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FairTax: Capitalism Comes Too Close to Socialism

with 20 comments

So, Mike Huckabee wants to get rid of the IRS and repeal the 16th Amendment, which allows the federal government to collect income taxes. He is a proponent of what’s called FairTax, a variety of tax ideas typically billed as a “consumption tax.” I have to admit there is a simple, almost tempting elegance to it: we get rid of all federal level taxation, and replace it with a federal sales tax of about 23%. On top of this, families (depending on household composition) up to the poverty level essentially get all their money back over the course of the year; instead of a once-a-year refund-check, they get a monthly prebate. Supposedly this makes the tax progressive and not regressive, in that the assumption is that people who make more money aren’t necessarily spending as much of it (they save it or, I guess, invest it), and therefore aren’t getting taxed for it as much. They still get that prebate (again, varying with household composition), though since they are assumably consuming more than this minimum, they are not getting all their taxes back. Another way of putting it is, the tax does not “punish” people for just getting by at or below the poverty level, so they get their income supplemented with the prebate checks to offset the sales taxes; those above this threshold, if they are spending much more than it, are really the ones carrying the tax burden, though it only gets higher as one makes more money. Another way still of putting this is with something of an example I’ll borrow from wikipedia:

For example, a family of four (a couple with two children) earning about $25,000 and spending this on taxable goods and services, would consume 100% of their income. A higher income family of four making about $100,000, spending $75,000, and saving $25,000, would consume only 75% of their income on taxable goods and services. When presented with an estimated effective tax rate, the low-income family above would pay a tax rate of 0% on the 100% of consumption and the higher income family would pay a tax rate of 15% on the 75% of consumption (with the other 25% taxed at a later point in time). A person spending at the poverty level would have an effective tax rate of 0%, whereas someone spending at four times the poverty level would have an effective tax rate of 17.2%.

At the top of the list made by Americans for Fair Taxation in support of the FairTax is that it “enables workers to keep their entire paycheck.” This is achieved, at least in part though probably mostly, because the FairTax movement involves repealing the 16th Amendment—eliminating Income Taxes and the IRS in general. It is a supply-side economic move masked as a demand-side, as the most widely made purchase is left out of this picture while at the same time remaining the central element: human labor.

It bears a more than striking resemblance to a Lacanian objet (petit) a, or when we put it to work (Jodi Dean reminded me of this), a Zizekian obscene supplement. The FairTax says it wants workers to get their fair compensation for their work, and that the real boon in this is their increased spending power, though it is the implicit transaction between employer and worker, paradoxically with regards to human labour, that is left out of this plan’s scope. In other words, human labour qua spending power is liberated while at the same time never brought into question.

It just makes no sense to tout this elimination of income taxes as an achievement, when it would just as easily could be achieved by taxing employers for buying their workers’ labour. In a way, this is how income taxes work now, though they really target the tax-paying worker and not the employer like they should. Effectively, taxing employers and not employees for working would be taxing employer profits (perhaps into practical non-existence) and turning them around for social ends. In other words, FairTax tries to have the populist appeal of Socialism without the economic model to realize it.

It’s at once surprising and not that neoliberals have not jumped on this more, though I think it ultimately is because how closely it takes them to Socialism. It is a very short though profound logical leap to say, “If we are going to tax the consumption of all these goods and services on the part of consumers, why not producers too, who consume human time and energy for money?” It is as if that thought were an object-cause of Capitalist desire: they must approach it all the time in order to manage all the while stoking the fires of Capitalist growth, but ever realizing it would amount to the completion of the Capitalist telos: the blowing out of that flame and the end of Capitalism itself.

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Written by Joe

January 13, 2008 at 3:49 pm

20 Responses

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  1. Okay, so why not tax that which is consumed most of all: human labour?

    pdxstudent

    January 13, 2008 at 7:56 pm

  2. Bah. Whoever that was, I’m sorry if WordPress gave me the wrong thing to click. I approved your comment, and then they sent me another, apparently from another person, with the same lengthy comment. It struck me as spam, so I spammed it, but when I did so the original comment went away too.

