Your Opinion: Fair Tax based on massive sales tax
Tuesday, March 15, 2011
A letter-writer in the March 5 edition of the paper asserts that the Missouri Fair Tax proposal, if enacted nationally, would save Social Security and Medicare, double our gross domestic product and provide for full employment. While the writer doesn’t say the Fair Tax plan will provide for world peace and cure the common cold, this too, might be possible with just a few tweaks to the bill.
The writer can make such extravagant claims because he fails to explain what the Fair Tax scheme is. In fact, it is a plan to abolish the graduated income tax entirely and make up for the lost revenue with a massive new sales tax. On its face this is an extremely unfair proposal.
Graduated income taxes operate on the principle that people with high income are better able to pay and therefore are taxed at a higher marginal rate, e.g., 6 percent under current Missouri law. People with low incomes are taxed at a lower rate, e.g., 1.5 percent under current law. Such graduated tax rates are considered fair, but all of this would be abolished under the Fair Tax plan.
To make up for lost revenue the Fair Tax plan would put in place a new sales tax covering a wider range of goods and also for the first time covering services, e.g., services provided by doctors, lawyers, and hairdressers.
The current bill proposes a 7 percent cap on the state sales tax rate; however, analysis by Moody & Associates (http://www.jamesrmoody.com/fileshare/January%2024%20S tate%Auditor%20submission.pdf ) shows that a sales tax rate of at least 12 percent would be required to recover the revenue lost from current taxes. (Moody, a former state budget director, was Missouri Commissioner of Administration under John Ashcroft.)
A massive new sales tax would hit the lower and middle income classes especially hard. At 12 percent the state sales tax on a $1,000 television set would go from $42.25 under current law to $120 under the Fair Tax. Since rich and poor alike buy television sets, clothes and many other goods, this tax which taxes both at the same time is not fair.
And notice that the 12 percent sales tax rate calculated by Moody & Associates is what is needed to replace taxes lost under the current system. It does not allow for massive new revenues that would be needed on the national level to double GDP and create full employment as envisioned by the letter-writer of March 5.