The Fairy Tax

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.”

Ludwig von Mises, “The Theory of Money and Credit

In principle, I like the so called “Fair Tax” proposal. I say “in principle”, because I think it is really a good idea to pull the taxing on the edge of the economy – it creates a cleaner interface, thus greatly simplifying the whole process. I say “so called” because it is not fair, but more about it later. The visible taxing is but one of the burdens on the economy. Even in a “sales tax only” world, the government fingers are still in the economic pot and there are many other issues that are much more urgent as well as dangers associated with enacting another tax without making 100% sure it is a replacement rather than addition. So, buckle down, here we go …

According to the Fair Tax website, the fair tax is

“a comprehensive proposal that replaces all federal income and payroll based taxes”.

Additionally, it promises to do away with the much dreaded IRS. The rationale, in a nutshell, is that businesses will be relieved from the tax burden, everyone will pay the same amount and economy shall tremendously prosper as a result. If it were so simple to fix our economic woes, I wonder why did we not do it already? Methinks there is something seriously flawed in both the plan and its timing. Not that it does not have valid points – it does, many. There are indeed measures in there that would have stimulative effects on the economy. But there’s much, much more to it then just simplifying the way we pay taxes and – poof – we find ourselves in a paradise literally overnight. For, that is precisely what the fair tax proponents like Neal Boortz promise.

For starters, there is absolutely nothing in the legislation proposal that addresses the main ill that affects the economy most and has to be dealt with first – the central planning embodied in the lethal combination of Federal Reserve System, fiat-money, fractional-reserve banking and their corollary – the rapidly growing federal deficit-spending machine. Any reform that does not address those issues is merely a band-aid on a cancer. The fair tax proponents are surprisingly honest about it:

“We are not calling for elimination of federal taxation, which would be irresponsible and undesirable.

This would imply that, until 1913, this nation was irresponsible and has lived in undesirable way. The conspiracy-theory-borderline conclusion whether the 16th ammendment only accidentaly coincides with the Federal Reserve Act is left as an exercise to the reader. But, wait, there’s more – the real trouble with the mindset behind the “fair” tax is succintly expresed in the following sentence:

“Nor does our endorsement call for reduced federal spending.

With all due respect, I can not but wonder whether these people are aware of the grim reality of U.S. debt. And, with more due respect, I wonder if they are aware of the fact that some of their colleagues have a very different opinion on the subject.

Furthermore, while the current tax code indeed harms the business efficiency, it is by no means the only obstacle. The main obstacle is the aforementioned rigged financial system and acompanying forrest of regulations. But Fed is not the only culpit – there’s FDIC, EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, OSHA, CPSC, NHTSA, EEOC, BATF … and the obstacles those agencies impose on the businesses.

Futhermore, it is troubling that the H.R. 25 states (SEC. 2 CONGRESIONAL FINDINGS.):

“Findings Relating to Repeal of Present Federal Tax System- Congress further finds that the 16th amendment to the United States Constitution should be repealed.

The term “should” is obviously weak language and by no means a guarantee that this shall happen. Repealing a constitutional amendment is a long process and H.R. 25 provides no guarantees thereof – only suggests that it should happen. That being said – how likely is it that we end up with both income and sales tax which later, as entitlement programs sink deeper and deeper into financial troubles and U.S.A. drifts ever closer to the European social democratic model, morphs into a full-blown VAT? Even the fair tax proponents admit that there is no guarantee on that. They just hope that things would be so good that additional taxes would not have to be imposed.

But even if one disregards all the mentioned shortcomings that would prevent the realization of the paradise promised by the fair taxers, at it’s very bottom, the fair tax is not fair – it comes with income redistribution as a built-in feature. Yes, the people who receive money without doing any work in return will still be with us. Since subsidies always create more of the subsidized activity, we can expect the number of recipients in this category to keep growing. But, even when I chew up on that one, I stumble over the percentage controversy. Call me paranoid, but if it’s all the same tomato, is it really only by accident that we are served a perception of the smaller one?

Last but not least, what we call taxes (all of them – federal, state, excise, property, …) is by no means a whole picture. Inflation is taxation. So is deficit spending.

Admittedly, it’s easy to be a critic. Some smart people thought hard and long, money was spent, efforts expended and trashing it all without a counter proposal would be irresponsible. So, I propose the following course of action:

  • Pass H.R. 1207 (Federal Reserve Transparency Act of 2009). That will give us some grounds to discuss whether central banking is good or not for our economy. I suspect it will provide a lot of reasons to abolish it.
  • Abolish the Federal Reserve. For those who think this is radical and impossible, I submit the fact that it was done twice before in the U.S history (hint: check that $20 bill face bio).
  • Establish sound money. Since only God can make it, deficit spending is automatically taken care of. This, in turn, automatically shrinks the governement.
  • Establish 100% reserve banking.
  • Reform the taxes.

I have only touched on the most troubling aspects of the so called “fair” tax. It’s nickname is misguiding and the proposal aims at the right target in a wrong way and prematurely. The authors have fallen into the common economic fallacy trap – not thinking it all the way through.

