To secure the votes he needed to be elected speaker of the U.S. House of Representatives, Kevin McCarthy apparently agreed the proponents of a plan called "The Fair Tax" could bring it up for a vote.
It was a reasonable trade. The legislation has a lot of support among libertarian-leaning types and is popular among the grassroots. Even some Democrats like it because it gives them a chance to lie about tax policy—as President Joe Biden and others have repeatedly done—to paint the GOP as the party of tax hikes.
The proposed tax is not, as Biden and other progressives like to claim, an add-on to the income tax. It is a replacement. No more income tax, no more capital gains tax, no more death tax—they're a few of the federal levies that would end if the "Fair Tax" were adopted.
Many economists agree taxing consumption instead of income brings the economic benefit of removing disincentives on activities that produce economic growth. Still, it's a bad idea and should be voted down.
If the United States moved from an income-based tax structure to a consumption-based one, more jobs should be created, wages should rise, there should be greater upward economic mobility, and the Internal Revenue Service could be eliminated. That sounds like a win on top of a win on top of a win on top of a win.
Except it's not.
As currently structured, the Fair Tax legislation does not require the repeal of the constitutional amendment allowing the federal government to tax income. It simply phases one tax in while another is phased out. If history is any guide, that means we'll eventually end up with both.
Sales taxes are regressive. Biden and others are having a field day with that bit. The president recently tweeted: "House Republicans are starting this new term—voting to cut taxes for billionaires, raise taxes on middle-class families, and make inflation worse."
Believe Biden on that—he knows how to make inflation worse. It's a hard accusation for the average Republican to answer, especially because so many people who write about tax policy don't understand the real impact of things like 100 percent tax rates. That's why noted taxpayer advocate Grover Norquist, head of Americans for Tax Reform, decries the Fair Tax proposal as presaging "political death" for anyone who brings it up.
"This tax ravages retired Americans by double-taxing their life savings [and] will never pass," Norquist said. He attributed whatever enthusiasm exists for the proposal on an understandable frustration with the IRS's assault on privacy and the present income tax code's complexity and the disincentives to savings and investment. But creating a new tax—a national sales tax (or eventually a Value Added Tax) is so dangerous and damaging that the FairTax has never even had a hearing in Congress.
The adoption of a national sales tax would indeed get rid of the IRS as we know it—but the new entity it would create to ensure the federal government got its "fair share" of revenues would be far more terrifying. Agents and auditors would need a complete record of where your money went each year instead of where it came from. If you think the tax man is intrusive now, wait until you have to account for every dollar you spent.
At the moment, the rate for the Fair Tax is set at 23 percent. There's no guarantee it will remain there. Indeed there's no guarantee it will remain a single-rate tax. You can hear the arguments for multiple rates now if you listen hard enough: "why should someone with the resources to buy a Rolls Royce or a Lamborghini pay the same tax rate as a working family needing a new minivan?"
In the end, the Fair Tax as currently conceived would lead to taxes on sales and income from all sources at various, variable rates. Still, there's hope for better things. Just days ago, newly elected Michigan State Senator Jonathan Lindsey introduced a measure abolishing the state's income tax.
That was one of the first things Lindsey did after being sworn in and, given the audible gasps of his pro-spending colleagues, let's hope it's not the last. Lindsey is in the vanguard of a movement of state officials pushing real reforms that phase out or abolish state income taxes because, for them, economic growth and job creation are more important. It's also a healthy reminder that the movement for change is coming towards Washington through the states, not the other way around.
Newsweek Contributing Editor Peter Roff has written about U.S. politics and policy for more than 20 years. He is now a fellow at several public policy organizations including the Trans-Atlantic Leadership Network. Email him at RoffColumns AT gmail.com. Follow him on Twitter and TruthSocial @TheRoffDraft
The views expressed in this article are the writer's own.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
