A letter in the April 16 issue of the newspaper argued in favor of a federal Fair Tax Act. Such an act would replace personal and corporate income taxes with a giant sales tax.
The previous letter argued that the income tax is bad for two reasons, some corporations pay it and others don't (they use loopholes to avoid it.) The letter contends this is unfair to those who pay and places them at a competitive disadvantage in world markets. Therefore income taxes should be replaced with sales taxes and that would be good for business.
This argument is wrong on a number of levels.
• Plug the loopholes. It is easy to fix any unfairness and raise billions of dollars in tax revenue just by plugging the loopholes in the present tax code. While politically difficult that is the fair and sensible thing to do.
• Competitive disadvantage in world markets? The federal corporate tax rate is 35 percent which sounds a little high in comparison to other countries, e.g., 28 percent in the U.K.
However, Bloomberg News reported that: "Two thousand U.S. companies paid a median effective cash rate of 28.3 percent (after using loopholes) in federal, state and foreign income taxes ... The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan. www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html.
The U.S. companies are not at a competitive disadvantage due to the corporate income tax rate.
• Good for business? The previous letter argues that "whoever can manufacture the best product for the less money comes out the winner." The writer forgets that it is not enough to manufacture a product; the product must also be sold. And when you slap a huge tax on those sales that is not going to be good for business. Ask any retailer how their business would do if the government made them raise their prices 12 percent or so and turn the extra money over to the U.S. Treasury. Sales and profits would sink.
The writer's assertion that "We would be the only country offering a tax free business climate" is simply not true. He would just shift taxes from business income to business sales. Business would still be taxed.
The writer's closing assertion that under the new sales tax regime "we could look forward to full employment for centuries to come" is preposterous.