Why I support the FairTax

"We don't need more taxes, we need more taxpayers."

JC Watts couldn't have been more correct. President Obama even implicitly agrees when he says we [all] need to have some "skin in the game." A broader tax base does many things. Pragmatically, it lessens potential disruptions in revenue streams to the government. Think of it as "tax diversification." In the same way it is good to diversify investments, so it is good to diversify tax revenues. To be clear, I don't mean types of taxes, I mean tax payers. If you have 1000 different taxes, all targeting the same group of people, that's like buying a 1000 different stocks, all in the same business sector. You're not really diversified. To properly diversify the tax base, you need more taxpayers, not more taxes. From a philosophical level, it makes sense too (at least to me). On a very basic level, government is a product purchased by the people; everyone consuming it should be paying something for it. And, if nothing more, when an elected government is reaching into your pocket, you're more likely to care about whom you elect. I could go into more detail, but I find I even bore myself at times, so I won't. I'll just assume, for the basis of this post, that I have demonstrated for both practical and ideological reasons that a broad tax base is desired.

So ... how do we do that? I see two ways to broaden the tax base. First, you can tax lower income earners more. Right now, a large percentage of income tax payers receive refunds larger than their net payments (let alone those who receive refunds without having paid anything in the first place). Increasing the taxes on lower income earners to the point that they pay a net tax - even a small one - does indeed broaden the base. But, that's political suicide. Why? I'm not sure ... based on my anecdotal evidence, recipients of such government largess don't vote. Certainly they're heard by the politicians, and they constitute a huge minority block (i.e. they COULD be very influential at the voting box), but they don't vote. Then again, perhaps they would if their pocket book was affected. So ... perhaps it is political suicide. I don't know.

The second way I see to broaden the tax base is to raise the income of lower income earners. Yes, yes ... there are those who enjoy working the system; there are those who refuse to earn more because it directly impacts their ability to collect an unearned check. They reason, "why work for a dollar, when it's already being given to me for free?" Nevertheless, I believe most people would rather earn more money, even if it meant getting off the government "payroll." And on that belief, this second option seems a good one. In fact, on the belief that most people would rather earn more money than not, this option seems to be without objection. The only problem is doing it!

So ... why the FairTax? Well, in my opinion (and no, I am not an economist, tax expert, or other qualified person), the FairTax does both things. First, it does indeed raise the taxes on lower income earners. The prebate included with the FairTax is designed to mitigate any impact on consumers up to the poverty level, but taxes are still raised on lower income earners. But it does it without the political suicide! The genius of the FairTax in this regard is that it's avoidable - taxes are paid on new retail products and services only. Taxes are not paid on used items, or - with the prebate - on base-living purchased either. If someone wants to, they can significantly limit - or even avoid - federal taxes under the FairTax. The power is completely in the hand of the consumer (i.e. the individual tax payer). With that type of control, combined with the prebate, the "sensation" of taxation is different. And that's huge. How the tax "feels," from a practical point of view, is very important. The FairTax doesn't "feel" like a remote government reaching into your pocket and grabbing money you've earned. Rather, the FairTax allows the taxpayer to feel in control; if you don't want to pay it, you don't have to. This isn't to say the FairTax feels good - a steep price increase on all new goods and services isn't warm and fuzzy - but it does leave the consumer (i.e. the tax payer) in control. And that control feels very good indeed.

