But... IS It Fair?

Since this came up recently, let's talk about the so-called "Fairtax Initiative." Created by 3 Houston businessmen - by which I mean the owner of the Houston Texans, for example - it is purportedly an attempt to replace our nation's convoluted tax code, and overbearing tax bureaucracy, with a fair tax, thus the name. It was popularized by Neal Boortz and Congressman John Linder, who co-wrote "The Fairtax Book."

Specifically, it is a proposal to eliminate the IRS (huzzah!) and simplify our tax code (hurray!) by replacing the entire current tax system (woohoo!) with a flat-rate, (yes!) across-the-board, (right on!) no deductions or exemptions (go tell it on the mountain, brother!) sales tax. (Wait... BOOOOOOOOO!!)

A fantastic idea, except for those last two words. See, current and existing sales taxes don't work the same way as the Fairtax; they're bad, but passable. Fairtax is neither passable, nor an improvement. Get ready for a blizzard of numbers.

First, when you or I buy something that has a sales tax now, it works like this:

Item Price: $14.99
Sales Tax: 6%, or .06
Final, after-tax total: $15.89 ($14.99 + .89 in tax)

Right, that's simple enough. That's not how the Fairtax works. See, the advocates of the Fairtax claim it will be set at a rate of 23%. Yeah, a quarter. But see, they don't do math like everyone else does. If the Fairtax were in fact calculated this way, a purchase of $100 would end at a price of $123; $100 + a 23% tax. Instead, they count the Fairtax as a percentage of the FINAL, AFTER-TAX price; the actual rate of the Fairtax is 30%.

Item Price: $14.99
Sales Tax: 30% of Item Price, or in this case $4.50
Final, after-tax total: $19.49
The voodoo they then perform to call it 23%: $19.5 * 0.23 = $4.49, making the $4.49 in taxes 23% of the AFTER-TAX price.

So, that's at best misrepresenting things a bit. (I would call it lying, but hey, who am I, huh?)
But just wait, this gets more creative. CNN's Money Magazine concluded that the claims that the Fairtax would allow you to keep all of your paycheck, pay the same price for goods and services, and still have a functioning government are... Well, hell, I'll just quote their article; they won't mind.

We'll explain this bit about "embedded taxes" in a moment. But first, let's consider what Boortz and Linder appear to be saying. Prices at the store are the same. Your boss stops taking all that money out of your paycheck. Uncle Sam is sending you money instead. And, oh yeah, the government is still up and running.

This just can't happen. "It is practically and logically impossible for the government be collecting the same amount of money as before and have everyone suddenly be better off," says Daniel Shaviro, a tax law professor at New York University.

See, the thing is that the Fairtax is misrepresented at several levels. First, its proponents make claims that are overtly impossible; second, they use voodoo math to attempt to claim that the rate is lower than it actually is, so that Joe Schmoe won't blow a gasket at the notion of paying an extra THIRD on top of his purchase price for taxes alone (and I will note that FactCheck.org's economists estimate that to break even, the Fairtax would have to be 34%, not 30%,) and third... well, third, Boortz and Linder are outright lying about how embedded taxation works.

Since I'm never one to leave well enough alone, let's dig into the concept of "embedded taxation."

See, when you buy a product, you pay taxes on it, whether you know it or not. This is because any taxes incurred along its route to manufacture are added into the cost, which passes directly along to you. So, for example, when you buy food that came from somewhere other than your garden, part of the cost of that food is the gasoline tax paid by the driver who brought it. Maybe a tiny fraction, but it's there.

Here's the big lie. Boortz and Linder are claiming that the Fairtax eliminates all those embedded taxes, which will cause prices to drop. The problem is that the Fairtax will REPLACE all those embedded taxes with an across-the-board 30% tax on everything, even items not now taxed directly; your gasoline tax, right now a fairly believable 18.4% at the federal level, will jump to 30%; EVERYTHING will cost more. Raw materials; finished goods; food; luxury items; everything. Now, this is "fair," in the sense that it's wholly dependent upon the purchase price, and it's voluntary to a degree, in that you can choose not to purchase a particular item, and thus not pay the tax for it.

But its actual effects in practice would destroy our economy virtually overnight. Don't worry; I will illustrate how this replaces the current price system with a hideous snakepit of embedded taxation.

First, repetitive taxation of the same goods is inherently abusive. Second, the economy depends on people buying things, which they will try like blue blazes to get out of if prices go up as much as the Fairtax will make them increase; and third, the cost of living will go through the roof. (I note here that the Fairtax advocates claim the government can save the poor from utter destruction here by rebating to them all taxes paid on anything up to the poverty line, a year. They will do this presumably with the money they take from everyone else. Socialism, don't you love it? There's ALWAYS gotta be income redistribution involved, somewhere.)

