The So-Called FairTax: The National Retail Sales Tax Plan

In 2005, radio talk show host Neal Boortz and congressman John Linder wrote a book entitled “The FairTax Book”. In 2006, they put out a minor revision with the same name in softcover. In 2008, they published “FairTax: The Truth”. These three books comprise what most people know about this new tax plan, and serve as the sourcebook for most of those promoting it.

Recently, I wrote the first in what will be a series of pieces about the so-called FairTax. Here, I will continue by introducing the major claims of proponents. As I continue to examine this new tax plan, I will try to bring into focus the claims in support and in opposition. As you read these articles and any responses that result, I encourage you to look past the hype on either side, and to be very aware of the tone of the arguments. This is a serious proposal and deserves serious consideration. If either side has to resort to personal attacks and repetition of unsubstantiated claims, readers should be wary.

In this previous piece, I introduced this new tax plan and began to discuss what I think is one of the major arguments in favor of the plan that I believe is untrue, and said that I would continue discussion of this issue. However, I have decided to put that discussion off for a bit. I am going to let Boortz and Linder determine the order in which I examine the pros and cons of this plan.

But before I continue, I want to explain why I so frequently put “so-called” in front of the “FairTax”. The reason is quite simple. By using this name, the proponents are trying to influence people in its favor before they know anything about it. They could call it the “Babies and Puppy Dogs Tax Plan” or the “Truth and Justice Tax Plan” or the “Mothers and Apple Pie Tax Plan” and I would have the same objections. This tax proposal should stand on its merits. I cannot help but think that if the proponents thought that it could stand on its merits, they would not need to give it such a name. If they were trying to be descriptive, they would call it the “National Retail Sales Tax Plan”. That is what it is. Then they could inform people about what that means and see if they like it.

So, what are the principal claims of this proposal? Perhaps the best place to start is to look at the main points that the authors chose to put in the most prominent places in their books. There are nine “bullet points” on the back cover of their first book. The first four of these are also presented almost verbatim on the back cover of their latest book. So, these would seem to be what they believe are the most important points.

Here is the first one. The quote is from the back cover of their latest book. This plan will “eliminate federal taxes and the IRS”. This would seem to be, perhaps, the most important claim: the logo that has been adopted by proponents, one that appears on the cover of all three books, is “IRS” with a red circle around it and red line through it.

Will this new tax plan eliminate federal taxes? One of the key claims about this plan is that it is “revenue neutral”. This is stated on p. 76 of their first book: “ …the federal government…will receive from the national retail sales tax exactly what they are receiving under the current tax system.” Notice that here they call it a national retail sales tax. So, the amount of federal tax collected will be exactly the same under the new plan as under the old. Will this plan eliminate federal taxes? No. The total amount of federal tax will be exactly the same. This plan will not eliminate federal taxes.

So, why would anyone say that it does? Perhaps it is because such a claim would be popular. If someone proposed a plan that was the “Give Everyone a Millions Dollars Plan”, I think people would like the idea.

The second part of their first claim is that this new plan will eliminate the IRS. Will it do so? Perhaps. The plan will eliminate the federal income tax and most other existing federal taxes, and therefore it can be truthfully argued that it might eliminate the IRS as it now exists. It will replace these taxes with a new tax that will, B&L argue, will be exactly the same amount as is currently collected. A new agency would need to be created to monitor this new tax.

So what is the IRS? The Internal Revenue Service is the part of our federal government that is charged with collecting taxes. An important component is enforcement: much of its efforts are aimed at determining whether or not people pay their taxes, and if not, to make them do so. For most of us, our interaction with the IRS is each spring when we prepare our tax forms and submit them. Many people don’t like paying taxes, so they don’t like the IRS.

Is an enforcement arm of a national taxation entity necessary, or will people, given the chance, simply pay all of their taxes voluntarily? It would be nice if the latter were true, but is it reasonable?

So, if this new tax plan were adopted, there would need to be a new governmental agency established to collect this new tax. It would probably need to be large to keep track of all the taxes due and those collected. It would need to be large to collect taxes due from those who did not want to pay them. That is, it would need an enforcement arm, and probably a very large one.

In a nutshell: will this new tax plan “eliminate federal taxes and the IRS”? It will not eliminate federal taxes. This is a false claim. It will simply give a new name to the taxes collected to support our federal government. It might eliminate the IRS, but will replace it with a new agency with a different name. The new agency will very likely be just as large as the IRS. Proponents will deny this: they will claim that the same amount of federal taxes can be successfully collected without any large bureaucracy. Given what you know about people and taxes, does this seem reasonable?

Next, I will look at this exact point: is it reasonable to expect that the same amount of federal taxes can be collected under the new plan without an agency as large as the IRS.