Wednesday, October 5, 2011
Is the “Fair Tax” Fair?
Herman Cain, the presidential candidate, was interviewed October 2 on “Fox News Sunday” and on “This Week.”As is widely known, Cain (b. 1945) was formerly chairman and CEO of Godfather’s Pizza (1986-96). From 1995 to 1996 he was also chairman of the board of directors of the Federal Reserve Bank of Kansas City.
Candidate Cain, somewhat surprisingly, won the Republican presidential straw poll in Florida last month and according to the new CBS News poll, he is now tied with Mr. Romney for first among the Republican candidates.
In both of Sunday’s television interviews, Mr. Cain was asked about his 9-9-9 tax plan, a bold proposal to replace the current federal income tax with a 9 percent sales tax, a 9 percent income tax, and a 9 percent corporate tax.
Mr. Cain has indicated that he sees the 9-9-9 plan as a precursor to the “fair tax,” which would be a national sales (consumption) tax that would take the place of the federal income tax. He is only one of a number of people actively promoting the “fair tax” idea.
But would the “fair tax” be fair? I think not.
The advocates of this new tax plan consider it fair, because “the more you spend the more you pay.” In addition, it is fair, they say, because everyone is taxed at the same rate.
However, it seems clear to me that the fair tax proposal, as well as the 9-9-9 plan, would tax the lower and middle classes more severely than at present, even with a “prebate.” In addition, unless the wealthy are already avoiding taxes through various loopholes, as many are, it means a huge tax break for them.
(The rather complicated plan for prebates is explained at www.FairTax.org.)
Take, for example, a couple with an annual income of $25,000. Most of that income would of course have to be spent on necessities, even though they might receive some prebate. Thus in all likelihood almost all of their income would be subject to the sales (consumption) tax.
But consider a couple with an annual income of, say, $250,000. They no doubt would pay far more taxes, for they would, most surely, spend far more than the first couple. But in all likelihood they would also put a sizable proportion of their income into savings, buying stocks and bonds or making other investments which would most probably increase their wealth in the future.
Thus, the latter would pay a far smaller percentage of their income for taxes while increasing their wealth in years to come. In most cases, the greater one’s income, the smaller the percentage of that income would be used for taxes.
So, the so-called fair tax cannot be called fair for low income people struggling to get by financially. Conversely, it would unfairly favor those with above average incomes.