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Problem in the Fair Tax Act

I read the Fair Tax Act of 2003 (H.R.25).

Okay, I read the first couple sections, then realized how long it was, and skimmed the rest. My purpose in this was to see how well it addressed my general concerns about a consumption tax. But it was a very fast read, so take this with two grains of salt.

In general, it's pretty good. It comprehends the difference between productive and consumption expenditures, including the taxation of services (which I forgot to mention in my earlier article). It provides for a tax credit for business purchases that were taxed at retail but economically should have been. It understands mixed-use (business and consumption) of property. It ensures the tax on any item will be collected exactly once. It says purchases for investment purposes will not be taxed, but I'm not clear on how the determination will be made.

I'm nothing like a tax expert, or a legislator, but color me impressed by it. Except for one glaring thing. It hugely screws up the transition from income to sales tax, allowing double taxation. Here I pause to be slightly embarrassed, because I didn't say anything at all about the transition in my earlier article. I wasn't thinking about that aspect of the matter yet.

Dollars that you hold in cash (or, say, in a bank account) are dollars that have already had income tax applied. It would not be correct to tax those dollars again with a sales tax. That would be double taxation.

In general, this applies to non-cash assets also. And I don't know how to fix it. Give people a sales tax credit based on their net worth (excluding pre-tax accounts) at the time the sales tax goes into effect? That sounds, um, complicated. There are cash-flow problems for the government, too — by moving from income to sales, it collects tax "later", so how is it going to fund operations until such time as everyone spends through their net-worth-based tax credit?

I also couldn't figure out if education (tuition) was exempt from the tax or not. It shouldn't be. But I couldn't decipher Title II section 201 subsection 2(a)(14)(B)(ii)(IV). If you can do it, good for you, and please let me know. :)

Tiny Island