    Before you send me all that information again, of which I’m more or less aware, could you answer my question first?

    pdxstudent

    January 13, 2008 at 8:06 pm

  3. The big advantage of a large varieties of taxes is that they will be relatively low and it is less likely for people to maneuver around them. So, while there is a seeming efficiency in having a straightforward tax on one variety of transaction in an economy, it amplifies corruption and inefficient workarounds.

    Also, do we really want to tax consumption? I mean, *I* do, because I want a simpler, more impoverished America. But if the aim is for a robust country, consumption is its driving engine. Look at the effort to juice the economy to avoid a recession. They are going to GIVE MONEY AWAY. Truly, it is a method that is completely insane [our national debt is huge and the country is going to get nothing — no bridge, no road — for this candystore giveaway] and yet brilliant because it is the most-efficient goosing.

    I also must object to the idea of “fair compensation for laborers’ work.” How do you measure this? Rather obviously, with all the hundreds of millions inept Fortune 500 CEOs have been getting after being booted out of their jobs, work is riddle by favoritism, Good Old Boy networks, nepotism, and blithering inequities. Companies have no clue how much to pay their employees and employees have no clue how much they might be worth. It’s as much a crapshoot as anything. I would like to see ‘the value of work’ addressed, but I don’t see how the FairTax touches it.

    Tom Armstrong

    January 22, 2008 at 9:41 pm

  4. Not sure what you mean by “taxing employers for buying their workers’ labour”. Employers currently pay taxes based on profit, and for good reason. If they had to pay it based on number of employees instead (or number of employee hours, or whatever) it would create additional excellent incentives for layoffs and for outsourcing to other countries.

    I oppose the so-called “FairTax” too, by the way.

    K

    February 7, 2008 at 2:03 pm

  5. Since business passes tax compliance costs along in their prices, FairTax eliminates yet another costly pass-through by assessing the tax at consumption. As illustrated by substantive research, the benefits are many ( snipr.com/fairtaxslate ) and are compelling.

    Ian from Ann Arbor

    February 7, 2008 at 6:07 pm

  6. I’ve been included in taxes for lengthier then I care to acknowledge, both on the individual side (all my employed lifetime!!) and from a legal stand since passing the bar and following tax law. I’ve put up a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes complete sense. Please uphold the good work – the more individuals know the better they’ll be outfitted to comprehend with the tax man, and that’s what it’s all about.

    Tax Guy

    November 22, 2009 at 7:52 pm

    • I am shocked that a tax attorney would agree with this entire post and instead prefer a 70,000 page tax code. Who would’ve thought that someone who probably makes a 6 or 7 figure salary and spends their entire livelihood manipulating, finding and possibly lobbying for more tax complexity would be against the FairTax.

      Max Pruger

      August 18, 2011 at 1:03 pm

  7. Missing from this article is the foundational purpose of switching to a consumption tax verses the production tax or labor tax which is taken directly from the worker without even owning it. When the employer pays the federal taxes, he has to recoup those taxes by placing the cost of the Federal tax into the price of the domestic product. We are handicapping our own industry in America by using the old closed border tax we had when Reagan gave us Free trade. What has happened since then? We have lost industry, watching it be distributed to the world. We should have switched to an open border tax structure, like FairTax, 30 years ago. Incidental, FairTax came about at that time and has been tweaked for 30 years and has had 20 million dollars spent on it vetting its worth.

    We want Jobs? Getting more of the same song and dance from the coupe Federal Government is not the answer. Under Reagan congress gave us a flat tax to help stimulate the economy. What it stimulated and the current flat tax proposed will do also, is it gave congress the ability to sell graft tax wavers at the tune of over 1,200 amendments to the IRS tax code. The current new flat tax is what is known as the reset button, to recycle all that corruption to fill Congressman campaign funds. They don’t want you, the Citizen to benefit from a tax structure change, but to keep their evil ways of greed. Demand we go to the FairTax and bring back sanity in the Congress, as they will suddenly have we the people to cater too, rather then a slew of lobbyists with nothing to present as bribes.