“Economics is haunted by more fallacies than any other study known to man. This is no accident. … The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Henry Hazlitt, “Economics in One Lesson

With some modifications, H.R.25 would be a worthwhile effort in an economic environment that operates on a solid foundation of free market, sound money and balanced governement budgets. In the reality of our current state of the economic affairs, I hate to say it, but it’s a fairy tale.

5 Responses to “The Fairy Tax”

  1. John Hanson Says:

    H.R. 25 attacks one problem directly: replacing funding of treasury by a consumption tax. Companion legislation goes after the ROOT of the problem referenced by Aleskx, viz., the Federal Reserve. That ROOT (the 16th amendment) enabled the Federal Reserve Act to exist.
    Spending? Under the current IRS code and regulations Congress can spend money virtually undetected by simply adding another change to it. Who noticed that 100 changes were added (pork all) to get the House to sign off on the 400 pages in the Bailout Bill? Under H.R. 25 Congress can no longer hide spending in the very process employed to collect its funding.
    Throwing the “light of day” on Congressional spending introduces an element of accountability desperately needed in the tax and spend process.
    On July 12th, 1909, the 61st Congress passed the 16th amendment resolution which was sent to the States for ratification. That first huge and enabling step set our Government on a 180 degree turn away from the Government our founding fathers created. Note that the Fed Reserve Act was passed in 1913 after ratification of the 16th was completed. The Fed is a main branch of our economic problems and must be eliminated as suggested by Aleskx. But if we don’t eliminate the root (16th) what new vines may spring forth to choke our economy and our basic rights?
    Being the Centennial of the birth of personal income taxation, July 12th, 2009, has been declared a National Day of Mourning and will be the center of activities to raise public awareness of the huge mistake the 16th has been for all Americans (except the Big Banks and Congress).
    A site has been created for the use of all web based groups seeking return of the government given to us by our founding fathers. It explains the facts surrounding the Day of Mourning commemoration and suggests ways for all groups to co-sponsor and co-promote the movement. They are free to create activities as do the Tea Party groups, many of whom are joining the July 12th movement the better to keep the steam in their kettles. All Americans can sign the new Declaration of Independence at:
    http://www.repealincometax.com/DOM/?T=0521-gajth

  2. Simplicio Says:

    John,

    Let me address main points in your reply:

    “Companion legislation goes after the ROOT of the problem referenced by Aleskx, viz., the Federal Reserve. That ROOT (the 16th amendment) enabled the Federal Reserve Act to exist.”

    Indeed. However, the problem is, if HR 25 passes, we’ll have a period of both sales tax and 16th. What precludes them from re-establishing the income tax again in, e.g. severely worsened economic conditions caused by inflation and insolvency of the entitlement programs? Nothing. Just like nothing precluded them to pass TARP – all they had to do was lubricate it with additional 100 billion worth of pork and it went through smoothly. Just like nothing precluded them to impose income witholding “temporarily” during WW II etc etc

    “Spending? Under the current IRS code and regulations Congress can spend money virtually undetected by simply adding another change to it.”

    But, John, there is nothing about spending in HR 25. Here it is in the open letter from the HR25 architects:

    Nor does our endorsement call for reduced federal spending.

    “Throwing the “light of day” on Congressional spending introduces an element of accountability desperately needed in the tax and spend process.”

    It’s already clear as day. What is also clear is, that nothing short of constitutional sound money strict enforcement will stop them.

    “But if we don’t eliminate the root (16th) what new vines may spring forth to choke our economy and our basic rights?”

    Exactly. But first get rid of Fed. Then establish sound money. And 100% reserve banking. Once you have that in place, spending through inflation and deficit is gone and we can talk how to reform the ways we’re being taxed. But to impose a new tax on ourselves without 16th being repealed? No thanks.

  3. Mark Says:

    simplicio,
    Income taxation is completely immoral, and I, for one, would like to see it abolished, and The Sixteenth Amendment revoked.

    To answer your question as to how to keep The Federal government from enacting it again in the future, if revoked, we will also need to get an amendment added to The Constitution that will uphold the Tenth Amendment, which says…

    The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. http://www.senate.gov/civics/constitution_item/constitution.htm#amdt_10_(1791)

    Therefore, if the federal government has not made a law in respect to the states, then they should no be able to overturn state laws.

    In fact, one could argue that any law that supersedes state laws since 1791 could theoretically be null and void.

  4. Tax Guru Says:

    I’ve been included in taxes for longer then I care to acknowledge, both on the individual side (all my employed life story!!) and from a legal standpoint since passing the bar and pursuing tax law. I’ve furnished a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes perfect sense. Please persist in the good work – the more people know the better they’ll be outfitted to cope with the tax man, and that’s what it’s all about.

  5. Pamela Gentry Says:

    I heard someone say that Obama is like the tooth fairy, I guess because he gives tax cuts to the poor and raises taxes on the rich, or so they say.

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