FairTax not as fair as it sounds

The FairTax: a new initiative aimed at the long overdue cleaning up of the cluttered… The FairTax: a new initiative aimed at the long overdue cleaning up of the cluttered American tax code. Introduced in 1999 by John Linder and recently respawned in 2005 with 51 cosponsors in the House and the Senate, this marvelous piece of legislation will totally obliterate the IRS, negating your need to file taxes ever again. You, the consumer, will get to choose how much tax you pay by how much you decide to spend on the goods you buy every day. Plus, because of all the extra money that the supply chain will save on taxes, consumers will save a quarter of the monthly income that they’d otherwise pay to retail.

That’s a nice sales pitch, and I’m sure it has already convinced legions of sheep. After all, this type of thinking is propagated by an entire legion of conservative radio talk show hosts. They tell people what to think, and those people who listen religiously comply for the most part. People like Rush Limbaugh and — locally — Fred Honsberger seem to think that they’re doing you a favor by letting you in on their secret end-all tax solution. Their ultimate intentions, while not immediately obvious, have disastrous implications for you and me if the snowballing support for the FairTax allows it to be passed into law.

For anyone who knows anything about how things work, across-the-board flat tax is a bad idea. Here’s why:

This country has stacked economic resources. That is, the bulk of American currency and wealth is possessed and controlled by a relatively small group of individuals. Consequently, our current progressive tax code has adapted by levying the heaviest taxes on the rich and the super-rich. We have a bracketed tax code, meaning that taxable income is divided into brackets, and each bracket is taxed accordingly. If you were to make $30,000 a year, perhaps you would pay 10 percent on the first $7,000 and 15 percent on the rest.

The centers around which wealth aggregates — these very wealthy people I speak of — are the pillars that hold up major portions of the world’s economy. But more importantly to Americans, they have a very important role in financing our federal funding. Without taxing them as heavily as we do, we would be unable to afford trillion-dollar federal budgets.

Wealth most definitely has a condensation effect. It is readily observable that the wealthy have low consumption rates — they spend a smaller portion of their income than do the poor and middle class. After all, the rich do not become as wealthy as they are by spending money. After one attains a comfortable level of living, the rest of one’s income becomes disposable. Though you or I may see this as income to spend on more consumer goods, the affluent instead see its potential to increase capital. Thus, you find this type of people spending money a lot more on investments.

The FairTax can only work in a relatively flat income landscape. Otherwise, the wealthy will have continuously increasing disposable wealth. They are invariably smart enough to reinvest this wealth, producing more wealth for themselves and in the process exacerbating the wealth condensation problem. Though as we have said, wealth begets wealth and so such a landscape of non-stacked income is very unlikely.

It seems that proponents of this bill do not understand how inflation works. Either that, or they’re purposely not addressing the inflation issue because the additional income promise is a wonderful selling point for them. Imagine for a moment that every “middle-class” consumer had 25 percent more money. This would mean that every run-of-the-mill consumer would have more wealth to buy more goods. When this happens, the demand for everyday consumer goods increases. Price follows demand very closely; the result is that prices would go up to satisfy consumer equilibrium. So you’ll have more money to spend, but things you want to buy will cost more, a wonderful net result of zero.

It’s not a coincidence that, on the other hand, capital goods go unscathed by this whole proposition. A wealthy individual is free to invest as much as she wants — and to make as much money as she wants — from capital goods without having to pay a cent for her gain. This seems wrong to me. If an individual is blessed enough to have the faculties and the proper guidance to make considerable wealth from a country, it is her duty to take greater part in supporting the continued prosperity of that system.

Furthermore, much of the wealth that you and I have is created by these people. Perhaps not directly, but wealth is very often created through the direction and support of a wealthy individual. The capital is in her control for some time before we acquire it. It makes more sense to tap that wealth at the source than to trust it to survive the entropy of exchange.

If you’re interested enough to read into it, beware the ultimate goals of the FairTax lobbyists. These are small-government people, and it is their conviction that the United States needs to minimize the oversight, control and other powers of the federal government. They want to shift the tax burden to you — the average American taxpayer — because they know that it will reduce the amount of money available for us to spend on public programs.

If you’re a student, educator or otherwise an American that makes an annual income of less than a million dollars, I ask for your sake that you do not take this issue lightly. I clearly go to a school that uses public funding; I shudder to think what would happen to all aid, supplements to tuition and grant money that would be unavailable to me if the FairTax were to be passed into law.

E-mail Karim at kab85@pitt.edu.