FairTax is a great idea, but misses the target due to a serious misunderstanding of what actually motivates both individuals as well as corporations, not to mention Congress.
Before I begin, let me introduce myself so you’re aware of my credentials and will focus on what I have to say.
I am a retired U.S. Air Force officer, a systems/business analyst and project manager with three degrees in business, two masters, two in the sciences, with two concentrations and two summa cum laudes. Specifically:
- Master of Science in Management with a concentration in Project Management (summa cum laude)
- Master of Business Administration with a concentration in Technology Management (summa cum laude)
- Bachelor of Science in Finance, Insurance, and Business Law
I’ve long eyed the FairTax as a much more sane approach to taxation than the current IRS Form 1040 and its complex and unnecessary rules. However, I’ve noticed a major flaw with FairTax that resulted in most people, including members of Congress, dismissing the FairTax approach out of hand.
The flaw is that FairTax attempts to replace all tax revenue with the FairTax instead of just individual income taxes. The difference between 23% and 10% is the difference between failure and success, between people saying, “No, 23% is way too much; I don’t way to pay businesses’ taxes for them!” and them saying, “10% for my own taxes sounds reasonable.” 23% is also in the same range as the VAT (value added tax) found in most socialist countries, a definite turn-off for most Americans and members of Congress.
The flaw is one of perception, not only the public’s perception of the program but also your perception of how people will react. As both a leader in the Air Force as well as a manager and summa cum laude student in Management Science, I know one axiom to be true above all others:
People rarely act in either the best interest of themselves, their employer, their society, or their country. Instead, they tend to act in ways which them feel good about themselves and their efforts.
In fact, if you watch a 10 min YouTube video entitled Dan Pink: Drive, you might understand what I’m saying.
For kicks and grins, and to better my understanding of personal income taxes, I went through Jackson Hewitt’s Tax Prep Course this Fall. Tax law is not easy. There’s a reason CPA’s specializing in personal tax returns are rare. I was a corporate accountant before I joined the Air Force. That was difficult enough. Personal income taxes are not easy in the least.
The problem with the U.S. Tax Law is that it centers around the Form 1040, which itself is inherently flawed in its complexity, primarily due to the myriad of rules, alternatives, and exceptions behind many of its entries. Even the complexity of its entries are the result of everyone and their brother crying “I want tax relief” and then getting some in the form of even more complexity.
America’s GDP is more than $18 Trillion. The Fair Tax would simplify that greatly. Although almost half (47%) of all 2016 federal revenue comes from individual income taxes, the total revenue is $3.3 Trillion, thus, 47% of that is $1.5 Trillion.
Individual income taxes provided $1.5 Trillion, roughly 10% of that $18 Trillion.
Thus, instead of taxing individuals such that hundreds of millions of people must spend hours and sometimes days filling out complicated forms, why not instead just tax all goods and services 10%? That 10% would come to $1.8 Trillion, thereby ELIMINATING the need for personal income taxes altogether, not to mention saving hundreds of millions, if not billions of man-hours wasted by Americans filling out their taxes.
This approach is a modified but far more palatable version of the FairTax both to individuals as well as to corporate America.
I agree with your main emphasis: Not only would this save BILLIONS of man-hours of human effort, but it would also create a huge incentive for Congress to focus on actual overall economic health of our nation. Finally, it would tax everyone, as everyone consumes goods and services, but it would tax the largest consumers (mostly the rich) the most. Who can argue that this isn’t fair?
Even with a 10% sales tax on all goods and services, and used only to eliminate all personal income taxes while leaving the existing corporate tax structure intact, a FairTax 10 approach would still be doomed to failure without one absolutely critical component:
A 28th Amendment.
If enacted, the 28th Amendment would read as follows:
Section 1. The sixteenth article of amendment to the Constitution of the United States is hereby repealed.
Section 2. Congress is hereby prohibited from either laying or collecting any tax on personal incomes, from whatever source derived, without exception.
Section 3. Congress shall collect 10% on the sale of all goods and services.
Section 4. Congress shall be prohibited from repealing or modifying this amendment for a period of 100 years from the date of its acceptance, except that Congress may reduce the tax percentage one time, to zero (0%) should it no longer be economically necessary to continue taxing goods and services.
Only an Amendment to the U.S. Constitution would keep that 10% tax on goods and services at 10%. Without it, Congress would all too quickly tap into it and raise it to a level similar to that of socialist nations. The “100 years” restriction is similar to another Constitutional time restriction. Do you, the reader, know which one? 🙂
Alas, FairTax’s approach was flawed because it thought people would fall in love with the idea of not having to pay a personal income tax and abolishing the IRS. While attractive, it was never perceived as credible.
FairTax should have first determined what both individuals and corporations would prefer and then work within that framework, alongside both people and corporations, to change America’s tax code for the better, instead of going for the whole enchilada and failing.
Had FairTax considered what motivates both people and corporations, we might have the modified version of the FairTax in place in 2018 instead of the GOP tax plan, which is little more than a good tweak of the tired old system.