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by JB Williams, ©2011

Cartoon from 1933 regarding the argument about a sales tax vs. an income tax. Why have Americans accepted the imposition of many different taxes on their earnings?

(Jul. 14, 2011) — Nothing in life is more certain than death and taxes. But the notion that there is or will ever be anything fair about either of these life realities, is just plain foolhardy.

Ever heard the phrase – you can’t get blood from a turnip…? Sounds like a silly old analogy from days gone by, but it happens to remain true today. People who can’t pay taxes don’t pay taxes, and that’s why people, who can pay, will always pay for everyone. Fairness isn’t even part of the equation.

In his July 11 Part III of his Economic Vision statement, presidential candidate Herman Cain does his best to pitch the “Fair Tax” – a libertarian economic proposal that offers to replace the federal income tax with a national sales (consumption) tax.

The Fair Tax concept would replace a federal tax on gross income with a national sales tax on everything you purchase. The allure is the idea of no more witholdings from your paycheck and that idea is embraced by a lot of people who are sick and tired of working 1/3 of their job for the federal government and then watching the federal government waste their earnings and then some.

But the problems with a national sales tax are significant.

  • The tax rate would be at least 30% in order to deal with the insane level of federal spending
  • A direct 30% tax on consumer activity will absolutely reduce consumer activity
  • A consumer driven economy must have healthy consumer activity
  • We would pay taxes on items that are currently tax exempt, such as services and food
  • Sales tax on an average new car would be $7500 (based upon a $25,000 car)
  • Tax on the average grocery store visit $75 (based on a $250 grocery bill)
  • People who can’t pay taxes now, will have to pay taxes under the Fair Tax

When consumer activity drops because they cannot afford the tax on everything they purchase, and the 30% consumption tax rate will not cover federal spending, what happens next?

When people don’t buy new cars because they cannot afford the sales tax, how do we pay people to build cars? When “rich folks” refuse to pay $3 million in tax on their $10 million corporate jet, how do we pay people to build jets?

The fastest way to kill consumer activity and a consumption driven economy is to tax consumption at all levels. How “fair” is that? People will simply curb their consumption habits to avoid paying consumption taxes.

Properly Defining Fair

Begin with understanding that not only is there no “fairness” in our current tax system, there won’t be much fairness in any replacement tax system either.

You can’t get blood from a turnip! People making at or below $35,000 per year do not pay federal income tax now, because they can’t afford to. This accounts for approximately 47% of American working families. They won’t be able to afford a 30% consumption tax any better.

As an equal American citizen, blessed with all of the same freedoms, liberties and opportunities as all other Americans, their fair share should be equal to that of any other American citizen. But it isn’t and it never will be.

Those making over $35,000 do pay federal income taxes. In fact, those “rich” households making $113,000 or more in combined income, the top 10% of income earners in the nation, pay over 70% of all federal income taxes collected. Surely, that qualifies as more than their fair share.

This will not change under a national consumption tax. Those who can pay will, but they will pay less by simply consuming less. Those who can’t pay will be forced to pay some, but their purchasing habits will have to change (shrink) dramatically in order to balance their household budgets.

Last, as consumption drops across the board in order to avoid paying excessive consumption taxes, the government will be forced to raise taxes on the “haves” again and again. This — some call a “Fair Tax.”

The Flat Tax by Comparison

Former career congressman Dick Armey and his Freedom Works are proposing a Flat Tax, which proposes to do away with or at least greatly simplify federal income taxes, from our overly complex graduated tax system which penalizes success, to a flat tax where everyone pays the same percentage of tax, based on whatever their income might be.

The flat tax proposal makes much more sense than the so-called fair tax. It is based upon gross income as opposed to consumption. It is less punitive as compared to the current graduated tax system. It is far less complicated, which will likely put both I.R.S. employees and tax preparation offices out of work.

It seeks to eliminate double and triple taxation in things like the Death Tax. Those who make more will still pay more, even if the tax rate is the same at all income levels. Although this is still not based on fairness, it is fairer than the current system or the Fair Tax proposal.

Watch out for the elimination of certain tax deduction though. The home mortgage deduction has been used to promote home sales quite successfully. Eliminating such deductions will have a direct negative impact on home sales and any other items that lose their current deductibility. It will also cause a new foreclosure crisis if existing homeowners lose their mortgage deduction on properties already purchased.

No Such Thing as Corporate Tax

Every time you hear a politician say they are going to tax the corporation on behalf of the people, realize that by corporation, they mean YOU!

There is NO SUCH THING as corporate tax. When the government taxes any corporation, every penny of that tax is passed on to employees in the form of lower wages, shareholders in the form of lower return on investment and consumers in higher prices at the store. YOU pay ALL corporate taxes. The corporation only collects and remits.

Corporate taxation is also a form of double taxation. When a dollar is earned and taxed at the corporate level, net after-tax earnings are taxed again at the employee and shareholder income level. The same dollar in income is taxed twice, once at the corporate level and again at the individual income level.

Then on your net income, you will pay tax after tax after tax as you consume products and services until at the end of the day, well over half of what you make goes to pay one tax or another. The insanity begins with the corporate tax and all of it comes out of YOUR wallet.

As a result, there should be no corporate tax. There is no such thing!

No Escaping the Real Problem with These Solutions

There is no getting around the fact that new tax systems will not solve the actual problem. The problem is federal spending.

There is no amount of taxes that our federal government cannot outspend. Based on the last seventy years of history, there is no tax system that they will not outspend.

This problem is almost a hundred years old in America and the idea that anyone in Washington, DC really wants to solve the problem cannot be supported by any evidence. For over seventy years now, both Democrats and Republicans have spent our nation into bankruptcy and a $15 trillion dollar national debt, as they continue spending money we have not had for decades, and can narrowly barrow today.

Certainly, our tax system can be much more intelligent, much simpler and yes, even more fair.

But the best thing to do is end the deficit spending immediately, and then come up with the best plan for dealing with our debt crisis. If we can’t stop the spending, it doesn’t matter how we tax.

First things first…. Stop the bleeding, and then start the healing!