    Alexander Hamilton stated that the least burdensome tax structure is the sales tax as if you cannot afford to pay it, you don’t have to. The charts show that the 90% of the people will benefit from this new FairTax plan. Those who are criminals or illegals, under the table will suddenly have to pay their fair share. That is how 90% benefit from a tax neutral change in tax reform. We need our industry jobs back and fairtax will bring an approximate 15% price advantage to domestic made in the USA products over imports. The Steel industry touts that it only takes a 10% advantage to put them back to work.

    Don’t let the communist Marxist progressive income tax fool you into thinking it is your friend. Most rich people do not pay taxes as they have either bribed congress for a waver, taken their money off shore to hide it and most importantly, most do not make incomes. Wealth is not taxes, unless you tax their spending. Also, if you just seen the 60 minutes show on corporations hiding their wealth off shore to avoid taxes. Remember, they took our industry offshore for the very same reason, to avoid federal taxes by importing the very product we used to make. We are to the end of this rope and no raising of taxes or cutting of spending can save us from what is coming. Only changing the tax structure to a consumption tax will do so.

    Please read this http://rgeorgedunn.blogspot.com/p/america-where-did-we-go-wrong.html

    R. George Dunn

    August 17, 2011 at 5:23 pm

  8. While the FairTax has some Progressive/Liberal elements, it is not a road to Socialism.

    First, it strictly limits the ability of the government to collect funds for redistribution in a number of ways. The individual citizen has control over how much they pay in taxes, limiting governments ability to extract more than he feels appropriate. And, under the FairTax, Congress is limited in their ability to manipulate the tax code to set up the class distinctions and animosities so critical in implementing Socialism.

    Second, the mechanism of collecting taxes, from retailer, to State, to federal, helps serve as a check on the growth of a highly centralized government. Instead of money flowing to Washington, and then being dribbled out to the States, the States have the money and, in the worst case, could withhold it from Washington.

    But most importantly, the FairTax makes explicit the supremacy of Man over the State through the concept of the prebate. The individual takes care of himself and his family first, and then begins to contribute to the government, instead of the present situation where government decides what it will take first, and the individual gets whatever is left over. A really radical idea!!

    kicker51

    August 17, 2011 at 5:53 pm

  9. I have heard a lot of absurd arguments about the FairTax but this has to be one of the most ridiculous. Socialism, as defined by Wikipedia, is an economic system in which the means of production are publicly or commonly owned and controlled cooperatively. In other words, it is using FORCE (remember that word) to take from the productive and distribute to the unproductive. This sure sounds a lot more like the compulsory income tax than a voluntary FairTax. Under the FairTax, no one is FORCED to arbitrarily send a portion of their production to the gov’t. The citizen has the right to choose when and how much they will contribute to the gov’t coffers. The current income tax punishes productivity, it punishes savings and it punishes achievement. The FairTax, on the other hand rewards all of these activities. When the first and overriding principal of any system is FORCE, then everything that comes after is irrelevant.

    The comment about taxing labor shows the narrow-mindedness of this argument since it is still a tax on production not consumption. Production is what drives growth, consumption is what depletes resources, why would you want to punish the good and reward the bad? Anyone with children knows that if you reward good behavior you get more good behavior. If you reward bad behavior you get more bad behavior. This is exactly what is happening with our current income tax system. The poor remain poor because there’s no real incentive for them to work and produce. The ultra-rich, stay ultra-rich because they live on wealth (ie. consumption) not income and the middle class gets squeezed because their production is taken away.

    There are so many misconceptions and half-truths in this article that it’s difficult to know where to start however, let me just highlight the big ones.

