I see a great deal of opposition to a Fair Tax, and almost as much to a Value Added Tax. Since I am all too aware of the drawbacks to a “Value Added Tax,” let me talk about the various system of systematic extortion governments implement to feed themselves.
First, what’s wrong with the present system? Too many people see the current system as unfair, since a great many people pay no direct taxes at all. In fact, many get a subsidy from the government out of the pockets of those whose labor was taken to provide it. To add insult to injury, much too large a percentage of tax receipts wind up funding bureaucrats. Who are like the proverbial lilies of the field, neither toiling nor spinning, just collecting fat salaries for doing as little as possible. And impeding those who do toil, spin, and pay taxes.
So of course, there is a clamor for a “new system” to so everyone will have “skin in the game,” so to speak. So lets discuss alternate tax schemes, starting with a concrete example to keep life simple.
Right now, a dairy farmer is taxed on its profits, the creamery on its profits, the retailer on its profits, and a small percentage of the cost of a gallon of 2 percent goes to the state. Altogether, income taxes on producers and middlemen account for about 3% of the cost of milk. (Of course, as a nod to my economist friends – this does not account for the taxes on expensed items such as payroll taxes on the cashier, the taxes on the fuel to bring milk to market. All together, direct and indirect taxes account for about 20% of the cost of a gallon of milk.) And a quick survey of grocery chain ads around the United States shows milk is selling for around $3.50 a gallon.
Keeping in mind that dairies sell milk by the pound of butterfat – but I am trying to keep things simple —
To start with, let’s say the Congress, in its miniscule wisdom, decides to impose a 15% “Value Added Tax,” a VAT, on top of all other taxes. That tax starts with the first person to charge for a product, and “compounds” every time a product is sold..
So the dairy farmer guesses his cost of production at $1.47 a gallon, and must pay a 15% tax. Which brings the price the farm must get to $1.6905 a gallon. Which the creamery/processor may or may not pay.
If the creamery buys raw milk at 1.6905 a gallon, with ordinary markup for processing costs it will sell that gallon at $2.586465 plus 15% VAT. Or 2.9774 a gallon. Which the retailer will have no choice but to pay.
And with a normal markup to provide that 2% profit, the retailer must sell for $3.96 a gallon. Plus VAT. For a total of $4.55 a gallon. For milk that under the present system sells for $3.50 a gallon. So with compounding a 15% VAT on top of the present tax system would add about 29% to the price of milk. And more than that to the cost of almost everything else. Because very few common items pass through only three hands before it reaches the market: and because most common items have raw materials costs to pay VAT on.
So how about that “Fair Tax.” The Fair Tax is a sort of VAT – on retail sales. It would repeal all the myriad federal taxes we pay, from income taxes to the levees, assessments, and whatever other sort of legalized extortion at gunpoint Congress has burdened us with. There would be no tax at the raw material level, nor any tax at any level short of the checkout stand. So what happens?
When it is all said and done, a typical American worker works for more than four months to pay their Federal taxes, and almost eight months to pay their all their direct taxes. Most of that would be done away with. Remember that labor is wealth, and wealth is money. So virtually two thirds of our yearly labor is taken up by direct taxation. But of course, there are the indirect taxes that are included in the price of things we buy.
The cashiers payroll taxes, and the taxes and imposts on the truck that delivered the milk and its fuel. Altogether – a typical American worker labors for eleven months to pay their direct and indirect taxes. Only about 8% of our earnings go to pay for goods and services; the rest goes for taxes on goods and services. If all our taxes were eliminated, that $30,000 car would probably retail for about $2,400. Can you imagine what would happen to our exports if we could deliver a Ford Focus to the dock for $2100?
A fair tax would sweep all those direct and indirect Federal taxes away. Instead of income taxes and luxury taxes and fuel taxes and tax taxes, there would be one single tax on retail sales. To be sure, a 15% Federal Fair Tax. A tax on every new item and every food product you buy. But you would NOT pay most of the gross 92% tax rate on both new and used merchandise you pay now.
So what would happen? MASS CONFUSION – until everything settled down. And then that $3.50 gallon of milk would sell for about 63 cents. Including the Fair Tax, but not including state and local taxes.
“But everyone would pay taxes, wail the progressives!” Your darn tootin’ everyone would pay taxes. That is why it is called a fair tax. But they would also pay much less for goods and services. Meaning that the tax burden on the poor would be enough less that they could actually buy something again.
Of course, the number one purchaser of goods and services is Good Old Uncle
Sucker, er, Sam. The second largest purchaser are the 50 states, followed by city and county governments. Their costs for most things would come down by the same percentage as everyone else. So the cost of government would drop substantially. So the US Gummitup would cost everyone a whole lot less money. And the cost of state and local governments would also drop – drastically. Instead of 92% gross tax on everything – there would be a gross 25% tax on retail sales.
Now, I have tried to lay out the basics of a somewhat complex subject in a relatively painless fashion. For more, let me give the podium to Karl Denninger, who addresses the basics of the Fair Tax from a different perspective.
A national survival perspective. And Denninger makes sense to the working economists I talk to. So he’s worth the read.