I am watching the debate on the Fair Tax with both eyes open. It was proposed by a Republican, so automatically the Democratic Press and Democratic politicians seized the day and began castigating the idea.
Just so you know, the tax being proposed is a 29.8% sales tax. It sounds enormous but when you do the math as I did in the Epoch Times piece I wrote, it’s not. If you total up all the taxes you pay and your entire tax burden, it’s higher than that.
Professor John Cochrane wrote an editorial in the WSJ about it. My piece in the Epoch Times looked at it a bit differently. I compared the two tax schemes and applied them to income levels and then analyzed the academic literature on the Fair Tax.
For all this talk about being “fair”, Democrats sure want to embrace socialism and their argument is that system is fairer than capitalism. Of course, they are incorrect.
States that are highly regulated in their procedures are more socialistic than states that are not aggressive with regulation. States that have high taxes are generally more socialistic and less free than states with low taxes.
We have always compared income and property taxes when looking at differences between states and layered them over migration patterns. For the last ten years, high-tax states have lost their population to lower-tax states. Changes in the nature of work increase the rate of change.
But, what if the Federal Government got rid of all taxes and instituted the Fair Tax? Where would people move to? Would they continue to leave high-income tax states for low-income tax states? It’s a great parlor game.
If that happened, and states didn’t do away with income taxes, the flow of people from the high-income tax states wouldn’t stop. It would increase since now not only would I have a national sales tax to pay, but I’d have state sales and income taxes to pay as well. Talk about a huge tax burden! No one would be left in California, New York or Illinois.
But, what about a state like Texas, Tennessee, or Nevada? They are 0% income tax states. Texas has high property tax rates, but they also have a high sales tax. Tennessee and Nevada have high sales taxes relative to every other state in the US.
I think if a Fair Tax were enacted, there would be enormous pressure on states to get rid of income taxes and other taxes as well, and just go to a sales tax. If a state chose not to change, I suspect you’d see people leave. The obvious beneficiaries are states with low sales taxes already. Florida already doesn’t charge an income tax, so I suspect people would continue to flood into the state.
If you lived on a border of a high-tax state like Illinois, you’d buy all the goods and services you could in any bordering state.
If states ditched their income taxes, they would have to recalculate every single income stream they had. How do you think it would sort itself out?
While I believe high state income taxes and state income taxes of any rate are a key motivator for folks emigrating from certain states (New York, Illinois, California) to other states (Texas, Florida, Arizona), it is not the only motivator.
Inefficient and confiscatory state income taxes may even be the fuse that sparks the decision to move, but climate, schools, governance, crime, cost of living are equally significant.
It is the witches' brew of "all of the bloody above" that is renting UHauls and moving folks.
In that regard, high state income taxes are almost always tied to Dem governance and all of those issues are found in those same breeding grounds of cesspools.
Comparative state income taxes is not a Federal concern and it is totally unrelated to the issue of a flat tax/national sales tax.
The idea of a flat tax based on a national sales tax is not quite ripe, but a lot riper than it was five years ago. The issue will be what things are not taxed -- food, gas, utilities, clothing, school books?
The outcry will be that the national sales tax is regressive, but it can be wordsmithed around to avoid that trap.
It would take a national, political will to embrace the debate and to let go of the winners and losers under the current Tax Code, but abandoning the current Tax Code and going to a flat tax/national sales tax would be a good approach.
The other concern is the weaponization of all Federal gov't including the IRS. This argues for a flat tax/national sales tax.
JLM
www.themusingsofthebigredcar.com
Taxing income is difficult. People don't understand, but when i discuss with them i give them some simple points to help understand, and why i prefer a sales tax over an income tax. Its generally very illuminating how a simple conversation can be very enlightening.
Taxing income is extremely difficult because it requires you to answer 4 very difficult questions (1) what is revenue (2) when is it earned (3) what are expenses that go against or offset that revenue and (4) when are they incurred.
I like to give the following as simple question and answer to illustrate. Suppose we enter into an agreement. i lend you 500 shares of microsoft stock. The agreement indicates that you lend me $130,000 cash. No interest rate and no maturity date other than if demanded each side returns the other assets. Obviously, there is unwritten agreement between us that we will never ask for the assets back.
Can you guess the number of pages in the Internal Revenue Code that cover the aspects of this transaction. If i tell you its well over 500 pages in over seven different sections, does that effect how you look at something so simple? It generally does.
Helps also that I have CPA at the end of my name :)