Fair tax is a terrible idea
The Reminder Editor has challenged readers to consider the "Fair Tax" as an alternative to the current federal income tax. Supporters make it sound alluring, but it is a terrible idea, for 10 to 12 reasons, but let's review just four:
First, it will raise the prices of everything anyone buys, including necessities like food and clothing. For the rich, this extra cost will be offset in theory by reduced income taxes. The poor will receive an up-front payment each year that they can use to pay the tax. Three huge problems here: The government would have to borrow all this money to give to the poor to get the ball rolling in the first year; the administration required to verify the eligibility of ever-more poor people would be expensive, and fraud would increase; and many of the poor would spend their windfall advance early and run out of money. The advances would be huge, since they would include Social Security tax.
Second, the current Social Security "insurance" scheme devised by FDR would be converted into a straight welfare program. Elders would no longer be able to claim it is "their" money and the government would means-test the benefit to exclude SS for folks who saved for their retirement separately.
Third, businesses will be forced to account for, collect and pay the tax at every level raw materials, rough manufacturing, assembly, distribution, etc. another expensive unfunded mandate which would increase the costs of all goods and drive more businesses overseas.
Fourth, if the income tax were actually repealed, the rich would get to keep all the money they earn except what they spend on living. One could argue that the Fair Tax would actually fall more heavily on the middle class, which tends to spend most of what they earn, while the rich invest and save. They would not pay the increased tax on their investments until they sold them. So the rich might contribute less. Conversely, since the working poor would no longer have to pay SS tax. That burden, too, would fall on the middle class.
Finally, no thinking person and certainly no Massachusetts taxpayer would believe that the income tax actually would ever be repealed, so we'd end up with both taxes to pay. This would only be temporary, of course, kind of like Dukakis' temporary state income tax increase. And this shows us the true goal of the "Fair Tax" proponents: more revenue for the government. If we really want a simpler, fairer, tax system, we should look at the "flat tax" alternative.