Second, the FairTax encourages earning, saving, and investing. Under it, there is no longer a tax-cost for making money. What you earn is yours. Everyone truly owns their own labor. This is so fundamental, it cannot be overstated. This - more than anything else - will raise lower income earners into greater wealth. From a philosophical view, this is huge too. Under the FairTax, the government does not have a claim on your labor; you are no longer a serf. Look it up - serfdom - and compare. Under our current system, we are all indeed a type of serf to the Federal Government, "tied to the land" via our citizenship. When you own your own labor, and are taxed on your consumption, you are considerably more free. The tax becomes a payment to the government for the services it provides (e.g. the markets allowing for free trade could not exist without the government and the protections it provides (contract law, common defense, etc.)). The tax, therefore, is reasonable. But I digress. My point here is that when an activity is not taxed (e.g. earning, saving, investing), that activity increases. People have an incentive to earn more insofar as they keep what they earn, and people have an incentive to save and invest more, as their wealth continues to remains their own and, when invested, grows without any tax consequences. The end result - everyone, even the poor, earn/keep more money, as they have an incentive to do, and through that process become more able to bear a tax burden (and indeed, through their consumption, create more tax payers). The tax base becomes considerably more broad.

There are so many more reasons why I support the FairTax, but each would indeed require a posting of its own. However, I do want to mention one other reason here, if only because I haven't seen anything mentioning it elsewhere. The FairTax, or some other similar tax system wherein the raising of revenue is divorced from its use, fundamentally changes the political conversation - in a good way. Let me explain. Right now, in addition to income tax withholding, we pay Social Security and Medicare payroll taxes on wages. There is, then, a feeling of "paying into a system" and likewise a feeling of being entitled to a later redemption of services based on those payments. Federal funds earned on gasoline taxes slated for use on the federal highway system is another example. In reality, all funds collected go towards the general revenue of the Federal government. For programs like Social Security, the funds are used to purchase treasury bills, and then THAT money (from the sale of those bills) is deposited into the general revenue fund, essentially converting the Social Security "lockbox" into a bunch of IOU's. Now that makes sense ... we really couldn't keep all the funds collected for Social Security in a "lockbox" out of the economy - that would be devastating. It's just too much money to remove from the economy. But in any case, the reality is that all funds collected by the Federal government go into the general use fund, and all expenditures by the government come from that same general fund. Everything else is just accounting on paper.

So ... what would happen if the tax method reflected that truth, if it reflected that all taxes go into a general fund, and all payments come from that same fund?

Well, under the FairTax, there is no slating of funds for particular projects or programs. Funds are just collected. So ... lets consider what happens. Under the FairTax, the questions for political debate resolve into just two:

1. How much of our money do we want to pay to the government (i.e. how high should our taxes be)?
2. What do we want the Federal government to do with the taxes it raises?

There is no longer a sense of entitlement based on taxed paid. The question of things like Social Security and Medicare no longer revolve around feelings like, "I paid into it, I deserve it!" but rather around questions like, "Is this something we want to do as a society?" And, just as importantly, the question of how much money we want to spend in taxes is considered independently. Consider this - everything the government does, it does for its citizenry. If the government didn't do it, the citizens would have to pay for/do it themselves. So, how much we want to pay in taxes directly relates to how much we want the government to do for us; how much we want to put on auto-pilot. Common defense, public roads, standardization of weights and measures ... the government provides those services and we pay for them through our taxes. As I said before, government is a product we purchase via taxes. Example: everyone needs food. As a society, we could agree to feed everyone, and tax accordingly. I don't think we should do that, but we could.

The point I'm trying to make is that under a program like the FairTax, those two questions are separated. We decide, independently, how much we want to tax ourselves, and, again separately, what we want to do with that revenue. The political debate becomes one of priorities. What's more important? Universal Food Coverage, or Universal Military Defense? If - and only if - we agree we want both, do we then consider raising the tax rate to support both. Programs are only accepted as a justified use of taxes if they are universal (think provide for the general welfare), because everyone is paying for them. Taxes are only raised when the citizenry agrees that a new, desired program is needed or an existing program needs expanding. Or, programs are reduced or eliminated based on priority, as their implementation is independent of a specific tax. No longer are "firemen, teachers and police" the first on the chopping block - a fear tactic used by politicians to push new taxes. Rather, politicians become willing to reduce or cut programs that have the least base support; they prioritize. It becomes politically viable to reduce or even cut programs. The debate becomes more honest, and the citizenry more free.

Ugh ... I'm rambling. If you'd like to learn more about the FairTax, go here.