I Support a Consumption Tax to Replace the IRS

Here goes Don Quixote Staheli again, tilting this time not against the voucher windmill, but against the current income tax system in the United States. I haven't done a whole lot of study on it yet, but this is my announcement that I support a Consumption Tax to replace the Internal Revenue Service.

My brother is an accountant, so he probably won't really like this post too much, but I support a consumption tax instead of an income tax. There, I said it.

So I submit to you, the Committee of the Whole, my initial ideas on a consumption tax. (That way, if I have any hair-brained ideas, I can change my mind!! ;-) )

I know it's not an easy proposition. Because after all, there is still the behemoth known as the IRS. Any Consumption Tax would probably need a Constitutional amendment at the same time to repeal the 16th Amendment. Ron Paul reminded us of this a couple years ago:

One tax reform idea tacitly endorsed by Federal Reserve chairman Alan Greenspan calls for a national retail consumption tax to replace the existing income tax. Absent the outright repeal of the 16th Amendment, however, we cannot be sure that an income tax would not reappear at some point. One can easily imagine popular support for retaining the income tax on the “very rich,” which of course is how the 16th amendment originally was sold to a gullible public in the 1910s.
He also said

A pure consumption tax like the Fair Tax would be better than the current system only if we truly did away with the income tax by repealing the 16th amendment. Otherwise, we could end up with both the income tax and a national sales tax. A consumption tax also provides more transparency and less complexity. But the real issue is total spending by government, not tax reform. In other words, why change the tax structure if spending stays the same?
I recently listened to an interview of presidential candidate Mike Huckabee on The Right Balance with Greg Allen. Here are some notes that I took of the interview (I had to pull over to the side of the road a couple times to type them into my Palm Treo 700WX smartphone, as I was en route to work while listening to TRB).

Governor Huckabee said that there is already a 22 percent built-in tax for everything we consume, because corporations pass their costs along at that rate--after all they don't pay taxes, you do! The US already has the highest corporate tax rate in the world, which encourages corporations to hide their companies and accounts "off-shore". The part that I really like about his plan is that each family that lives below the poverty level would receive a consumption tax rebate check to bring them back up to the poverty level.

Here are some concerns:
  • Will we need the IRS to send all the rebate checks out?
  • How complicated would it be for companies to upgrade their computers and cash registers to account for this new tax?
  • How long (if ever) would it take for corporations to reduce the cost of the goods they sell to us by 22% to match the taxes they no longer have to pay?
Another concern expressed by some is that a consumption tax might affect charitable giving. It might. But I hope not. It won't affect mine. That's not a very good argument anyway against changing the tax code to something that is fairer and simpler.

Getting rid of all the current income tax loopholes would be much better.


  1. Answering your concerns:

    Will we need the IRS to send all the rebate checks out? Anyone working for the IRS will hope so.

    How complicated would it be for companies to upgrade their computers and cash registers to account for this new tax? I don't think it would be hard - any retail operation already has to track sales tax and they have to change the rates frequently so making that change for them would be simple. For businesses that don't deal with sales tax now - they can learn from their retail peers.

    How long (if ever) would it take for corporations to reduce the cost of the goods they sell to us by 22% to match the taxes they no longer have to pay? Companies won't lower their prices to pass the savings on to us - they will only lower their prices if they see it as a competitive advantage. I believe it will happen, but there's no telling how fast.

  2. When addressing the question "How long (if ever) would it take for corporations to reduce the cost of the goods they sell to us by 22% to match the taxes they no longer have to pay?" David is partially right. The other factor to put into that equation is that they will have to pay taxes on product they have to buy and then still pass it on to the consumer.

  3. Mike Huckabee is an adroit public speaker. He communicates his message in life-like, cogent terms, with compelling examples like the story he told (at the Ames Straw Poll) of what his then-11-yo daughter entered into the "Comments" section of a Visitors Book after visiting the Yad Vashem holocaust museum: “Why didn't somebody do something?” Very effective.

    Huckabee is all about calling his listeners to "do something," to awaken them to their own empowerment, and summon them to action in order that "Main Street," and not "Wall Street," will prevail in guarding the values and beliefs upon which the Republic was founded.

    Huckabee puts his listeners at ease, and reassures them, articulating clear concepts in a natural, easy style (no doubt something well-cultivated as a pastor). He’s not angry or demanding, like a Ron Paul, nor is he as “rigidly-scripted” as Romney, and his large brown eyes peer through a humble demeanor, drawing a striking contrast to a somewhat mechanical-squinty Brownback. One can easily imagine sitting comfortably with this man over a cup of coffee at the Main Street Cafe.

    Most importantly, perhaps, Huckabee convinces many that he is ONE with the FairTax grassroots movement. While many - like Romney, and others, who are invested in the current income tax system - seek to demagog the well-researched FairTax plan, its acceptance in the professional / academic community continues to grow. Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown because of the hidden aspects of the current system that make political accountability impossible.