    Simplicity. Simplicity is the hallmark of the FairTax. In order to confuse people, those who argue against the FairTax attempt to complicate and distort it but the truth is that it’s simple. The FairTax is a national sales tax that is included in the price of every good and service sold. That’s it. There is nothing new or complicated about this concept. 45 out of 50 states have a state sales tax. And even residents of the other 5 states, can understand this concept (heck, my 4 year old understands this concept). The only difference between a state sales tax vs. FairTax is that the FairTax is included in the price where a state sales tax is in addition to the price. In other words, under a sales tax a $10 item on the shelf with a 5% sales tax would be $10.50. Under the FairTax the item would just be priced $10.50 on the shelf. See isn’t that already simpler? And when someone is hired for $10 an hour and works 40 hours, their paycheck says $400. Under today’s system, the final check would depend on marital status, kids, home ownership, leap year, leprechuans appearing on the moon, and the color of someone’s underwear. And after all that, at the end of the year, the employee has to spend money to file a tax return to make sure it all “evened out”.

    The Pre-bate. Again something that is simple, yet often distorted. By moving to a consumption tax vs income, what’s the best way to insure that the poor don’t pay taxes and that all essential goods are tax free? Well we could start exempting certain goods like food and medicine. Can you hear Pandora’s box creaking yet? The moment one exemption is brought into the tax code, the army of lobbyists will storm the hill faster than flies on sh.. honey. Think of it this way, if we exempt food do we exempt potatoes? How about French Fries or Potato chips? Unlike the current system, the gov’t won’t have the ability to pick winners and losers, only the people will. So what’s the “simplest” solution. Figure out what the definition of poor is and credit them back all their FairTax tax. Seeing as we have a pretty good definition already, called the poverty line, let’s use that. To look at this from another angle, there are a lot of advocates for a Flat Tax. The Flat Tax says, exempt all income up to say 30K and tax everything above that at a flat tax rate. That’s exactly what the pre-bate does. But unlike any income tax which forcefully removes money from ones paycheck then gives it back at the end of the year the FairTax gives it back every month. Oh yeah, and it’s predictable. You know exactly what the rebate is every month. Isn’t that nice? Who reading this article can say for certainty how much they will get back or owe in taxes at the end of each year? You have a better chance of hitting the lottery and getting struck by lightning at the same time than knowing exactly what your tax payment or refund will be come April 15th.

    I don’t have time to completely dismantle this opinion piece (including the falsehood of increased spending power, which is not part of the FairTax) however, I will point out one more thing. According to every independent study on the FairTax, nearly all US citizens in every tax bracket come out better under the FairTax with the poor coming out the best, the middle class coming out really well and the rich coming out just slightly better (the only exemption would be trust fund babies who never worked in their life. For the first time they would actually have to pay into gov’t coffers). Can you imagine that, a system where EVERYONE comes out better.

    Max Pruger

    August 18, 2011 at 6:26 am

    • In my haste I forgot that there are several other groups who don’t come out better. They are illegal aliens, tourists, unscrupulous lobbyists, unscrupulous politicians, criminals and those who who deal in illegal activity. Since I initially said nearly all “US citizens” that immediately discounts illegal aliens and tourists but I thought it important to specifically mention that they would be taxed under the FairTax. Also, before another misinformed “intellectual” responds and says that a drug dealer won’t pay tax on their cocaine sale, you are correct. However, when that same drug dealer takes his ill gotten gains and uses it to buy that fancy Escalade, gold grill (for his teeth not his car) and something special for his mother on Mother’s Day, then they would be subject to the FairTax.

      Max Pruger

      August 18, 2011 at 11:34 am

  10. The FairTax is the road AWAY from socialism. The communist manifesto calls for:
    2. A heavy progressive or graduated income tax.
    3. Abolition of all rights of inheritance.
    The USA has perfectly implemented item 2 of the CM, and with a 55% tax on inheritances over the deductable amount has largely implemented #3.
    The FairTax gets rid of income and inheritance taxes. This would be a step AWAY FROM socialism, not toward it.

    Chris

    August 18, 2011 at 7:14 am

    • Great point Chris. To quote someone else “the Communist Manefesto calls for exactly the kind of income & inheritance taxes we have now – but those of us who want to get RID of that are the socialists? give me a break!”

