PrintApril 11, 2010
Fair Tax Distraction
Every April, as the due date for individual income tax returns rolls around, I watch for two inevitable events. One is reports of various U.S. attorneys all across the nation issuing indictments for tax fraud. The typical targets are local citizens prominent enough to make sure that the story gets media attention just before the annual peak in filings. The other is articles promising a quick political fix to the labyrinth known as the Internal Revenue Code and the entire industry that has grown around it. The most commonly proposed solutions being promoted are some variation on a flat tax or a national sales tax.
I have been following this policy debate since I heard Majority Leader Dick Armey argue the merits of a flat tax while Louisiana Congressman Billy Tauzin pushed a national retail sales tax in their 1997 multi-city Scrap the Tax tour. In fact, for several years thereafter, I made a point of wearing the official Scrap the Tax tour tee-shirt while working weekends at a CPA firm preparing corporate and individual income tax returns.
Reform is greatly needed. I have seen firsthand how inefficient the income tax system can be and how it can trap the unwary. I also know, however, that any alternative is likely to have unintended consequences and that none of them will truly solve the more serious problem of a government that is spending well beyond its means.
Since 1997, the national sales tax has picked up a snappier name, the Fair Tax, as well as advocates whose arguments go well beyond the need for the federal government to find a better way to generate revenue. The so-called Fair Tax movement is active in my locale, where it often cosponsors events with the local Tea Party.
In addition to the standard line that a form of national sales tax will broaden the tax base while eliminating the IRS, I often hear other purported benefits. Among these are earnest statements that the Fair Tax will end lobbying by special interests and thus eliminate government corruption. I sometimes have to bite my tongue to keep from asking if the Fair Tax will also cleanse the nation of original sin. I usually settle for reminding Fair Tax advocates that I heard those exact claims some thirty years ago from the advocates of that era's panacea for an ever-expanding government: term limits. The voters of California bought the argument about how citizen legislators would preside over a smaller, less expensive, and less corrupt government. We all know how that experiment turned out in the term-limited California legislature: Public employee unions and other interest groups have bankrupted the state.
In 1992, Michigan also adopted term limits for state offices. It's hard to imagine that the state's economy would be in even worse shape today were state representatives allowed to serve more than three two-year terms in office and state senators two four-year terms. The skeptics who argued that there would be no promised surge in innovative government reform and that special interests would gain power in a term-limited system have been proven correct.
Needless to say, I am not very popular with members of the Fair Tax Nation.
In 1992, Michigan also adopted term limits for state offices. It's hard to imagine that the state's economy would be in even worse shape today were state representatives allowed to serve more than three two-year terms in office and state senators two four-year terms. The skeptics who argued that there would be no promised surge in innovative government reform and that special interests would gain power in a term-limited system have been proven correct.
Needless to say, I am not very popular with members of the Fair Tax Nation.
One question I had in 1997 has grown even more urgent. Why do the proponents of the National Sales Tax, aka Fair Tax, think that its purported efficiency is a feature? In an environment of runaway spending, I see giving the federal government a new and more efficient way to reach into my wallet as a huge defect. Isn't talking about an efficient new tax even in the most theoretical of terms at a time when all levels of government are starved for new revenue akin to encouraging a prime candidate for gastric bypass surgery to don a bikini? I have nothing against bikinis in principle, but handing one to a body politic that has become addicted to overindulging at the public trough is not likely to yield a pleasing result. Indeed, it is entirely possible that we are looking at the grotesque prospect of some form of a national sales tax or a value added tax being imposed not in lieu of the current income tax regime, but rather, on top of it.
I have found the national sales tax to be one of those ideas that seems seductive at first glance but whose promise doesn't hold up well on close examination. Its proponents argue that since everyone would pay their share simply by conducting day-to-day commerce, people would thus come to know the real cost of government. They argue that it follows, then, that the total demand for government services would shrink.
Really? Everyone can read the calorie count of almost every morsel of food in the grocery store, and it hasn't seemed to make a dent on the nation's obesity problem. The fact is that a lot more goes into people's support for government spending programs than the size of their personal tax burden and what they think their own benefits will be. If economic cost were the only factor, then all wealthy people would be libertarians and all poor people socialists.
