FairTax proponents generally respond to these criticisms with what we would have to call flimflammery if we thought they understood the issues. Existing taxes are embedded in today’s consumer prices, they say, so getting rid of them would cause prices to drop. Adding sales taxes would be “a wash,” says Huckabee. So prices don’t go up, and workers get to keep their “entire paycheck.” Again, it sounds too good to be true.
And again, it is. If prices stay flat after a sales tax, workers can’t keep their “entire paychecks”: Wages have to fall. The paycheck you’re keeping would be smaller. (Think about it this way: If existing taxes are embedded in the cost of every product, they’re embedded in the cost of labor, too.) If wages don’t adjust downward, then unemployment has to rise. If the Federal Reserve increases the money supply to prevent this combination of falling wages and rising unemployment, then consumer prices will increase.
Most experts in tax administration also say that enforcing sales taxes gets hard quickly once the rates hit double digits. That’s one reason that many countries with broad-based consumption taxes levy value-added taxes, which are collected in smaller amounts at each step along the production and distribution chain, instead of sales taxes, which are collected in one big lump at the end. The fact that no country relies on sales taxes to the extent the FairTaxers advocate does not, however, faze them. Americans for Fair Taxation’s website discusses the issue thus: “Two of the largest economies in the world rely almost solely on sales taxes: Florida and Texas. Many civilizations in history have relied solely on transaction-based consumption taxes: a percentage of a grain shipment in exchange for a safe harbor.” Sales taxes in Florida and Texas are under 10 percent. Might imposing a 30 percent tax rate on the sales of a non-grain-based economy pose different issues? AFT doesn’t say.
Even some of the real advantages of the FairTax are overstated. Households would not have to prepare returns, and would thus enjoy more privacy. On the other hand, the federal government would still have to know people’s wages in order to determine how much they have earned in Social Security benefits. (Which leads to another problem, albeit a surmountable one. Those benefits are now linked to payroll taxes paid, which would of course end with the FairTax. As a result, people would have an incentive, for the first time, to make the federal government think they earned more than they actually did: They would accrue higher Social Security benefits while paying no extra taxes. Waitresses would start over-reporting their tips. The FairTax proposal has to take steps to combat this misreporting.)
And we haven’t even gotten to the politics of it. How likely is it that Congress and the president — any Congress, any president — will agree to create a new tax system that punishes the middle class and senior citizens? One that taxes people when they buy a home in which to live, but not when they buy a house as an investment? (This example comes from The FairTax Fantasy, a fairly comprehensive attack on the idea by Hank Adler and Hugh Hewitt.) That requires state and local governments to pay taxes to the federal government whenever they buy something — and thus, in all likelihood, to raise their own taxes? Let’s even stipulate that these are good ideas, and that the protests of the homebuilders and the charities at the loss of their popular deductions should be ignored. What are the odds that they will be?