      Max Pruger

      August 18, 2011 at 7:28 am

  11. Also, the argument that business purchases labor misses the point – the FairTax is a tax on consumption, which is most easily identified as a retail sale. Income occurs when someone does something good for someone else -and by extension all of society. Why punish that? Likewise, savings (other than the stuffed mattress kind) and investment are when someone allows their capital to be put to use by others for their benefit – and by extension all of society. Why punish that either?
    Consumption is when the person – instead of acting to benefit society – places a demand on society and/or natural resources. Given that there are limited resources and labor available, that demand must also be limited. Obviously the free market with its supply/demand/price interaction naturally limits demand, but it also makes sense to tax an individual on the amount of demand made on society rather than when he benefits it.
    The whole area of dispute over who is going to pay what effective rate based on their income this year, or over their whole lives after they retire, is irrelevant.

    Chris

    August 18, 2011 at 7:23 am

  12. Wow. Thanks, Max. I think I’m starting to get it.

    Bill E. Payne

    August 18, 2011 at 7:32 am

  13. Ask me about Socialism, Marxism, Fascism, or Communism and I’m clueless. I couldn’t tell you the differences between any of them to save my life. But I know how to read and I understand when something doesn’t make sense. To call the FairTax a “socialist tool” is like calling Karl Marx, George Soros and Saul Alinsky right-wing extremists. The FairTax goes against EVERYTHING those Socialists have ever wanted. And since Socialism hinges upon income tax, why would anyone even think for a second that the FairTax is a “socialist tool” (unless, they themselves don’t understand socialism)? If anything the FairTax opposes Socialism, Marxism, Fascism and Communism; and creates what is better known as Americanism; the devotion, loyalty, or allegiance to the United States of America.

    In 1996 [1], the Cato Institute posted a blog titled “Ending Tax Socialism” wherein it clearly states “Progressive income taxation should be abolished and replaced with a flat-rate tax on income or consumption — not just to enhance efficiency but to protect our rights to life, liberty and property“.

    fairtaxer

    August 18, 2011 at 8:45 am

  14. Any tax on a business will be passed on to the consumer.
    THAT is the beauty of the FairTax.
    You are taxed ONCE on the purchase of new items.

    And what could be better than taking power AWAY from politicians.
    That power is their ability to manipulate the tax code for the benefit of one indusrty, one company, or weven one person.
    All it takes is a nice, big, fat, juicy contribution to a politician’s campaign fund.

    The FairTax treats EVERYONE the same, from the poorest person to Bill gates (and his ilk).

    Scrap Iron

    August 18, 2011 at 8:54 am

  15. I’m a CPA with a Masters in Taxation. My personal opinion is this thing would cost me my job and make my degree obsolete, but I support it 100%. You don’t waste tons of legislation trying to define income and expenses, when they can be claimed, who gets to claim them, etc. You don’t have companies paying taxes that they then build into their prices so consumers pay the tax in the end. You don’t have people dodging income tax compliance working for cash.
    If you have money to spend and you spend it, you pay tax. Much easier to collect. Much easier to forecast. Impossible for people working for cash to avoid. Tourists help pay for the country they are visiting. Illegal aliens pay a share as well.
    It’s a great message to send to the country, MAKE ALL THE MONEY YOU WANT. Knock yourself out. Strive to be as rich as possible. When you spend it, we’ll take our cut. Fair enough.
    The fact that it closes the IRS, ends tax returns at all levels, and burns the tax code is just a bonus.

    Dean Majors

    August 18, 2011 at 1:24 pm

    • Dean, I don’t think it will cost you your livelihood. Businesses still need accountants, individuals still need financial planners. In fact, a high level executive at H&R Block came out supporting the FairTax. His comment was, “We’ll make far more money helping our clients invest their money than we make filling out their tax returns. You’re about to turn us into a nation of investors, and we have the largest Rolodex in the nation.”

      Max Pruger

      August 18, 2011 at 1:37 pm

  16. I am of the opinion this author simply wrote this article or blog out of boredom or because he likes to “hear himself talk”. That is one of the most absurd commentaries I have ever read regarding the FairTax. That a “tax attorney” believes it to be a well written piece is laughable. If I knew who he was and where he is I would warn people to stay away… he should return to family law and chasing ambulances.

    Jd Adams

    August 18, 2011 at 8:55 pm


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