Tuesday, February 19, 2008

Fair Tax Rhetoric

I’ve written before about the Fair Tax, not because I oppose it but because some of the arguments offered by proponents are without basis. As Mike Huckabee’s bid for the White House draws to a conclusion, I feel the need to address one of his selling points in particular.

In campaign stops all over America, Huckabee touts the possibility that the IRS will be put out of business of the Fair Tax is established. The crowds react wildly. After all, who in this land likes the Internal Revenue Service?

But is it realistic to expect the IRS to wither away with the replacement of the income tax by a consumption tax? Remember, the IRS doesn’t create tax laws. It only enforces compliance. Certainly calculating taxes will be simpler but will enforcement be simpler?

One argument always made in favor of the Fair Tax is that it eliminates the ‘underground economy’. That is, people that are here illegally or are engaged in illegal activities will have to pay the tax just like the law abiding taxpayers. Even business owners who hire labor but don’t properly report the payments on either a W-2 or 1099 with the appropriate withholdings will now have to pay taxes as will the recipients of this ‘tax-free money’. But is this a reasonable expectation?

If it is so easy for employers to avoid proper payroll tax, why wouldn’t it be just as easy for business owners to avoid paying the fair tax? Suppose a local retailer sold goods and services subject to the national sales tax. When strangers came and shopped, those consumers were charged the appropriate amounts under law. Then when the storekeeper’s friends and family shopped, no sales tax was applied. Even worse, suppose business owners actually collect the proper amount but falsify the financial records in order to submit a lesser amount. How do the Huckabees of the world suppose the Fair Tax will operate without a tax gap? Or do supporters expect us to believe that taxpayers will be so relieved that the IRS no longer exists that everyone will freely collect and submit what they properly owe?

It simply is not true that the Fair Tax will eliminate the need for government enforcement. And if it isn’t true then it shouldn’t be said be people such as Huckabee.

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