. What I'd like to read is a categoric refutation of the arguments that Boortz is making. Taranto doesn't seem to understand how taxes are passed onto the consumer through the supply chain. Taranto refuses to even acknowledge how prices are inflated because each hand that touches a product or a commodity has to pay some share of the tax for the transaction.
In effect, we have a value-added tax (just like Europe does), but it's "hidden". It's very much like when people argue that they pay 7% of their income for SOcial Security and Medicare, and their employer pays the other half, when in fact, the employer is paying nothing. They're just taking the required value out of the salary they would be paying out to the employee. If you don't believe me, look at how human resource departments allocate their expenses for human capital. SS and Medicare outlays are included in that overhead. That equates to money that would have been paid out as salary that simply is being reclassified.
Taxation on goods and services works very similarly. Let's assume that you run an assembly plant for computers. Each component is supplied by a vendor. That vendor has to pay taxes. The commodities used to produce that component come from another vendor. That vendor has to pay taxes. The logistics companies who distribute the components and commodities also pay taxes. The software vendors that provide ERP services to track the commodities and components are taxed. Each transaction has an associated tax. These taxes are evident to the vendors who pay them, but are transparent to the purchaser, because the cost is embedded in the product or commodity. The bottom line is that, if a good costs less to make, the cost savings will be passed onto the consumer. If you doubt that, watch how a market economy works. If a supplier decides to keep their margins high by charging the same cost as before the embedded taxes were removed, watch another firm enter the marketplace that will lower their margins while keeping expenditures nearly the same. Watch the firm that lowers the price to the consumer thrive, while the "greedy" company that stubbornly stuck to its old pricing structure goes out of business.
Taranto ridicules Boortz in his posts to "Best of the Web" on the fact that he finds it absurd that prices will be lower when the current taxation scheme is eliminated. Taranto is (I believe) a supply-sider, so it surprises me that he doesn't understand that the elimination of embedded taxes will lower the cost of goods and services. Actually, in his latest post, he at least acknowledges the argument.
In fairness, the fair tax fans' notion is federal taxes on income, payroll, corporate profits and other things make up a substantial portion of the cost of bringing an item to market. The repeal of these "embedded" taxes, the argument goes, would reduce pretax prices, both wholesale and retail.
If Taranto accepts the above premise, then I fail to see his objections to the idea. If the Fair Tax could lower pretax prices, eliminate political constituencies by consolidating taxation into one rate that is applicable to all, increase the rate and ability of taxes to be collected (since every act of consumption would be taxed), and reduce the size and scope of an agency as large as the Internal Revenue Service, what's not to like?
It appears that, at this point, Taranto's only issue is with the idea of a tax "prebate". I'm not going to argue the merits of a prebate here, nor am I going to argue what the Fair Tax rate should be. Those details would certainly need to be well thought out in the event that a Fair Tax was implemented. However, considering the above points, and considering the current way that Washington uses tax policy, I just can't help but to think that there has to be a better way, and I believe the Fair Tax is the best idea I've heard so far. If Taranto has a better way, I'm all eyes.
Labels: Financial, Politics, Taxes
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