Many Republicans of today triumph the "Fair Tax," which would attempt to tax some form of consumption, rather than income. The logic behind this is that it would be easier to administrate, be less intrusive of privacy, and able to tax those who illegally earn their income. Also, it would encourage savings over consumption, which appears to be something society needs.
Democrats seem to revile a "Fair Tax," as it would be less progressive. Thus, to be revenue neutral, the poor would pay higher taxes, which many of them simply can't afford.
Libertarians on the other hand don't really care. They generally dislike all taxes and realize that no matter what form the tax, the general result is a negative impact upon production.
Problem 1 - It is not up-front about its true costs and ability to truly replace income taxes
My first gripe is that the Fair Tax is evasive of its true rate. Sales tax is normally computed as a % of the product's initial cost, before including the tax itself. Measured this way, the Fair Tax would have to be at least 30% to be revenue neutral, which it would have to do to replace the income tax. Yet, we measure income taxes as a % of our total income, which includes the portion we pay as taxes. Thus, measuring the Fair Tax as a % of the sale after adding the tax, it is about 23%, which is what its advocates constantly quote. This allows it to be compared better to the income tax, but only when people use their average rate, not the marginal rate. Please note, Warren Buffet, one of the world's wealthiest men, paid about 17% of his income to taxes not too recently. Also note, that your highest income tax bracket is not your actual rate. The average rate on all income is only ~15%. For most people, the Fair Tax is a tax hike.
Gripe 2: to attempt to retain the progressive nature of our current tax structure (which isn't actually correct - only the income tax is progressive, thus, overall taxation may in fact be regressive), the Fair Tax plan involves a "pre-bate," which is essentially a monthly welfare check from the government. Everyone is eligible, and the estimated cost is astronomical. The true rub, however, is that the Fair Tax plan does not include this amount in its figures for revenue-neutrality. In practice this means that the Fair Tax would actually have to be closer to 40% to truly replace the income tax without a huge funding shortfall (in addition to the shortfall we already have, given our government's concern for budget deficits).
Problem 2: Does it really lessen administration?
Just as many individuals are able to successfully and legally avoid paying their "fair share" of taxes, business owners will find means of successfully and legally avoiding consumption taxes, using coupons, vouchers, and other circular business expenses that drive up profit while making less in official sales. Depending upon the complexity of the schemes, more administration than the income tax may be required. It is very important to note that even with the giant administration apparatus of the IRS, a large number of individuals still successfully cheat their taxes.
Problem 3: Is it truly less intrusive, or does it simply push this burden onto a smaller group?
A "Fair Tax" may be less intrusive to most individuals, but it may become extremely intrusive to retailers. This means less retailers and higher prices, which may not turn out to be worth the increased privacy for most individuals. The largest gripe of privacy against the IRS usually comes from small business owners. The Fair Tax doesn't seem to change anything for these individuals.
Problem 4: Can it really prevent criminals from evading taxes?
As far as criminals go, as long as they are consuming legal goods, they are contributing to the income of others, who are then taxed upon that income. Indirectly they still pay taxes; however, by passing them onto others, they pay less taxes than they should. A "Fair Tax" doesn't necessarily change this, however. As criminals' quality of life suffers from the higher cost of consumption, their disregard for lawful behavior will encourage them to seek cheaper black market goods or even resort to theivery. In many cases, this may encourage them, or formerly-lawful retailers who are earning less, to provide black market goods. Furthermore, criminals are often large-scale purchasers of black market goods, including weapons and drugs. A Fair Tax does not change this.
On the same note, a Fair Tax effectively makes drugs cheaper compared to other goods. It may make black market firearms more competitively priced with legally-acquired ones.
Problem 5: Influencing behavior through government is an endless folly of government growth.
Savings needs to be realized that it is eventual consumption. In fact, all income is dedicated to consumption at some point. Saving, in and of itself, is pointless. Thus, a consumption tax does indeed tax savings eventually, with the general outcome similar to an income tax. People may be more inclined to save and invest, but this does not guarantee them a greater quality of life. Investment is a risk and a burden that many people don't want to take. This is still an attempt to use tax codes to influence people's lifestyles, despite their actual preferences. Nearly all of such policies create a market distortion that accumulates in a huge problem as people attempt to avoid its effects. If government does not admit that it is the source of the problem, it will only create larger problems in its "solutions". Remember that the Fair Tax is only proposed because the income tax is problematic. Would a more appropriate solution be to reduce government and thus reduce the burden of the income tax?
