What the Fair Tax Really Costs

The true costs of switching to and administering the fair tax could give voters a serious case of sticker shock.

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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We are told that the FairTax will close the doors of the Internal Revenue Service. Apparently, the thought is that closing the Internal Revenue Service will eliminate the $12 billion IRS budget. Let's give the total administrative expenses to the federal government under the FairTax a bit of thought.

Our first administrative problem is the statutory cost of collection.  The seller and the collecting authority each receive ¼ of one percent of the FairTax collected on the gross sale. This is an administrative cost of ½ of 1 percent of the FairTax collected on every retail sale. These two fees on a $10 trillion base represent total fees to the companies collecting the FairTax and the state administrating agencies of about $15 billion.

Undiscussed in the FairTax literature is the cost of setting up the systems to administer the FairTax. The recent census cost $13 billion and did not require verification of legal status or creating computer systems to maintain the lists of every registered family in the country. The setup cost of the FairTax with competent systems could be multiples of the cost of the census.

Our second administrative problem is Social Security. Currently, there is little fraud in Social Security from the benefit qualification side because gaining social security retirement benefits requires an employee to make and the employer to match social security contributions. For a self employed individual to qualify for Social Security, he must report taxable income. This relationship between payments and benefits goes away under the FairTax. Under the FairTax, it does not cost the employer a dollar to add a brother-in-law to his payroll reporting. Under the FairTax, the self employed taxpayer need only report a gross profit on taxable purchases to obtain Social Security benefits. Note, there will be filings necessary with respect to Social Security and with no Internal Revenue Service, Social Security will need to hire more than a bevy of individuals to audit all filings. Expensive.

The FairTax proponents will argue that the time (money) saved in no longer being required to file income and payroll tax returns more than offsets the increased costs of the FairTax to the government. The reader can make his own judgment here. The one certainty is that the cost of collection will increase dramatically for the government.

More to come...