There have been some great discussions over at Jabley. Anyone who is interested in the taxing system should read through that area.

There have been many good points raised about The FairTax. I am quickly becoming a proponent. However, I am still bothered by two implications of one big idea. The idea is that any given item is taxed once and only once, at the point where a consumer buys it from a business. Not before, not after.

Not before: Companies are not taxed on their purchases. The stated reason was not the one I gave in the above paragraph. The stated reason is that business profits eventually end up in the hands of an actual person, which must eventually spend it, and thus pay tax on it. And that any money that remains in the business is by definition investment, and therefore worthy of tax-free status. It’s the second rationale that bothers me. Not all purchases a business makes are investments, and plenty of investments that citizens make are.

I got a good comment from Micah Martello. Among other points, he says that “People already do this very same thing under the current system. Instead of paying the income tax, payroll tax, social security tax, medicare tax and compliance costs when you give yourself a salary to but that car you just pay yourself less and have the company buy the car. It’s still tax evasion under either system.”

I disagree. The difference is that under the current system, when the company bought the car, it paid sales taxes. Under The FairTax, it does not. Under the current system, when the company got the money to buy the car, it paid income tax on that. Under The FairTax it does not.

Not after: Under The FairTax, once an item has been taxed, it is never taxed again. Buying a used item is therefore tax free. I have troubles with this too. I see three related issues.
1) As I posted over at Jabley, it creates a perverse incentive if the value of a new item is more than 23% over the value of that same item used. Jabley dubbed this “Taxitrage”.
2) Who is checking? I don’t see any way to enforce this except to actually have an enormous data warehouse checking the status of every item in the USA. It’s absurd. Businesses have a huge incentive to commit fraud. “Sir, we have a special sale on ‘used’ computers, wink wink”
3) As a consumer, I’d be crazy to buy anything new. Why would I buy a new home, and pay an extra 23% on that price? Why would I buy a wireless router new, or a book, or just about anything. If I can get it used, I will. What does this do to the manufacturer? It amounts to a 23% hurdle that must be overcome in order to get the consumer to buy your product. In fact, it is very much like a tarriff that a foreign country must overcome to sell their goods in the USA, and high tarriffs are generally considered bad economics.

(Point 3 also leads to a 23% incentive to recycle consumer goods, and additionally gives the poorer people a way to purchase goods tax-free. Maybe that’s the point, though I don’t recall seeing that anywhere.)