As an aside, before I begin the breakdown here, understand that the first thing to know about taxation of any kind is that ALL taxes come directly out of the pocket of the American consumer. Businesses CANNOT pay taxes; a tax on a business directly equates to an increased price of their product. American consumers bear 100% of the tax burden of any tax imposed on businesses. I am constantly amazed that people understand this concept when it comes to "windfall" taxes on the oil companies, but fail to grasp that the Fairtax plan is the same thing, only vastly more so.

It is neither an accident, or a mistake, that consumer items cost much more in states with high state sales taxes, than they do in states with lower - or no - sales tax.

To address repetitive taxation, cost of living, and people's spending habits all at once, let's talk about Burger King. Even if you don't eat there, you know basically what they serve.

Some parts of their food seem - on the surface - easily accounted for. Lettuce comes from the farmer, and is taxed when BK buys it. But wait: lettuce needs fertilizer to grow, and farm equipment to harvest it, both of which are taxed when the farmer buys them. But wait: farm equipment needs to be assembled from parts, each of which is taxed when the manufacturer buys them; each of which is made from raw materials that were taxed when the parts manufacturers bought them. Each of these successive stages of taxation adds 30% to the price of the single leaf of slightly wilted lettuce that BK sees fit to give you in a Whopper (™, BK) sandwich. The tomatoes and onions receive the same treatment; good thing they don't use much of those, either, hmmm?

Mayo - made from eggs, soy oil, vinegar, and a host of other ingredients - goes in each burger. (Other condiments follow the same path, so bear with my use of mayo as an example if you prefer, say, mustard. Weirdo.) The eggs are taxed when the mayo manufacturer buys them; they come from chickens that ate grain that was taxed, raised by farmers with fertilizer and equipment that was taxed, made with parts that were taxed, made from raw materials that were taxed. Each of the ingredients follows the same Fairtax model, being taxed at each recursive step at a rate of 30%, and thus the cost of mayo goes far higher than ever before; thankfully, BK skimps on that, too.

The same for the bun; wheat, millk, eggs, each taxed recursively, each jumping by 30% in cost at each stage on its way to BK. Cheese, taxed at BK, and at the cheesemaker, from cows fed with taxed grain, grown with taxed fertilizer and equipment, milked with taxed machines, made from taxed parts, made from taxed raw materials.

Beef, from cows taxed at the slaughterhouse, taxed at BK, fed on taxed grain raised with taxed fertilizer and taxed farm equipment, made from taxed parts, made from taxed raw materials.

Now, make all that into a Whopper, and tax it one final time when you order it - and you have successfully raised the cost of that burger by an unbelievable amount.

Understand that every piece of equipment used along the way - from the mining equipment used to dig up the raw materials for the machine parts for the farm equipment, to the foundry that made the rolled steel for the frame of the tractor-trailer rig that brought those ingredients to BK in the first place - will undergo the same process of embedded, nightmarish abusive taxation.

Understand that our cost of living will SKYROCKET under the Fairtax.

But wait, it gets better.

See, it's not just fast food. Fairtax taxes EVERYTHING.

"Luxury" purchases will also get far more pricey, and since they're less necessary, more and more formerly middle-class people will opt to simply avoid purchasing them, rather than pay the tax on a TV that's suddenly 80% - at a wildly optimistic guesstimate - more expensive.

As the market for those luxury goods dries up - and I don't just mean Ferraris and big screens; I mean ANYTHING that's not directly related to survival - manufacturers will either go bankrupt, or be forced to move overseas, as will retailers and service operators. It's tough to convince someone to pay extra - LOTS extra, after Fairtax - for broadband internet or cellular service plans, when they can barely keep food on the table.

When those jobs dry up, unemployment will grow massively, and each new unemployed person will be an additional drag on a system now supported entirely by purchases - with fewer and fewer people able to make those purchases.

See, Fairtax is predicated in the notion that because the USA has a $14 trillion-per-year economy NOW, that it always will, as though we have some sort of "right" to remain fabulously wealthy.

We don't. We got there, and stay there, by virtue of hard work. And Fairtax eliminates those very elements in our economy that make it a resilient, $14 trillion-per-year economy in the first place.

In actual facts, Reaganomics WORKED. Since Reagan's trickle-down policies, we've been - as a national economy - reaping the benefits of those policies, over 20 years or so, just as Reagan said. But bad economic decisions - and bad economic policy - trickle down, as well, and in fact do so more quickly than good ones; people are slow to trust, and quick to fear, and investor confidence is a huge driving force behind our economy.

To see this in effect, look at the effects on food prices caused by the use of corn for ethanol production.

See how wide they've been?

Now, imagine price increases of 30% on every good, every service, every raw material, every part, every item for sale, and imagine the staggering impact of that.

Enacting the Fairtax will destroy the U.S. economy within a matter of months.

But that's fair; we'll all be bankrupt peons together, without a pot to piss in between us, and that's certainly better than what we have now, isn't it?

Isn't it?