The Fair Tax: Let It Stay Dead

The Fair Tax is an idea the sun should have set on long ago. Yet conservatives, including potential GOP candidate Mike Huckabee, continue to push the plan.

Some days ago, I wrote an article itemizing the strengths and weaknesses of a Mike Huckabee candidacy. I praised the former governor's intelligence and civility - but worried about his attraction to the bunkum idea of a Fair Tax. Gov Huckabee replied with a full-throated defense of the plan's merits. Huckabee finished second in the delegate count in the 2008 nomination contest. He has to be considered a front-tier candidate for 2012. The merits (and demerits) of a Fair Tax thus remain unfortunately very relevant.

So we return to the debate with a series of four posts on the Fair Tax plan by a leading student of the tax system, Hirschel Adler. In my opinion, he leaves the concept a smoking ruin.  Click here to read the entire series.

-David Frum

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The first problem with the FairTax is the manner in which the purported rate is calculated.

Let's assume a vendor is going to sell an item for $100.00 before calculating the FairTax to be charged to the buyer.

The FairTax rate is purported to be 23%. In the following example though, readers can judge whether most people would consider the FairTax rate to be 23% as supporters claim or in fact 30%. The reader can then judge whether the credibility of the entire FairTax proposal is lost once one concludes that the 23% rate is not in concert with the way most people would initially believe the FairTax is calculated.

Everyone agrees that the FairTax on the above transaction is $30.00.

To calculate the $30.00 tax, one needs only multiply $100.00 by 30%.  Hence, most people would conclude the FairTax rate is 30%.

To calculate the purported FairTax rate at 23%, the vendor must first divide the $100.00 being kept by the seller by .77. This yields the sales price of $130.00. One then need multiply the $130.00 by 23% to determine that the sales tax portion of the $130.00 is $30.00. This is not the way most people however would determine the tax rate.

The FairTax authors tell us that the 23% rate is “tax-inclusive, like the income tax". I was a tax practitioner for thirty-five years and never once heard the term "tax-inclusive" applied to the income tax. Taxpayers calculate their income tax by determining taxable income and then going to a rate table to see what is owed. No one gives a thought towards making some kind of “tax inclusive" calculation.

States calculate sales taxes (the FairTax is a sales tax) by multiplying the tax rate times the cost of the item without the tax. That is the reality. (30% for the FairTax.)

Why is having the tax rate stated and calculated as most people would understand the rate important? It is important because whether it be the FairTax or Obamacare, the public needs and deserves laws that citizens instantly and easily understand. The FairTax fails the credibility test because of the mental gymnastics required to achieve the purported 23% rate. This is the essence of bad legislation.

Until and unless the FairTax proponents 'man-up' to their proposal being a 30% sales tax, the FairTax is a non-starter. While one can debate whether the purported 23% rate is correct based on some linguistic technicality, to most people, using the 23% rate is somewhere between a miscommunication and a misrepresentation.

More to come…