Thursday, November 13, 2008

My Modifications to the Fair Tax Proposal

The Fair Tax Proposal as presented by Gov. Mike Huckabee to the American public comprises the following basic elements:

1. Replace the Income Tax with a flat 23% national sales tax.
2. The elimination of the IRS.
3. A cash rebate at the beginning of the year to every American, thus insuring that persons under the poverty line are not adversely affected by this sales tax.

The modifications presented in this abbreviated executive summary deal with numbers 2 and 3 above. More specifics will be given as information is received. However, for the time being, this executive summary explains the nuts-and-bolts of these modifications.

The Governor's plan speaks of closing the IRS. Unfortunately, public comments at debates and televised national speeches have not addressed the mechanism by which the federal government will collect the sales tax. Opponents have argued that even if the sales tax does replace the income tax, some federal agency must administer the tax; therefore in form, if not in substance, the IRS will still be around.
My counter to this position is to invite state participation in the collection of federal taxes. Most, if not all, of our states already administer a sales tax. Essentially, the federal government should ask state governments to collect the federal taxes. In exchange, the federal government should reimburse the state governments for up to one-half of the costs of operating their sales tax agency. For those states that do not collect sales taxes, the government will need to operate collection agencies within the confines of those particular states.
This corollary would be better for small businesses, since they would only have to fill out one sales tax return. The state governments would support this since for a marginally low increase in effort (i.e. collecting federal taxes from people they already tax), they will yield a marginally greater return on their investment (i.e. reimbursement of much of their overall costs). And for the federal government, it will save billions of dollars each year in costs associated with IRS audits and the like.

The Governor's plan speaks of giving annual tax rebates to each citizen in order to lift the burdens on the poor for whom a 23% sales tax may be too harsh. I agree wholeheartedly with this proposal. However, I recommend an additional step: sales tax rebates for businesses.
Aside from the threat of going to jail for tax evasion, most small businesses will have little incentive under the present plan to collect such atypically high sales taxes. Many sales will be in cash, and the sales register will be avoided as business owners give special discounts to customers. ("Want to save 23%… Pay me in cash and keep your mouth shut.") For this reason, we need to create a carrot and stick approach to encourage businesses to participate in the collection of sales taxes.
My proposal utilizes a mathematical equation involving a cumulative exponential distribution. Under this proposal, the government will compare the sales taxes collected by a business from the previous year with the sales taxes collected during the current year. If there is an increase in the sales taxes collected, then the business will enjoy a rebate based upon the aforesaid formula. The rebate will grow as the marginal sales taxes generated increases; however, the size of the rebates will taper off as changes in these year-to-year sales tax increases approach a predetermined level.
Businesses will have access to this formula, and will therefore be able to predict what their respective rebates will be given their projected sales figures. With this information, they will be able to leverage a stream of income to create major capital improvements, to lower prices in order to stimulate sales, or both. Regardless, these businesses will have to collect sales taxes if they expect to enjoy rebates. Thus, black market sales will be discouraged not by force of law, but by economic persuasion.

1 comment:

Jay Garbarino said...

to be clear the FairTax plan is John Linder's Plan

Frequently Asked Questions about the FairTax can be found here