'Fair Tax' a Foolish Tax

A sales tax is every conservative's favorite tax, to the extent conservatives can have a favorite tax.

A sales tax entails no paper work (except for businesses that collect it), requires relatively fewer government employees to process the returns than does an income tax, and, most important, it spares the rich from having to pay their fair share of taxes.

So it should be no surprise that the deceptively named Michigan Fair Tax Proposal is being pushed by Republicans. The ballot proposal, which was being kicked off on Wednesday (February 12, 2008), would impose a 9.75 percent tax on all goods, food, and services purchased in Michigan. Kevin Shopshire has the scary details at Michigan Messenger.

In return for paying that extremely high sales tax, Michigan residents would see other taxes wiped out -- the Michigan Business Tax, personal property tax, the 6-mill business education tax, and the Michigan income tax. Businesses doing business with each other would not pay the sales tax.

And no new taxes could be enacted without a vote of the people.

In other words, Michigan would be putting all its eggs in one basket. And it would be the same basket for the foreseeable future.

Backers of the proposal, who are closely allied with Republican presidential hopeful Mike Huckabee, try to finesse the issue of the sales tax falling heavily on the poor and middle income with a monthly "prebate."

That, however, does not solve all the problems with the regressive nature of the tax. Middle and lower income people spend a high proportion of what they make, so they are paying taxes on a big share of their income.

But rich people spend a much lower percentage of what they make. So they are being taxed on a much smaller portion of their income.

CNN Money looked at the national verison of this plan which the Houston group helping with the Michigan effort is pushing. They reported:

"So the FairTax tweaks the formula by sending a "prebate" to every American for the amount of tax they pay on spending up to the poverty line, which today is $22,400 for a couple with one kid. In effect, basic necessities are tax-free. FairTaxers propose a tax worth 23 of each $1 you spend, so a family of three earning $30,000 a year and spending that much on taxable goods would pay about 6 percent of their income in tax after the rebate. A family earning and spending $125,000, about 19 percent. (State and local taxes would be levied on top of that.)

"The rebates help make the FairTax progressive -- tax jargon for 'richer people pay more.' For the very rich, however, that's not quite the whole story. Say you earn $2 million a year. You can live pretty well spending $1 million, and as a result pay a mere 11 percent of that year's income in taxes. If the very rich pay less, that means more of the total tax burden in any year has to fall on somebody else, most likely the middle class. Reasonable people can disagree about whether this really matters -- over time, a consumption tax looks more progressive because the rich savers or their descendants eventually spend the money and get taxed. But Boortz and Linder say that all this worry about progressivity at the top is just jealous carping anyway. 'We have very few Communists left in this world, but there are some,' says the congressman."

That's right, rich people pay much less.

There are other problems, too. All services are taxed. Services like health care. Will the tax be levied on the total bill, or just the co-pay? People are having trouble paying the co-pays now. Let's add more to it.

This thing has a lot of holes in it.

Backers are starting to collect signatures now. So when they ask you, don't sign.