A Room with a Viewpoint

“The time has come,” the Walrus said, “To talk of many things: Of shoes—and ships—and sealing wax— Of cabbages—and kings— And why the sea is boiling hot— And whether pigs have wings.” (Lewis Carroll)

Wednesday, December 28, 2005

Embedded Tax v. Add-On Tax

Okay Delftsman, here goes. While I’m willing to concede that a consumption tax is at least no worse than an income tax, the Fair Tax Act, as it currently stands, leaves me cold.

So we’ll start with the embedded tax. My problem with it is that it is fundamentally dishonest. Forget that either 30% or 23% is mathematically correct. The fact is, the markup due to the tax is 30%. Embedding the tax can have only one purpose: to obfuscate and hide the true markup. It removes the focus on the tax when you spend it--at least on small-ticket items. You don't have to go to the register and have anything at all added on--gee it's just like there isn't a tax. Sure it will be shown on the receipt, but unless it's a big ticket item, you're probably not going to pay attention to it. The purpose of the embedded tax is to play sleight of hand with the tax you're paying, now you see it, now you don't.

Look at your objection to withholding:

That is why withholding was first instituted, Gma Jo. When the income tax was first levied against on the top 5% of the population, it was a lump sum payment; when it was decided to tax ALL earners, withholding was used to hide the amount that those earners were paying, as the masses would never have accepted the toll placed upon them, at least without requiring the government to account for it's expenditures in a much better fashion than they would ever be willing to do.
How is a sales tax, especially an embedded tax, any better? At least with the income tax there is an end of year accounting—at some point you know how much tax you payed. Do you have a sales tax in your state? If you do, do you add up the tax on each receipt on each purchase? I sure don’t. I don’t have a clue how much sales tax I pay.

So this is doubly-dishonest. First, it hides the total tax you pay because it is paid in increments, just like the withholding. Compulsive people like me will probably start tracking such a large tax on my purchases, but that’s because I’m a single grandmother with time on my hands. Second, it hides the true mark-up on the item.

Do you know the most unpopular tax? It is the property tax. Why? Because it is paid in a lump sum right after Christmas. The next most unpopular is the income tax. Why? Because in the end you know how much you paid. The least unpopular, at least right now is the sales tax. But that’s because the sales tax is relatively small. If people really start adding up what they spend in the consumption tax, or have to actually see how much in taxes they pay on a new car or a house, not to mention heart surgery, they won't like that either.

Yeah, I know, you get to choose how much tax you will pay by your purchases. That’s hogwash. If the only way you can keep your taxes down is to not buy the items you need, how is this better than the income tax? Sure, you can get a job and make a good income, but don’t you dare spend it!! The fact is, under an income tax you try to get a job earning as much as you can, and then you deal with the taxes. If you make enough and are smart enough, you will try to shelter a portion of your income from taxes. So under a consumption tax, you make your income, you shelter what you can in savings (just like you shelter some of your income in IRAs, etc.), then you buy what you need and want. To say in effect, “I’ll get that old gov’mint. I won’t buy a new car. I won’t buy a new pair of shoes. I’ll cut back on Christmas. Sure my kids will be disappointed, but I sure got that gov’mint.” It’s crazy. It’s the dog in the manger.

Deathknyte is right. There is no such thing as a fair tax. A fair tax is the one you pay, an unfair tax is the one I pay. A fair tax break is the I get, an unfair tax break is the one you get. You don't make it progressive, you hit the poor the hardest because they generally spend most of their income. You do make it progressive, you're again having the middle class and rich subsidize the poor (as a liberal, I don't object to this, but I read conservative commentaries that certainly did). And the income tax didn't become so complex overnight, either.

So if you believe the income tax has become irretrievably broken and needs to be replaced, go for it. If you’re going to have a consumption tax, have it. Then be honest about it in a way everybody can understand. Not just those who got A’s in high school algebra.