Tim Worstall

The Fair Tax

There’s a movement in the USA rallying behind something called The Fair Tax.

The FairTax replaces the income tax and all other federal taxes with a national consumption tax. The FairTax is levied only once, at the point of purchase on new goods and services.

Here’s why it won’t work:

The fraud has become so prevalent that it is blamed
for distorting British trade figures. In April the Government suffered
its first annual fall in VAT revenues since the tax was first collected
in 1973.

In its most basic form, the scam – known
officially as missing trader intra-community fraud – involves traders
selling goods inclusive of 17.5 per cent in VAT and then disappearing
without passing the tax on to the authorities.

The rate necessary is simply too high. 23 %.  I (and any other reasonably competent and similarly morally blind person) can work out any number of ways of making a few million in a few weeks under such a plan.

In

5 responses

  1. Matthew Avatar
    Matthew

    The problem in the UK is with trade with other European countries. This would be much less of a problem in the US, assuming the tax was Federally implemented, wouldn’t it?
    I also think you seem overly concerned with a VAT rate of 23% (not far off something actually implemented) and overly relaxed about the implications of imposing flat-rate taxes of 55% on millions of people who were paying 23%/33%.
    Tim adds: Matthew, one of the faults of teh Fair Tax is exactly that it is not a VAT. It’s ONLY at the retail point. Fraudster’s charter, that.

    Reply
  2. Matthew Avatar
    Matthew

    Ok, well it should be, and I’m a bit confused why you linked to a VAT fraud, which exploits certain (transnational) characteristics of VAT, as a criticism of it. With a sales tax Mary Poppins could, and probably would, commit fraud.
    Tim adds: Matthew, I realise it’s Sunday morning but here’s the link. VAT, across borders, is a one off 17.5 % tax. That is juicy enough for people to steal billions of it. The Fair Tax is a one off 23% tax. I don’t think it’s too much of a stretch to think that that will be juicy enough for people to steal billions of it.

    Reply
  3. Matthew Avatar
    Matthew

    There’s no need to be insulting. I don’t think the link adds anything. It would make more sense to link to US sales tax fraud, when the rate is only (say) 8%, or maybe a European country which has nearly 23% VAT (e.g. Ireland) and an article on how that has broken down so completely it is useless as a revenue raising tax.

    Reply
  4. Chris Ballance Avatar
    Chris Ballance

    Any tax system can and will be gamed. The fair tax sounds good on paper, but it would drive a massive expansion of the underground ecomony in the US.
    Tim adds: Quite. Everyone selling off the books has an immediate 23% price advantage.

    Reply
  5. Steve Avatar
    Steve

    Am I to understand that your only argument against the Fair Tax is that people might not pay it? There are pleny of people in the U.S who don’t pay income tax now, either through out and out evasion or by the use of carefully crafted (and lobbied for) loop holes. There are entire industries built around not paying taxes.
    The advantages of a Fair Tax system are numerous, and I for one count among them the fact that taxation will no longer be largely hidden from those paying the taxes. As a middle to maybe upper middle class American I am well aware that more than half of what should be going into my pockets is handed over to a government that never saw a spending bill it didn’t like. Things like the employment tax, luxury tax, even pre-deducted income taxes are doing a terrific job of keeping Americans comfortably ignorant, and therefor complacent, about our current and expanding tax burden.
    Tim adds: I don’t disagree that those are advantages to the Fair Tax. I’m stating something different, that it won’t actually work.

    Reply

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