Ironically, a huge motive for the massive consumption of today's society is the federal government's largely inflationary monetary practices, used to fund big government. As the money supply increases, purchasing power per dollar decreases. This causes prices and wages to rise, making debt easier to pay off later down the road, when quantity of dollars are more available. Thus, rather than earning and consuming, many people simply take on debt to consume. Additionally, rising prices tend to make things look less affordable down the road, encouraging consumption today. Thus, rather than implementing a "Fair Tax" as a means to encourage saving, a better idea may be to end the inflationary monetary policy.
Problem 6: If the Fair Tax is made politically-acceptable to the Democrats, will it further fuel the economic problems of class division and the welfare state they espouse?
The Democrats tend to rebel against class division in society, yet its policies seek to cement such divisions, by legally separating people into classes and governing them differently. They believe that increasing the progressive nature of tax helps the poor and doing the opposite hurts them. This is a matter of opinion. It depends upon the spending/saving preferences of the poor, whether they are net tax-recipients or tax-payers, and how much they value the manner in which government spends money. In a revenue-neutral "Fair Tax," the non-working poor surviving on the government's dole would end up paying consumption taxes. This ironically highlights the faults of the welfare state, as a simple solution is for government welfare payouts to simply increase by their increased financial burden due to the consumption tax. The spending and income increases would theoretically cancel each other out; however, in reality, the tax must cover not only the end recipient but the enormous cost of welfare administration (about 3/4 of total expenditures), requiring a much larger payout. Thus, there is no means for the non-working poor to have the same purchasing power without raising much greater tax revenue from somewhere else. Double ironically, a larger pay-out would give the non-working poor greater purchasing power of untaxed black market goods, such as drugs. I doubt this is the argument the Democrats use to debate the benefits of a consumption tax. We could exempt food and other essential items from consumption tax to fix this, keeping payouts the same. In many states' sales tax codes this is already done; however, this distorts the entire market, resulting in more food purchases and thus less tax revenue than expected (expanding into other industries possibly due to 2nd-market bartering or other schemes). We can pay out in food stamps and other government vouchers, but even these are illegally sold for cash. In the end, the welfare system will still reward non-production and be abused. Its recipients will see little change in their lifestyles. A Fair Tax that doesn't reduce the poor's purchasing power simply makes the problems of the welfare state that much larger, increasing the burden on those who are forced to pay for it.
For the working poor, they will generally be taxed more; however, they will likely be able to receive some sort of welfare-like aid, such as tax-free food and housing. Additional consumption can be avoided, by saving and investing, which may ultimately move the poor more toward the middle class. If a consumption tax moves more poor out of poverty, many will argue that it is a good thing; however, this is only possible from preventing them from consuming as much as they would naturally choose to do. This could be considered bad. It is of greater importance to look at the underlying cause of the problem - taxation. It is not the lack of taxation that keep the poor from saving or investing. It is either their own personal choices or the large burdens of current taxation.
A pre-bate is the worst of both worlds. It essentially is welfare not just for the non-working poor and the working poor, but for everyone. This imposes a tremendous cost that requires ever higher taxation.
Problem 7: Would we not be better off with reducing taxation rather than changing the collection system?
Democrats usually associate high levels of quite progressive taxation as a good thing; however, past attempts to do so didn't fare well for the nation, being either bypassed through loop-holes or hurting economic productivity for the entire social spectrum.
In general, lower taxation generally sees more productivity and greater purchasing power. Unfortunately, it denies state power. Government gets around this by borrowing or printing money, which are equally harmful to the economy, although it may take time for these methods to have full impact. These methods, it should be noted, are not really different from taxation. They are indirect taxes and will have negative economic effects even before they are truly "paid for".
In general, a revenue-neutral consumption tax would produce little difference in society than the income tax, unless coldly applied in full force upon those who must consume their entire incomes, which is politically unlikely.
Rather, the Libertarian position realizes that changing the form of taxation does not really mean a general change in quality of life. The only means to do so is by reducing taxation and government spending simultaneously, allowing greater focus of resources to satisfy consumer demands. Unfortunately, this position is unpopular to the war hawk, big government Republicans and the tax-and-spend Democrats who are fond of forcefully redistributing wealth.
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