In practice, poor but ambitious people who want to be wealthy someday are more likely to support low taxes, while those who feel that their personal wealth was not fairly earned often strongly support government spending on social welfare. Like those no-pain dietary fads in which you gorge on a single food group, political panaceas like a national sales tax seldom deliver as promised in the long run. If government is to be pruned back to a sustainable percent of gross domestic product, elected officials are still going to have the unpleasant task of repeatedly saying no to the engines of government growth.
The claim that a national sales tax is impossible to avoid is also suspect. If the tax is set at the level needed to support current spending projections, I can guarantee that people will find ways to avoid it. Black markets and barter transactions immediately come to mind as ways to curtail its impact.
As for a national sales tax being even-handed as well as simple and easy to administer, I question if any proponent is familiar with the countless exceptions and special rates that have been carved into the sales and use tax laws of various states. For example, the Wisconsin Department of Revenue once ruled that paper napkins placed under sample slices of cheese pizza during a grocery store promotion were subject to use tax, while those placed under sausage or pepperoni slices were exempt under the statutory provision for meat-wrapping material. Wisconsin may be America's dairy land, but the meat packers had the clout with the legislators.
Then there is the state that applies a low food rate to mini-marshmallows, which are used in salads, and the high candy rate to jumbo ones more often purchased to make s'mores. Is it realistic to think that Congress will be immune to carving out similar exceptions and behavior incentives in a National Sales Tax? Given the predilections of this administration, I find it more likely that we would find a lower rate for organic arugula and free-range eggs to offset that such so-called sustainable farming practices are less efficient. One rate for products by Government Motors is also a possibility. The break wouldn't be drafted that blatantly, but rather, it would list features found only in certain GM models. Before discounting this as being impossible to administer, stop to consider that every national retailer already deals with thousands of conflicting sales tax definitions and rate structures. Manufacturers and importers already bar-code most items, and all but the smallest retailers already use scanners.
The National Sales Tax does not poll well. Most voters see a national sales tax as an additional tax rather than as a replacement for the income tax. And they are right. Even if Congress did eliminate the income tax to replace it with a national sales tax, there would be nothing to stop a future Congress from ramming through a new income tax on top of a high national sales tax. That means that a precondition for wide political support for such a tax would probably require the passage of a constitutional amendment to eliminate the income tax.
If one were to start such a bruising political battle to change the shape of the future, I can think of much more promising causes than replacing the income tax once and for all with a national sales tax. Taking on the public employee unions at the local, state, and national level immediately comes to mind. The size of the government workforce has been growing for years, and the average employee now earns considerably more than those in the private sector, especially when generous benefit packages are included. Unions are by their very nature adversarial and thus create divided loyalties in members who are supposed to be public servants. The founding fathers never intended for public employees to hold themselves apart from all other citizens. Even FDR was reluctant to allow public employees the same collective bargaining rights as workers in the private sector.
My biggest issue with the proponents of a national sales tax is that they may be distracting attention from the biggest issue. For decades, Republican candidates have promised to cut the size of government. It has yet to happen. One reason for that is simple human nature. Most people like to say yes rather than no. Saying yes with other people's money is especially addictive. Another problem has been that it is human to kick the day of reckoning down the road. The cheapest way for a government to buy political peace is to promise generous future benefits and let the next generation of politicians figure out how to pay for them. I have yet to see anything in the national sales tax that alters those equations or that will cause our public officials to grow spines when confronted with the demands for still more government.
I was extremely disappointed last month when Fair Tax Nation, along with the local Tea Party, held a forum for the local congressional race. Six candidates who were running in the Republican primary showed up. They faced just three questions, none of which addressed the concerns of the growing number of un- and underemployed about new job creation that is likely to dominate the general election. The questions were: What will you do if ObamaCare passes? What is your position on the Fair Tax? The final question was supposed to be on the Tenth Amendment, but the moderator, through preface remarks about recently attending Ron Paul's Jekyll Island conference, turned it into a debate on the constitutionality of the Federal Reserve. That in turn devolved into a rant by one candidate in which he waded up and tossed money on the floor, declaring it worthless because it was not backed by gold or silver. I cringed when the majority of the audience applauded that bit political histrionics. When the candidate also spun a fairy tale of how farmers got along fine borrowing from the local seed store when the money supplied dried up in those idyllic days before the creation of the Federal Reserve, I was both bemused and horrified. Did those farmers have employees who took wages in the form of cabbages, carrots, and chickens, with a cow as their annual incentive bonus? Did the holder of the employee's mortgage offer a goat and a duck as change when a heifer was proffered as monthly payment? I could see Democrat media consultants crafting this imagery into attack ads should Fair Tax Nation's champion become the Republican candidate.
