Saturday, May 02, 2009

The Un-Fairness of the Fair Tax

I probably don't need to tell you that the South Carolina GOP is dominated by politicians who have been placed there to insure that the moneyed interests are protected at the expense of the working and middle classes. But in case you are from Mars and think that our picturesque little state is all magnolia blossoms and butterfly bushes, I give you last week's skirmish over the "Fair Tax." 

In the House, there was much Democratic hand-wringing over the party's disenfranchisement on the Tax Realignment Commission.  The party's powerlessness is guaranteed to mean that the party of lower taxes will raise taxes on the people who can afford it least. 

The Commission is also being empowered to "study and make recommendations to the General Assembly of the advantages and drawbacks of a revenue neutral replacement of the state individual and corporate income tax, state imposed sales and use tax, estate tax, bank tax, savings and loan association tax, and taxes on beer, wine, and alcoholic beverages with a broadly based consumption tax modeled on the proposed federal Fair Tax as that form of tax would have to be adapted to apply on the state level."

How fair is the Fair Tax? Judge for yourself. 

The Fair Tax proponents propose replacing all other taxes with a much higher sales tax on goods and services.  In Missouri, the Fair Taxers, pushed their scheme through the Missouri state House a few weeks ago. The Institute on Tax and Economic Policy released a study of that plan on Thursday.  Because of a rebate for households below the federal poverty level, the impact on the poorest Missourians was limited but still negative.  The only real benefit of Missouri's un-"Fair Tax" goes to the wealthiest 5 % of taxpayers. 

According to the ITEP, even with the rebate for lower level taxpayers, the Missouri bill: "…increases taxes on the poorest 95 percent of the income distribution, and in particular on middle-income families.  The middle twenty percent of Missouri’s income distribution, those with an average income of $37,000, would see an average tax hike of $2,036, the equivalent of 5.5 percent of their income. Because the sales tax rebate is based on federal poverty levels ($10,210 for singles and $13,690 for married couples in 2007), the credit doesn’t do enough to help middle-income Missourians who are also impacted by regressive tax changes proposed in HJR 36. The poorest twenty percent of Missourians, those with an average income of $9,000, would see an average tax hike of $190, the equivalent of 2.0 percent of their income...By contrast, Missourians in the top 5 percent of the income distribution would see a tax cut, on average, under this plan. In particular, the wealthiest 1 percent of Missourians, with an average income of over $1 million, would enjoy an average tax cut of $22,864 under HJR 36."

So the rich get a tax cut, and the poor and the middle class? We take it on the chin.

But you don't have to worry about South Carolina copying the flawed Missouri approach. That's because Rep. Rex Rice (R-Greenville/Pickens) has introduced the first Fair Tax proposal in South Carolina.  Rice's bill would show those pesky Democrat-leaning lower classes just who the bosses are in the Palmetto State. Because he would eliminate any rebates for the poor.

How fair is that? 

9 comments:

Jamie Sanderson said...

Good blog. Thanks for keeping the truth out there.

Anonymous said...

You have several things wrong:

The Fair Tax does not element all other taxes, only income taxes.

The Fair Tax does not operate under a rebate system, it is a prebate system so the money is alloted up front and isn't a burden on low income families.

The SC Fair Tax bill does not eliminate the "rebate" as you called it, but what is actually a prebate. I don't know where you got that information but it is false.

Also, I will say that is my opinion so I could be mistaken, but I believe that your information on the tax hike for the middle and lower class is misleading because it does not take into account the taxes that were overlapped on sales tax that they were already paying that would be eliminated by the Fair Tax.
i.e. - When a company sells a product, they pay taxes on the products they bought that were used to assemble the product (for example, a piece of wood with nuts and bolts) , and the company they bought it from paid sales tax on the products that they bought to assemble it (for example, the nuts and bolts) and the company that company bought their product from (for example the nuts and bolts company who bought the metal to mold the nuts and bolts) paid sales tax on the metal which is then taxed and taxed and taxed all the way down until the final product is sold to the consumer and they are taxed upon buying it, so over time that product has been taxed multiple times. Those numbers in raised taxes don't take into account the lower cost of the product that would occur because they weren't passing the cost of the tax along in the product. The Fair Tax only taxes products once at consumption, and used products that have already been taxed, are exempt from the tax.

Walmart said that if The Fair Tax was implemented, they would lower the cost of their products by 18 - 20 %. So Taxes might be higher on paper, but the products would cost less due to a tax cut. So ultimately their net income in higher. Not to mention they could probably get a job with higher pay due to the increasing job opportunities that the Fair Tax offers because it encourages the return of industry to our area.

Deacon Tim said...

Anon,
Thanks for stopping by, and even though we disagree, I welcome your thoughts.

I think the Fair Tax is a boneheaded idea that won't achieve any of its aims, from shuttering the IRS to lowering the prices on goods and services. Every "revenue neutral" Fair Tax scheme relies upon everyone, from you and me to the federal government, churches, and non-profits paying higher prices on everything they buy. The Missouri bill did study net tax liabilities and thus does include the "overlapping taxes."

One final thought. Are you seriously proposing that Wal-Mart jobs are going to result in economic prosperity for their workers? Even if they gave out 30% raises to their $9 an hour workers, a family of four would be below the federal poverty line, if that job was full-time. Which it wouldn't be, because we're talking Wal-Mart here.

In any case, thanks for reading.

Deacon Tim said...

Thanks, Jamie. Good to hear from you.

Anonymous said...

I do see your point Deacon, and I'm just as anti-Wal-Mart as the next guy. (Which is unfortunate that such a reckless employer is the sole way that may low income individuals can afford many of the things they need.)

I appreciate your response.

On the Wal-Mart issue, I'm not entirely clear about what you are saying. I was referring to Wal-Mart's statement that they would lower their prices 20% if/when the Fair Tax is instated.

Matt G said...

Hi,
Thanks for tackling this topic.
One commenter here makes the following argument:"I believe that your information on the tax hike for the middle and lower class is misleading because it does not take into account the taxes that were overlapped on sales tax that they were already paying that would be eliminated by the Fair Tax." As an author of the ITEP report that is cited in the original blog post, I can tell you that this criticism is wrong. Our analysis does, in fact, start by measuring the substantial tax cut that Missourians (and consumers in other states) would receive from eliminating the indirect sales taxes currently paid by MO businesses. When we find that low-income and especially middle-income families would see tax hikes under the Missouri "fair tax" proposal, we're adding up the impact of the initial business sales tax reduction, the sales tax rebate all Missourians would get, plus the benefit of income tax repeal, and then contrasting it with one tax hike-- the imposition of a single statewide sales tax on all individual consumption. On balance, it's a losing proposition for all but the wealthiest families.

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