The Fair Tax System

What is a fair tax? That question has perplexed many an economist and politician over the years. Most people would say the only fair tax is no tax. Problem is, without taxes, how can we provide services to our ever growing and needy population? How would we pay for roads, schools, baseball stadiums? Those luxury boxes won't build themselves you know. So, we have to have taxes, but how do we distribute the burden fairly?

Some have proposed what is known as a "fair tax". This system proposes getting rid of all income taxes, estate taxes, and tax taxes and replacing them with one big tax on retail sales. This seems like a good idea at first blush, and isn't that all we really care about anyway? Get rid of all the mess of convoluted taxes on everything from working (income tax) to taking a dump (sewer tax) and replace it with a simple system that everyone can follow. Sounds like a no brainer, until you consider the problems.

First of all, how would one collect this tax? It would be collected at the retail level, where store owners can manipulate their "books" for tax purposes. I know that may be a shock to some of you living in dreamworld, or waterworld, or wherever some of you reside. Fact is, there is no way the government can monitor what is sold in each store, at what time, and for how much. It is simply impossible. Take for example a bar. How is the government going to prove a business owner sold 14 shots of tequila on Thursday when most of the business was in cash? Such a tax just invites an even larger underground economy to spread.

And that is just the problem. Proponents of the fair tax have not considered the sales made person to person. Is the government going to try to go to every garage sale and collect taxes on sales or troll craigs list and ask everyone that sold something there for proof if it sold and if they have paid taxes on the sale? What about if someone wants to barter for a product or service? How will that be taxed? What if someone buys something in another country and brings it home? Will that be taxed? Fact is there are simply too many loopholes that will simply encourage a black market for products and services.

Every fair tax proposal to date taxes only retail sales, not sales from business to business or from wholesaler to retailer. Now, it doesn't take too much brains (cool sentence huh) to figure out how to avoid taxes. Simply start your own business, buy everything through the business, and pay no taxes. Who wouldn't do this? I know what you are saying, people could do this now and avoid sales taxes. Fact is, some do, but it is not worth it for most people who only pay 7% tax on the things they buy. The fair tax would be much higher, some suggest as high as 21% , so it would be much more beneficial for people to start a business to avoid the tax.

In European countries they have a solution for this called the value added tax. Each time the product is passed from one company to another, it is taxed based on the amount of value that is improved in the product. But, we are talking about making taxes fairer and simpler, and that tax is the most convoluted tax I have ever run across. Fair tax proponents have not suggested this either, so again we are back to people avoiding the tax by starting a business.

Also, what would be taxed? Fair tax proponents say everything should be taxed, really? So, if you buy a house for $100,000, you should pay $20,000 tax? How many people could come up with that? But wait, we could always exempt house sales from the tax! O.K. and then what is next, cars, airplanes, tractors? You see what would happen? Pretty soon everything would be exempt from the tax and we would be right back where we started with loopholes for everything.

Finally, there is the problem of implementing the tax. Would it be put in place overnight or phased in? How would you phase it in? Charge a higher and higher sales tax and lower and lower income tax? Most fair tax proponents argue it should be done right away. But, then what if tax revenues do not match what is expected? What if sales stagnate or go down in a nasty economy? Would the tax rate simply be raised more and more? Eventually, the "fair" tax would have to be 30% or more to pay for all government programs and services and do you think people would be happy with that? The one good thing about the current tax system is that it taxes people incrementally so they hardly notice it. A social security tax here, a medicare tax there, a cigarette tax down yonder. We may pay half of our incomes in tax, who knows? Who has time to figure out everything we are paying? If there was only one tax, there would be more tax revolts and people trying to avoid it because it would be so noticeable.

So what is the fair tax? The only true fair and reasonable tax that has any chance of success is a tax on land. Think about it. With technology, we can figure out down to the acre how much land there is in the entire country. It would be a simple system as we would know what the budget is for the year, how much land there is, and could tax it accordingly. This system already funds schools and services in almost every city in the country. People can't cheat it easily because either you own the land or you don't. It would also be very simple to implement because it is already in use, and would be less prone to the vagaries of the economy. And most importantly, it would be fair because one would only pay tax based on the value of their property. That is the only fair tax.