The Unfair “FairTax”

For my first post, I thought I would tackle something that divides Republicans. Gaining momentum in the Missouri legislature has been to exchange the Missouri income tax system and replace it with a sales tax, commonly known as the “FairTax” system. The Missouri House has shown that they are able to pass it, but the Missouri Senate is where the plan has stalled.

In Missouri, the sales tax plan would “not exceed 7%.” Switching to a sales tax-based plan is a bad idea. The champions of the plan argue that everyone will get a probate, or check that would cover the increased cost in taxes on necessities. No incomes taxes and receiving a check by the state each month sounds good right? Re-evaluate this with me with 3 major considerations.

1. The plan does exempt a few services such as tuition paid for education and donations to charities to be exempt. The following is a small list of what would be charged sales taxes that do not currently charge sales tax:

  1. Rent
  2. Healthcare/Dental Care
  3. Prescription Drugs
  4. Utilities (including cable/internet)
  5. Child care
  6. Purchasing cars/homes, etc.

While a 7% sales tax may not be much on a $10 a month prescription drug, it is significant on that home that did cost $100,000, has increased to $107,000. Rent for us college age students would rise from $600 per month to $642 a month.

2.  While the plan said the statewide sales tax wouldn’t be more than 7%, would this bring in enough revenue to Missouri? Because no state has made a transition fully to a “fair tax” system, to reach current revenue estimates, this tax rate could need to be as high as 12%.

Because the plan is capped at 7%, if Missouri makes this transition and were to bring in say $7 billion instead of the anticipated $8 billion, the state would be forced to make cuts to balance the budget. The Missouri legislature just cut over $500 million in General Revenue from its budget, and that was incredibly difficult to do. We will see a tougher budget year in 2012. Do we want to see a change in our tax system to create instability when budget times are already incredibly tight?

Let’s take myself as an example. Under the current tax system, while it is complicated, I hired an accountant to do my taxes. As both full time students, my wife and I had no tax liability (state or federal) and had a nice tax return. This wouldn’t be possible under the “fair tax” plan. The only calculator that I found online to attempt to compare the two systems was on the Fair Tax’s website. This calculator is of no help because it compares a federal “FairTax” plan.

3. An argument for the “FairTax” is that it would lower consumer prices, and increase consumer spending. While saying that if we take away taxes from a business, that they will immediately drop the cost of the product by the amount they are taxed is speculating, let’s go with it.

Because this plan is just for Missouri, would a company decrease their prices in Missouri and not the rest of the country? I don’t think so.
The “FairTax” model plans on consumer spending. The average family is over $8,000 in debt in credit cards alone by purchasing consumable items. Assuming a family does save money under a new system, do they help keep the economy afloat by purchasing a higher taxed item or do they pay down their credit card debt or pay bills with? Or, do they go to Illinois or Arkansas to purchase their $20,000 car instead of Missouri?

I would encourage everyone to read about the “FairTax” before making their opinion. Many research groups (proponents would argue these groups are liberal organizations) have said that moving to a consumption tax in Missouri would increase taxes for 95% of Missourians. During public testimony, dozens of groups testified in opposition to the proposal. Fortunately for Missourians, this proposal will not appear on the 2010 ballot, but this proposal isn’t completely dead yet.

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6 Responses to The Unfair “FairTax”

  1. edchambe says:

    Nice post, Craig!

    • Michael says:

      Eric, you would be uniquely positioned to examine Craig’s position, coming from a state without income tax. I would point out that Florida’s state tax rate is 6%, not the 12% Craig feared Missouri’s would need to be. Or did you mean the total sales tax with local and county taxes added on?

      • craigs2040 says:

        Michael,
        The sales tax rate of 12% that some believe it would have to be in Missouri all depends on what the state would exclude. At the capitol, there was much discussion about excluding the things that I mentioned would be a new sales tax (rent, prescriptions, healthcare, etc). Obviously, the more they exclude, the higher the tax rate to reach the level of revenue Missouri currently receives. The problem with making this switch is that whatever the rate is, we must be 99.99% sure that it will raise enough revenue to fund Missouri’s General Revenue budget. Missouri’s current sales tax rate is 4.225%. So the question is would an increase of approximately 2.78% in the state sales tax bring in enough money to fund all of Missouri’s $8 billion in GR.

        Thanks for the post!

  2. Troy says:

    The only good thing I can see coming out of the FairTax is the potential for it to have some impact in terms of reducing wasteful consumerism. But that also means reducing economic activity if that proves to be the case. I see little else to like about the FairTax.

    The Flat Tax, however, is something I think is worth considering. But that’s another issue for another day…

  3. Molly says:

    good post and nice analysis. the tax system needs to be addressed, but there definitely needs to be some consistency across states and there needs to be some kind of balancing of the various types. Basically the income tax has become a way NOT to have to pay taxes as you and your wife found (I am HOH with two kids in school and in school myself so I got almost all of what I paid in back).

    Have you read Nudge by Thaler and Susstein? Their idea is that the IRS does our taxes for us, sends us the return to sign…the underpayment of taxes by those who can and should pay is huge, they argue.

    Nice job on the blog!!!

    • craigs2040 says:

      Thanks for the post Molly! I have not read Nudge. It sounds like an interesting read, I will be sure to check it out.

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