Part IV on the Income Tax:

Opponents and proponents of the consumption tax argue over several points. Black markets, catastrophic transitions, and the difficulty in repealing the 16^th Amendment are a few of the common issues cited when discussing the FairTax plan.

1. Black Market:

Some will argue that instituting a national retail sales tax would create a large underground market that would avoid the taxes that would be applied at the cash register. There currently is a large black market for tobacco, drugs, and other illegal items. Also, many people cheat on their tax returns or don’t even file. However, under the FairTax plan, when the profiteers of illegal activity use their money to purchase luxuries like cars, jewelry, etc…, they would be required to pay the sales tax.

Also, according to a letter from Norman Cooper to Congressman Lamar Smith on FairTax.org (http://fairtax.org/pdf/Lamar_Smith_rebuttal_letter1-11-07.pdf), the elimination of tax returns would free up enforcement officials to target those not in compliance:

Today, the estimated 18 million wage-earning Americans that have dropped out of the income tax system entirely as “non-filers” will pay the FairTax, as will illegal aliens who are paid “under the table” today. And because of the dramatic 90 percent reduction in the number of tax filers, tax evaders will be more easily monitored and caught under the FairTax system. Today, taxpayers can cheat in the privacy of their homes and bury their cheating on 227 million tax returns in the unnavigable 7,000 code sections with plausible deniability that they even understood the law. Contrast the current system with the FairTax, where individuals would no longer need to file returns, and retailers would be provided a credit compensating them for the costs of sales tax compliance. Even if all approximately 25 million business establishments in the U.S. were retailers, the number of returns filed would decline 86 percent.

The FairTax makes it so that far fewer taxpayers will have much less incentive to cheat and much greater chance of getting caught if they do.

The basic gist is that there are cheats in all systems. Resourceful cheats will get away with it and the boneheads will get caught.

2. The Economic Costs of Transition:

What would happen to the economy during the transition to a national retail sales tax? I know there is one group strongly opposed to any transition.

According to the National Retail Federation Senior Vice President for Government Relations Steve Pfister, (article link: http://retailindustry.about.com/b/a/152273.htm)

"A National Retail Sales Tax or VAT would devastate the nation's economy for years before economic gains -- if any -- would be seen."

"Under the proposed national sales tax rate of 30 percent at the cash register, consumers would simply stop spending on anything but the barest necessities for a prolonged period of time," Pfister said. "This would have a ripple effect throughout the economy with an impact far beyond the retail industry. Even at lower rates, the psychological effect on consumer spending would be profound."

"Our research shows that during the transition period from the current system to a consumption tax, the economy, employment and consumer spending would all decline significantly. The price is too great to pay for any modest growth that might come in the long-term. Many retailers and the companies behind the products they sell -- especially the small businesses of America already struggling to succeed -- would be out of business before they could benefit from that growth."

The members of FairTax.org would strongly disagree with the National Retail Federation findings. Below is an excerpt of a letter from a Mr. Evans to Congressman Goodlatte on the FairTax.org website (http://fairtax.org/pdf/GoodlatteFinal-posted070110.pdf):

Finally, you state that a tax system of this nature poses problems of transition, “require[ing] many sectors of the [economy] to be forced to make sweeping changes in the way they do business.” Yes, Americans will have to get used to nearly $280 billion in compliance cost savings. They will have to get used to not paying income or payroll taxes or any taxes before they have decided whether to invest that income (which is not taxed), pay for tuition (which is not taxed), buy a used home (which is not taxed), give to charity (which is not taxed) or consume it for themselves. Corporations will have to get used to paying no income or payroll taxes as well. Foreign producers will have to get used to competing on a level playing field with U.S. producers since they have long been given a free ride on taxation by the current system exempting foreign producers.

The FairTax plan is in fact the only plan that does not “dismiss these difficulties” as you assert it does. FairTax.org has spent considerable resources meeting with industries to seek to reduce transition costs. One of the largest transition rules is a delay between the date of enactment and the effective date. On the other hand, the flat tax, which you seem to prefer, totally ignores transition rules. For example, a business which buys inventory one day before enactment of the flat tax and sells it one day after enactment gets no deduction but must include the entire gross receipts in income for purposes of the flat tax (VAT).

3. Feasibility of Repealing the 16^th Amendment:

Under the current tax system, special interest groups lobby members of Congress for additional tax laws that are favorable to their specific interest. Unfortunately, Congress has a long track record of passing laws that are designed for the benefit of the few and are not in the interest of all.

A constitutional amendment would be required to repeal the 16^th Amendment. There are two ways to propose an amendment:

1. Two thirds of the members of each House (US Senate and US House of Representatives) can propose an amendment to the Constitution

2. Two thirds of the State legislatures can call a Convention for proposing amendments.

Would two thirds of the members of each House (US Senate and US House of Representatives) have the courage to propose an amendment to repeal the 16^th Amendment? What would that do to their campaign contributions? Would they be willing to gamble that support of such an amendment would ingratiate themselves to their constituency? (The 2^nd method identified above for proposal of an amendment has never happened in our history.)

Now suppose that an amendment to repeal the 16^th Amendment was successfully proposed. The effort would not stop there because three fourths of the States would need to approve it by the state legislatures or by a state convention.

The path to repeal is difficult. It was designed that way by the Founders so that our way of government could not be changed overnight. However, in order to reap the full benefits of the FairTax plan, the 16^th Amendment must be repealed. By failing to repeal and leaving the income tax option available, Congress would have the option of reinstituting the income tax on top of the consumption tax. In my humble point of view, that would not be ideal.

My next post will cover the progressive tax.