Democratic Party Ninth District
Joan Grafstein

So what's wrong with the FairTax? This proposal to substitute a national retail sales tax for almost all kinds of federal taxes has definitely energized lots of our friends and neighbors in North Georgia. Radio talk show host Neal Boortz and Georgia Congressman John Linder have written a bestselling book supporting it, and Republican presidential candidate Mike Huckaby and Democrat Mike Gravel are supporters. What is it? What are its pros and cons? Who would win and who would lose if it were enacted into law?

Although it's an interesting proposal with appealing initial simplicity and some real advantages like encouraging savings, and while it would benefit the very poor somewhat, the real winners would be households with incomes above $200,000. The burdens of the FairTax would fall disproportionately on the middle class, on working families and retirees, and for this reason I cannot support it.

What is it? The FairTax is a bill pending in Congress for a national retail sales tax on all goods and services (except education) sold by businesses to individuals or governments. Individual-to-individual sales are exempt. If you have (or are) a business, you can purchase goods and services for your business tax-free. FairTax supporters say the sales tax rate is 23% (using the calculations appropriate to the income tax it replaces) but if it's calculated like any sales tax we're familiar with, the rate is 30%. The law purports to be "revenue neutral"- the federal government is supposed to receive exactly the same amount of money from the FairTax as it now receives from the taxes that would be eliminated.

Advantages include: (1) encouraging saving- more money would be available for investment and the economy would benefit; (2) simplicity- no more complicated income tax forms; (3) transparency- taxpayers would see how much tax they are paying; (4) privacy- no IRS and no need to furnish personal information on income tax filings.

Disadvantages include: (1) increased tax avoidance and evasion- other countries found widespread avoidance with this kind of point-of-sale tax, taxes on services are notoriously hard to collect, and the problem of purchases wrongfully claimed as "business related" would increase; (2) disruption thwarting expectations and planning- deductions for mortgage interest, charitable contributions, and childcare would vanish and retirees who paid tax on income while working would have to pay a new tax on every thing and service they buy; (3) the bill isn't likely to pass in its current "clean" version (only tuition is exempt) so either the rate of 30% would have to go higher, some taxes slated for elimination wouldn't be, or the nation's debt would increase; and (4) the bill creates another agency like the IRS that would need private information to verify exempt sales and collect tax from avoiders and evaders.

Who wins and who loses? The drafters knew that sales taxes are more regressive than income taxes (burden poorer people far more than wealthy people.) So to make it more likely to pass, the amount of sales tax that a household at the poverty level would pay will be rebated (actually "pre-bated") to each household whether poor, middle income, or wealthy. But this does not make the FairTax progressive. Economists conclude that except for households below the poverty level, households with incomes under $200,000 will pay more in tax under the "FairTax" than under the current system; only those with incomes above $200,000 will pay less in taxes under the FairTax. This is not a "Fair" tax.

Joan Grafstein is an attorney, mediator, and arbitrator who lives in Flowery Branch and works in Atlanta. She is a member of the Hall County Democratic Committee.