Fair Tax redux...

Is the Fair Tax really fair?

How much must pretax prices go down before you're comfortable paying an additional 30% on your home purchase, kid's tuition and doctor appointments? Increasing the cost of buying a home by 30% would not stimulate the housing market. On a house currently selling for $200,000, a 30% tax means you have to borrow $60,000 more just to get in the door. That doesn't make a lot of sense.

Arguments that the Fair Tax would eliminate the underground economy are less than persuasive. Add a 30% federal hit to a 6% state sales tax, and you have created a golden opportunity for smuggling. Look at what happened to cigarettes when states increased their prices with higher sales taxes. They're now marketed out of the trunks of cars. Those cheating on their income taxes would cheat on their sales taxes. Just substitute the term "black market" for underground economy.

The idea that the Fair Tax would eliminate complexity in the tax code also fails to recognize reality. Special interests would almost certainly hire lobbyists to propose exemptions for such things as home purchases, medical services and education. I spent some time in Washington, D.C., and I never met a lawmaker who wanted to run for re-election on the platform of hitting housing, medical services and education with a 30% tax.

The poor would get little from the Fair Tax because they really don't pay income taxes under our current system. For 2008, if you're married with one child under 17, you have no tax on your first $31,400 in income. The Fair Tax can't beat a zero tax liability. Any real savings would come from the elimination of Social Security and Medicare taxes.

Bush administration economists have projected that the Fair Tax would actually increase taxes for those making more than $30,000 and less than $200,000. That's because a flat 30% rate on their gross consumption would suck more dollars than a graduated rate on taxable income, after deductions, exemptions and the like. Taxpayers in that range would lose the benefit of the 10%, 15%, 25% and 28% rates on their taxable income.

Transition rules -- the rules that would apply as one shuttered income taxes and started up the Fair Tax -- would cause chaos. Consider your Roth IRA account. You've already paid income taxes on those dollars. You wouldn't be happy when you spent the money and had to pay a tax again.

Somebody would have to enforce the sales tax law or it would have no teeth. So, in practical effect, the plan would not eliminate the IRS. The plan would just convert its function from income-tax compliance to sales-tax compliance. Some agency would have to step in.

Would the national sales tax be enough to raise as much revenue as our current system? Yes, if the rate was high enough, no if it wasn't. I'd bet everything I have that the rate wouldn't remain fixed.

The biggest losers: Municipal bond holders
A subgroup of the wealthy -- those who escape income tax under the current system by investing in federal-tax-free municipal bonds -- would be big losers here. Under the Fair Tax, current tax-free dollars would be hit when they were spent. That would decrease the attractiveness of such investments and potentially increase their cost.

Higher interest rates for state and local projects would result in increased costs for schools, bridges and jails that are normally financed with tax-exempt bonds. Or it might mean higher state and local income and real-estate taxes to cover those costs.

Home values -- and people who work in the real-estate industry -- would suffer. So would those who sell high-priced goods. Cars, appliances and high-ticket items like, say, Tiffany jewelry, could immediately become 30% more expensive. Would the corporate income and payroll tax savings be enough to offset this addition cost? It's arguable, and economists disagree. Personally, I have my doubts.

My biggest fear is the inability of Congress, no matter which party is in control, to control spending.

We raise more tax money today than ever before in our history. The problem is that we increase spending faster than we increase tax revenues. We may end up with both an income tax and a national sales tax. Wouldn't that be a kick in your wallet?