    Romney's recent WEAK response to FairTax questioning on “This Week with Geo. Stephanopoulos” drew a sharper contrast between Huckabee and all other presidential front-runners who will not embrace it. Huckabee understands that what's wrong with the income tax can't be fixed with "a tap of the hammer, nor a twist of the screwdriver." That his opponents cling to the destructive Tax Code, the IRS, preserving political power of granting tax favors at continued cost to - and misery of - American families, invigorates his campaign's raison d'etre.

    Of the FairTax, Huckabee asserts that it's...

    • SIMPLE, easy to understand
    • EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
    • FAIR, FLAT, and FAMILY FRIENDLY, loophole-free, and everyone pays their share
    • LOW TAX RATE is achieved by broad base with no exclusions
    • PREDICTABLE, doesn't change, so financial planning is possible
    • UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
    • VISIBLE, not hidden from the public in tax-inflated prices or otherwise
    • PRODUCTIVE, rewards - rather than penalizes - work and productivity

    A detailed benefits analysis of the plan (from The FairTax Book) explains Huckabee's ardent advocacy:

    For individuals:
    • No more tax on income - make as much as you wish
    • You receive your full paycheck - no more deductions
    • You pay the tax when you buy "at retail" - not "used"
    • No more double taxation (e.g. like on current Capital Gains)
    • Reduction of "pre-FairTaxed" retail prices by 20%-30%
    • Adding back 29.9% FairTax maintains current price levels
    • FairTax would constitute 23% portion of new prices
    • Every household receives a monthly check, or "pre-bate"
    • "Prebate" is "advance tax payback" for monthly consumption to poverty level
    • FairTax's "prebate" ensures progressivity, poverty protection
    Finally, citizens are knowledgeable of what their tax IS
    • Elimination of "parasitic" Income Tax industry
    • Those possessing illicit forms of income will ALSO pay the FairTax
    • Households have more disposable income to purchase goods
    • Savings is bolstered with reduction of interest rates

    For businesses:
    • Corporate income and payroll taxes revoked under FairTax
    • Business compensated for collecting tax at "cash register"
    • No more tax-related lawyers, lobbyists on company payrolls
    No more embedded (hidden) income/payroll taxes in prices
    • Reduced costs. Competition - not tax policy - drives prices
    • Off-shore "tax haven" headquarters can now return to U.S
    No more "favors" from politicians at expense of taxpayers
    • Resources go to R&D and study of competition - not taxes
    • Marketplace distortions eliminated for fair competition
    • US exports increase their share of foreign markets

    For the country:
    • 7% - 13% economic growth projected in the first year of the FairTax
    Jobs return to the U.S.
    • Foreign corporations "set up shop" in the U.S.
    • Tax system trends are corrected to "enlarge the pie"
    • Larger economic "pie," means thinner tax rate "slices"
    • Initial 23% portion of price is pressured downward as "pie" increases
    No more "closed door" tax deals by politicians and business
    • FairTax sets new global standard. Other countries will follow

    Passionately supporting FairTax, Huckabee understands that, if elected President, Congress will have to present the bill for his signature. His call to action goes beyond his candidacy: Main Street will have to demand that their legislators deliver the bill.

  4. I'm more of a flat tax person. I'd rather fill out a tax return postcard than deal with a tax on everything I buy. And I don't think the 16th amendment repeal will happen.

    With the sales tax, sending out rebate checks seems too complicated, and ripe for fraud. And what economic effect would there be from the increased prices for goods? It's true that people would be saving money by not paying income tax, but they might not think of that when they're suffering from sticker shock.

  5. I like all of it, except the idea of sending out rebate checks. My thoughts are the everyone should pay their fair share.

    Something I might be in favor of in lieu of the rebate checks would the elimination of taxes on very basic foods. Bread, milk etc.

    The realistic side of me doesn't see this happening, but I'd like to think that at some point the America people with realize that they have been had, and will work together to get something like this in place.

  6. Some concerns :

    Fairtax proponents do not adequately challenge the income tax, Current Fairtax legislation that I have seen allows for a continued income tax and the IRS. Wishful thinking that the greatness of the Fairtax will just make the income tax disappear. More likely, we would end up with both and be no better off than Europe and Canada with both heavy progressive income taxes + a huge VAT.

    The rebate scheme "pre-bate" is a dream-come-true for socialists, central-planners and communists alike. In no time at all, we would all be fixated on the latest and greatest political saviors to raise our prebates, adjust our poverty adjustments, wipe our noses and tuck us in at night.

    Since when did Ron Paul become "angry or demanding", Ian? You didn't score any points with me to your beloved Huckabee by that comment, especially as Congressman Paul is a mild-mannered statesman who I sometimes wish would get just a bit angry and demanding.


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