The Tax Cut You Can't Afford

By Nick Star

In recent days I have seen a discouraging and confusing surge in the number of "fair tax" bumper stickers on the road. Yesterday one such sticker was on a Nissan Sentra around 20 years old. My initial thought was "you moron, you can't afford a 'fair tax!'" The real problem with the 'fair tax' is that it is completely regressive, leaving the poor paying higher rates, and the ultra-wealthy paying almost nothing. Unfortunately, the gentleman is merely another victim of the wealthy convincing the poor to pay the taxes of the upper 1% for them.

A review of the FreeTax.org material, however, should sound many alarms for any reader with a 3rd grade education. The first, and most obvious, is that your federal income tax would be replaced by a 23% sales tax, tacked onto your current local and state taxes. In most areas this would mean around 30% sales tax, and in many places, significantly higher. The tax would also be imposed on food sales, which many states forgo at the present time.

But that 23% tax hike replace all of your income taxes? Nope! It only replaces FICA. You are still responsible for your state income tax, local income tax, social security tax, and Medicare tax, not to mention your property taxes. And of course insurance premiums will still be deducted from your check, but more on that later. According to FairTax.org, this would be enough to meet around 70% of the federal income tax it would replace. Not to worry about the $900B deficit though, revenues will increase eventually! While 23% is obviously way too low to pay the bills for all of the roads, schools, military and everything else we use, we will use their absurdly low estimate just for sake of argument.

So your bills for groceries and other consumable items will have a 30% tax on them instead of paying your FICA tax, at least that's all you will pay more for right? Wrong again! If you have ever bought a car you noticed that you pay a sales tax on that new car too. This, too, would be subject to the tax. When you take that car to be repaired, those are also subject to the 30% tax. And if the repairs cost 23% more, and your car insurance pays for those repairs, your car insurance will have to go up by 23% as well, to compensate for the increased repair costs. The same would be true for your homeowners insurance.

Not to worry about your escrow, insurance, car, and grocery, bills going up, in addition to everything else you buy, the government will give you a tax credit in the amount of the estimated taxes paid by a family at poverty level (not including the indirect increases to your other bills of course). The current level for a family of four is $21,200 annually.

According to FairTax.org, every economic demographic under $500,000 salary will save money on their tax bills. Yet somehow, more tax revenue will be collected than under the current structure. The only way for this to be true is if those making over half a million a year will pay significantly higher taxes. I find this hard to believe considering that this is the group of people who actually have money to save for the golden years. What is the tax rate on money you make, then put into investments? Zero. And the money used to vacation in Europe? Zero. The money used to buy lavish mansions? Zero. Granted, their escrow payments will go up too, but those are a much smaller portion of their income that those making the national average salary of somewhere around $50,000. If you buy your private jet elsewhere, you would even be able to escape paying that 30% tax on that too.

Remember that the 23% rate cited by FairTax.org retains the current, nearly trillion dollar deficit left to us by the über-fiscally responsible previous republican administration. That is to be made up by the - wait for it - stimulus provided by this new tax! Allegedly, a 30% sales tax will cause your discretionary spending to increase! When your kid wants a new DVD, and you know that new $30 Blu-Ray will, in fact, cost you $40, and the $75 dinner at your local chain family restaurant will cost you $100, you will be more motivated to spend money! But if, for some weird reason people start spending less money, that 23% tax rate will have to increase just to compensate.

FairTax.org does cite some ways that this will spark economic growth, but most are not related to the tax code. One such change would be to repeal the tax on exports. No mention of how that money will be made up. Granted, that may increase domestic exports. This would be a great thing for a country that, due to laissez-faire economics and the free trade policy of the neo-conservative movement, has lost its once large manufacturing base that probably saved our butts in World War II. Another alleged positive impact of the new tax policy is that, because your mortgage payment is not taxable, every homeowner would effectually receive a tax write-off for their home payments, even those who do not currently itemize. This would generate new home sales and would provide another economic spark. What is seemingly ignored, however, is that this same effectual tax rebate would now also be given to renters, as rent is also not taxable. While it is my belief that rent should be deductible anyway, this new policy would remove the incentive to buy a home, not strengthen it. Using the same argument, cocaine and hookers would become tax deductible!

One of the most valuable things humans learn as they grow is skepticism. When the head cheerleader tells you to vote for her for class president because she will double the length of lunch periods and make first period optional, you know not to believe her. When a guy calls you at dinner time and tells you an initial investment of your life savings in an unknown start-up company will leave you a millionaire a year later, you know not to believe him. And when some multi-millionaire from Texas tells you he has a plan to cut everyone's taxes and still make more money, read his plan before you slap his advertisement on your 1989 jalopy!