My gut feeling is that most voters care little about the history of the Federal Reserve. Nor will they be impressed by a candidate who grandstands by throwing money around, even when it is his own. Voters certainly have an interest in a simpler form of taxation than the encrustations made upon the Internal Revenue Code since the last major revision in the 1980s. I think, however, that they will agree with me that claims that special interests politics will vanish with the enactment of the Fair Tax are unrealistic, if not downright naïve. What voters do seem to care about are jobs, exploding deficits, and a feeling that events are fast spinning out of control and that few in authority are to be trusted.
I know I am not looking for candidates who wax eloquent about a golden age when all the politicians believed in the sanctity of the Constitution. For one thing, I am not sure when that age began or how long it lasted. After all, John Adams supported the risible Alien and Sedition acts; the original proponent of limited government, Thomas Jefferson, made the extra-constitutional Louisiana Purchase; and Abraham Lincoln seldom let the Constitution prevent him from doing what he found necessary in the midst of the crisis of the Civil War. Nor do I want candidates who play at being tough in a room packed with acolytes.
I want candidates who will remain tough when a dozen senior congressmen and the president are all pressuring them to make just one exception to those promises that got them elected in the first place. I want candidates who can reel off ten or twenty federal spending programs to be eliminated and who I trust will stand tall against relentless lobbying and news stories about heartless and devastating cuts to crucial government functions like National Public Radio. I want executives who firmly promise to veto budgets that raise taxes of all kinds, and I want legislators who are implacable in saying no to new entitlements even as they work to encourage private alternatives. Governor Christie of New Jersey comes to mind on spending issues. So do any number of mayors in smaller cities and towns who are bringing a newfound sensibility to what should and should not be in the budget as they work to make the delivery of essential services more efficient.
In 2008, America elected a president who had never run anything larger than his own mouth and whose biggest responsibility had been to show up on time for the fawning TV interview. In 2010, they will be looking for candidates who understand how markets work and how real wealth is created. Our president seems to accept no vision other than his own and no voices other than the applause of carefully vetted crowds at campaign appearances.
The political antidote to all of this is candidates who seek practical solutions with broad support, not candidates who preach a quite different vision of utopia to a different set of true believers. Our president thought that a vote for change meant that he was free to finish an anti-business agenda of the New Deal vintage, recreating the Great Depression in the process. In their effort to correct the president's misperception, voters are not likely to reach out to candidates whose idea of change is to take us back to the policies of the late 19th century.
We have all overindulged in government goodies these last few decades. As with a middle-aged fan of good food and drink who suddenly realizes that an extra pound or three a year has left him fifty pounds overweight, there are no quick fixes, no fad regimes that will painlessly shrink the government of the United States back to an economically competitive weight.
The highly addicting diet of government entitlements has to become a thing of the past. So do the subsidies for the wealthy that range from earmarks for museums that already have major endowments to demanding procedures for firefighting be adopted to protect luxury vacation homes built right next to national forests.
The list of areas where citizens need to become self-sufficient must grow. Like that list of healthy foods we must eat to stay fit -- the fresh fruit, the leafy greens, the whole grains -- we have to make into an ingrained habit a whole new way of looking at our relationship with government, not just until the economy recovers, but for the rest of our lives.
Libertarians have some of the answers with their ideas for smaller, more efficient government, but so do cultural conservatives who talk of the need for stronger families. For if we take the federal government out of the economically unsustainable social welfare business, then there will still be sick people to care for, down-on-their-luck people who need help, and the elderly or impaired who need daily assistance. In the pre-social welfare state world, the primary delivery system for these services consisted of a strong multigenerational family supplemented by churches and fraternal organizations.
Before we tie candidates to pledges over whether a simplified income tax or a national sales tax is best for the nation's future, it would be helpful to first ask them to articulate what is to take the place of the traditional delivery systems in the rapidly approaching post-welfare state world.
