The Freedom Caucus has a crazy plan to raise taxes on the poor
During negotiations for the recent election of Representative Kevin McCarthy (R-CA) as Speaker of the House, one of the demands of the extremist Freedom Caucus was to vote on the so-called Fair Tax bill. This would abolish the IRS along with all existing federal taxes and replace them with a 30 percent national sales tax.
The bill is a political dead letter. Not only could it never pass the Senate, let alone be signed by President Biden:Axios Reports who will give a big speech on Thursday criticizing the idea, but McCarthy himself recently went against plan. He may not even make it out of the House committee.
However, the “Fair Taxes” plan is still worth delving into as an example of the doe-eyed folly that passes for policymaking in right-wing circles. Matt Bruenig, founder of the People’s Policy Project, has the full details in a video analysisBut in short, such a sales tax would be an administrative disaster, would lead to gigantic tax evasion, and most importantly, would be monstrously unfair.
At first glance, most would wonder how, if the Freedom Caucus abolished the IRS and at the same time advocated for a huge new tax, the government would collect it. The answer is that they would first ask the state governments to collect it for them, but in case the states don’t want to (since several states currently don’t have a sales tax) and cannot be compelled to do so under the Constitution , the law would establish two new federal tax agencies, an Excise Office and a Sales Tax Office. So from the start, we’re “abolishing the IRS” only to replace it with IRS 2.0 under a different name.
The administrative problems do not stop there. This single tax is supposed to replace all the vast income from income and payroll taxes, but according to a rough analysis from the Brookings Institution a few years ago, would actually require a fee of about 60 percent to raise so much money. Additionally, the Fair Tax bill says the 30 percent rate will only stay for the first year, after which the Social Security Administration is supposed to calculate how much money it would have collected from the existing payroll tax, and the sales tax rate would be adjusted to compensate. However, it is difficult to see how the SSA could do this without the income data produced by existing tax returns.
Then there’s the problem that a sales tax is easy to cheat. Because it is imposed only at the point of sale to the end customer, only two parties would have to agree to evade it, and it would be very tempting given how huge the tax is. Infringing companies could offer their customers a deep discount for paying cash under the table. This is the reason why European countries with consumption taxes have long since abandoned the old sales tax for a value added tax, which is collected at each point in the supply chain based on the difference between what someone paid for a good and what they sold. That way, there is de facto mutual surveillance between all parties in the supply chain, rather than having to rely solely on the final retailer.
Passing the “Fair Tax” would be by far the largest upward redistribution of income in American history.
But the most important aspect of this sales tax is how incredibly regressive it would be. Income tax is fairly progressive (at least in terms of rate structure), Medicare payroll tax has an additional 0.9 percent rate on income over $200,000, and to the extent that estate and capital gains taxes are paid, they hit the wealthy almost exclusively. Bruenig collects spending data broken down by income quintile to roughly estimate what would happen if we replaced the status quo with a 30 percent sales tax. The result is that the poorest fifth of the American people would pay something like 70 percent of their income, the second poorest would pay about 38 percent, but the richest fifth would pay only 17 percent. Now, those numbers would probably change a bit if this actually happened, because people would change their behavior, but this basic breakdown is certainly correct. It’s a no-brainer and done well proven that the more money people earn, the more they will save and therefore pay less sales tax.
Calling this turkey a “Fair Tax” is a sick joke. Passing it would be by far the largest upward redistribution of income in American history.
Finally, it’s worth noting that the idea of the Fair Tax originally came from, wait for it, Scientology. Years ago, that group was in a dispute with the IRS because the agency would not allow it to be categorized as a religion, which would have given it numerous tax benefits. so in characteristic fashionScientology Agents proposed the idea of Fair Tax essentially as an attack on the IRS. Later, he got the status of religion, but the idea of it became the palace of the conservative political mind, where he stays.
This is conservative politics for you: equal parts stupid and brutally cruel to the most disadvantaged people in American society. The fact that the Freedom Caucus has worked so hard to get a vote on a bill that will not pass and is already a political ballast around the neck of the GOP demonstrates the depth of their bigotry and the dangers of allowing Republicans to control government. McCarthy shot down the idea this time, but if the GOP controlled the Senate and the presidency, it might be a different story.
January 26, 2023