TeeJaw Blog

If You’ve Saved Up a Nest Egg You Might Not Like The “Fair-Tax”

Posted in Government and Politics by TeeJaw on Saturday, October 8, 2011, 9: 27 PM

The “Fair Tax” proponents want to replace the income tax with a national sales tax. They call it the fair tax because…well, I don’t really know. I suppose it’s a fair tax, unless that’s an oxymoron.

Radio Talk show firebrand Neil Boortz is one of the biggest supporters of a national sales tax having written two books on it: The Fair Tax Book and FairTax: The Truth. Another book, The Fair Tax Solution: Financial Justice For All Americans, by Ken Hoagland claims to be the definitive book on the fair tax and its potential to save the American economy.

The Fair Tax, we are told in these books, will abolish the IRS, let you Keep all the money in your paycheck, you’ll pay taxes only on what you spend not what you earn, and it will eliminate all the fraud, hassle, and waste of our current system.

Former New Mexico governor Gary Johnson is a candidate for the Republican nomination for president. You might not have known that. You might not have even heard of Gary Johnson because he was not in the first debates, although I think he was in the last one (I don’t watch those things, I’d need a barf bag).

There’s much to be said for Gary Johnson, a staunch libertarian who understands that if he’s serious about wanting to be president he’ll need to be the Republican nominee. Running under the Libertarian party would merely be an exercise in self indulgence and would only help the reelection of Barack Obama. Give him credit for not going that way.

Gary Johnson has made some promises for when and if he were to become president, almost all of which sound pretty good. For the most part, a libertarian in the White House would please most of the “leave-me-alone” type of Republicans. One of Johnson’s promises is to push for the Fair Tax.

The first huge problem with a national sales tax is that getting rid of the income tax will not be easy and if that were not fully accomplished first we would end up with both the income tax still in place and a national sales tax on top of it. That would surely please the political class but the economy would be in a shambles and everything Americans need to buy almost every day would cost a lot more. It would be a disaster.

Therefore, the 16th Amendment would have to be repealed first. The proponents of the fair tax don’t even begin to understand the massive logistical problem of getting the whole thing done in the way they imagine. They fail to take into account the tricks and shenanigans the Left would play to see to it that both systems would thereafter exist in tandem. Would a leftist Supreme Court rule that even without the 16th Amendment an income tax is Constitutional? Yes, of course it would. When the dust cleared Americans would wonder what hit them.

But even if one assumes the 16th Amendment would get repealed (it takes another Constitutional Amendment to repeal a prior amendment) and the Supreme Court would actually uphold the Constitution, and it all gets done before the national sales tax takes effect, there’s still the matter of how a national sales hits people who have saved and invested and piled up a nice nest egg for their retirement. The money in your nest egg has already been taxed, as you earned it. When the national sales tax goes into effect, that money will be taxed again, as you spend it to live on in your retirement. That may be a time when you no longer have a lot of actual income.  In that case it won’t mean much to you that you get to keep all the money in your paycheck because you no longer have a paycheck.  You may have an annuity you bought with your nest egg, or you may take a monthly withdrawal from your nest egg (to supplement your social security) in an amount you calculate will make it last for about a long as you expect to live. Since it’s your own money you won’t pay any income tax on it as you withdraw it from wherever it’s invested. It’s previously taxed money, after all. You saved it out of what you had left after paying your income tax all those years.

You need it now, to live on in your retirement. But as you spend it on necessary goods and services it will now get taxed a second time, and possibly at a higher rate than it was taxed the first time. The proponents of the fair tax are talking about a rate of 23% on everything you buy.

The Fair Tax doesn’t look so fair anymore.

Maybe they’ll tweak it to make is so you aren’t taxed on money you spend that was already taxed under the income tax system. Yeah, that should be easy to figure out.  But I thought the fair tax was going to be simple and eliminate all the hassle of doing your taxes at the end of the year?  Fat chance.

One other problem that could be the subject of another post later.  States will be tempted to raise their income and sales taxes after the Fair Tax is enacted.  There will be a false perception that Federal taxes are now less of a burden, allowing the states to drain more money from their citizens.  More evidence, if any were needed, that the so-called Fair Tax is a false promise.


One Response

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  1. One Hand Clapping said, on Thursday, October 13, 2011, 1: 53 PM at 1:53 PM

    Contributions into Traditional, SEP, and Rollover IRAs are tax deferred, allowing the contribution and the earnings to grow tax-free, until the taxes are eventually paid later in retirement. Same tax postponement with 457(b) plans. Not so with Roth IRAs.

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