I’ve come to the conclusion that the FairTax no longer represents fundamental pro-growth tax reform.

It has taken me awhile to resolve my feelings for the FairTax. Unlike Indy and others, I think the bill would benefit our economy and country greatly. I think it might be one of the few ways out of this mess our congress critters have made with entitlements. I think a consumption tax is a better way to raise revenue than a tax on productivity. I think the FairTax would encourage savings and investment, bring foreign capital to our shores, strengthen the dollar and lower the price of oil.

The problem is that the FairTax promoters and supporters jumped onto the Mike “I’m happy to raise taxes in anyway you want” Huckabee bandwagon. How is it that people who want to lower taxes and improve government would vote for someone who increased the tax burden of his state by 50%?

I began to realize that the FairTax promoters would use any means available to promote their idea and the FairTax supporters would buy it. The FairTax movement stopped being for better public policy and became a cult.

The Boortz/Linder plan is to promote the FairTax here, there and everywhere. FairTax! FairTax! FairTax! Rally the people with a voice so loud Congress will be unable to do anything about it.

The problem is voters are more interested in American Idol or the latest season of Lost than how the tax plan they advocated for is being amended by the sausage factory on Capitol Hill and K-Street. HR25 could call for the mass execution of puppies and the voters will be happy because the bill’s title is “FairTax”. That is the fundamental flaw of the FairTax right now - its promoters and supporters.

Here is what I predict would happen if the FairTax ever got traction in DC:

Bowing to pressure from constituents, congressional leaders will agree to hear the FairTax in the House Ways & Means Committee. First to testify will be the Home Builders Association. They’ll complain that in a housing slump no one will buy their product (new homes) if it has a 23%1 tax on it. Home builders are a powerful lobby, so new home sales will be exempted from the tax. Then the Representative from Detroit will hold a press-conference saying how the FairTax will hurt the American WorkerTM, because it will make automobiles cost 25%1 more2. Labor Unions will protest and the US Automakers will be exempted. Even though most US cars are made in Mexico and foreign cars are made in the US foreign automakers will not be exempted. After all, if you exempt foreign car companies you’re sending tax breaks overseas and the populist voters won’t support that. A new bureaucracy will be created to determine how much of a car is made in the US and what percentage of the price should be taxed.

Soon every special interest with a lobbyist will start clamoring for an exemption. Teacher’s Unions will align with publishers to try and exempt books. Advocates for the poor will try and exempt personal computers - but only for personal use, and only if you make under $30,000/yr, etc. Food, Medicine, education, legal services will be exempted.

Next the budget wonks will complain that the Prebate will cost too much, and the class-warfare types on the left will call it a handout to the rich. So Congress will amend the plan once again. Soon only those making under $60,000 ($100,000 for married couples) will be eligible for the Prebate. That means the entire apparatus of the IRS will need to be kept around to verify income eligibility for the Prebate. W2s, 1040 forms and the lot.

By the time the bill makes it to a floor vote, the sales tax rate will be 45-60%1, half the daily necessities will be exempted, and the revenue numbers will come in way too low. The President (doesn’t matter which one) will say that he’ll veto the bill unless the Congress can meet certain revenue figures. The conference committee will convene and they’ll decide to keep the current Income Tax, at a reduced rate of 25% on all incomes over $75,000 ($125,000 for married couples).

So thanks to the Cult of the FairTax, the IRS will still exist to tax the high-income earners and to verify eligibility for the Prebate. New bureaucracies will be created to set the tax rates on imported goods “to protect American manufacturing” and to keep the K-Street crowd employed. The provision that the bill doesn’t become effective till the 16th Amendment is repealed will be gone.

Twenty years from the enactment of the FairTax, the income cap will still be $75,000/$125,000 (thus affecting the lower middle class) and the marginal rate will have creeped back up to 39%. And we’ll have a 35% sales tax too.

But, won’t competition force the price of goods to go down? Yes and no. Boortz likes to use the example of a loaf of bread dropping in price because the embedded income tax goes away. I don’t disagree. Bread is a commodity with lots of competition, low barriers of entry and a free market in which it trades. Bread prices will drop quickly. But what about a gallon of gas? Most of the cost of a gallon of gas isn’t the cost of manufacture, its the price we pay to third world despots. They don’t have an embedded cost of the income tax, so you won’t see the price of a gallon of gas dropping.

What about other things? Cable service? Cable and phone services are monopolies. The free market has been superseded by local and state governments. There is no free market forcing prices down in those industries. That $300 iPhone? Mostly made in China, the manufacturing costs won’t drop. And since the device has already been designed here in the US, the embedded costs of the income tax have already been spent. Apple will still need to recoup those costs.

Promoters and Supporters of the FairTax are selling a bill of goods regarding the price drop that the FairTax will never be able to provide.

Milton Friedman once said “Only a Crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are laying around”. This nation is going to face a crisis thanks to the incompetence of the morons in Washington. Health Care, Social Security, and a national debt that has dramatically increased under this so-called conservative administration will lead to massive economic dislocation.

When that occurs the people in Washington will need to do something. But only then will they actually ignore the K-Street crowd and do what is in the best interests of this nation. If the FairTax were to be enacted anytime soon, it will be a mutated abortion of what Linder and Boortz promise and it will be their fault for creating the Cult of the FairTax.

1 We will use the embedded rate for all illustrative purposes here. 23% or 30% doesn’t matter to my argument, so I’m just going to assume the figures quoted by Boortz, Linder and their supporters.
2 Remember: the FairTax is revenue neutral so to exempt new home sales, the rate will go up.