Among the precession of Republicans vying for Senator George Voinovich’s soon-to-be vacant seat is star car-dealer Tom Ganley. As chief of the largest automotive group in the Ohio (and perpetrator of wretch-inducing commercials), Ganley’s all about business, and what businessman-turned-politician's campaign could get rolling without a promise to overhaul the nation’s tax system?
Ganley supports “FairTax,” which is essentially a redux of Steve Forbes’s flat tax with a twist. FairTaxers wan to eliminate all income taxes — business and personal — and make up the budget void with a high sales tax instead. They'd also disband the IRS.
Supporters believe that a 23 percent sales tax (which ends up producing a 30 percent markup in traditional terms) would be sufficient to fund the government without widening the deficit, but some economists believe otherwise. The tax would be in addition to the state and local sales tax, which in Cleveland would add up to 31.25 percent, or a 46 percent markup on the price of goods.
The current tax system is progressive — those who earn more pay higher tax rates. A head of household earning between approximately $11,000 and $44,000 tithes 15 percent of their income to the government, while someone pulling down $357,000 or more owes up 35 percent to The Man.
So here's the problem with the so-called FairTax: The poor don't save much; they spend most, perhaps all of their income. So they would likely end up paying a lot more in taxes than they do now. They'd also lose the few loopholes that benefit them. For example, anyone who’s married with one child under 17 doesn’t pay taxes on the first $31,400 of income. FairTax makes no such allowances.
Meanwhile, imagine the jubilee among the wealthy over their contribution to society dropping from a 35-percent tax on their marginal income to a 23-percent tax on purchases only.
Besides pushing two words into the ever-trendy “single word separated by capitalization,” FairTax is intended to be more appealing to the masses than the ol’ flat tax by offering to mail every citizen a “prebate” to compensate for the increased burden on the poor. According to The FairTax Book, everyone would receive a prebate of up to about $185. Those who live paycheck to paycheck naturally would spend that right away, giving at least 23 percent right back.
Or possibly more. William Gale, an economist at the Brookings Institution, called the 23 percent figure a “big lie about tax reform” and predicted in 2005 that the figure would rip a $7 trillion hole in the budget over 10 years. Instead, he suggested 31 percent would be a more reasonable figure, and even more if the model takes evasion into consideration.
And why not evade? Economists and common sense agree that when taxes start to rise to that high of a level, the incentive to cheat becomes ever more tantalizing. If buying a product under the table meant making it 46 percent cheaper, there’s no denying that people would take advantage of it. Lots of people already drive out of state or to Indian reservations to buy cheaper cigarettes.
The only way to combat evasion is regulation and oversight. So while FairTax advocates dream of tearing down the IRS headquarters like the Berlin Wall, it seems delusional to believe that we’d no longer need the threat or audit and prosecution to keep people from trying to render unto their own pockets what should go to Caesar.
At MSN Money, Jeff Schnepper notes:
The biggest winners [under a FairTax system] would be most savers and investors. A consumption tax gives savers something like an unlimited-deductible individual retirement account. There would be no tax hit until the dollars were actually spent. While the money was saved or invested, it would grow fully tax-free.
Financial companies would get an enormous windfall. Most of their expenses are payroll-related, and, relatively speaking, they spend little on goods and services. Much of their profit is generated by investments. That wouldn't be taxed until spent.
And we've all seen how responsible investors and banks are when there's lots of cash sloshing around.
The transition alone is good reason to avoid FairTax. Supporters propose a five-step process but the prediction is that, as the switchover date draws near, consumer demand will explode as people stock-up and purchase goods before the taxes come into effect. Then, as the transition snaps into place, demand would collapse.
Perhaps it’s just a bad case of Have-Not Fever, but the FairTax proposition seems too simple to be realistic. To believe we can dispel the complexities of collecting taxes in such a direct way seems foolish. It’s unreasonable to believe there wouldn’t be exemptions added and changes made to the tax rate over time. At the core, it’s a system that takes a larger part from the thin wallet than the thick one. To say that such a system is fair is to argue that the poor owe the nation as much (or more) as the rich. An aspiring politician like Ganley needs to realize that supporting a plan so poorly developed shows a serious lack of intellect, a poor choice for a candidate whose career consists of a high school diploma and 47 years of automotive sales. — Niklos Salontay