In a recent survey that my wife took, she indicated that she supported the Fair Tax. I asked her why. Without knowing any of the details of the proposed legislation, she said “Because fairness is good”. Of course, calling something Fair, doesn’t necessarily make it fair.

The Fair Tax has been discussed, and even supported by some of the candidates, in the Republican and Democratic presidential debates, but is it really fair? I, for one, don’t think so.

The proposed Fair Tax legislation would eliminate income taxes, payroll taxes, and estate and gift taxes and replace them with a national sales tax on all retail purchases of goods and services. It would also eliminate the IRS. The legislation proposes a tax rate of 23%, but that is an “all inclusive” rate. State sales taxes are stated as “exclusive” rates, a rate that is added to the price of the good or service. That rate for the Fair Tax would be approximately 30%.

At first blush, the Fair Tax sounds simple and may even seem fair, but its not. Let’s assume that you are retired and live off of your savings and social security. Chances are that you pay little or no income tax, and certainly no payroll tax, under the current system. However, under the Fair Tax you will pay a 30% national sales tax on all of your purchases of goods (including food) and services (including haircuts). You already paid income tax on your savings (when you earned the money that you saved). Now you have to pay tax again when you spend those savings. Fair?

Let’s assume you want to buy a house to live in. You will have to pay a national sales tax of 30% on top of the price of the house. You will be competing to purchase the house with an investor who wants to hold it as a rental property. Guess what? The investor isn’t buying the house as a retail purchaser so he doesn’t have to pay the 30% sales tax. In other words, there is no way you can compete against an investor to purchase that house. Fair?

Let’s assume you are single and make $35,000 a year. No more federal income tax or payroll taxes are withheld from your paycheck. You (and everyone else) also get a “prebate”, an advance rebate of the Fair Tax equal to the amount that would be paid by someone earning at the poverty level. What a great deal! But, you have to pay a 30% sales tax on all purchases of goods and services. Would your total federal tax burden, net of the prebate, decrease? If you use all of your income for consumption of goods and services it would actually increase. Fair?

Let’s assume you make $5 million a year in compensation. You only consume $1.8 million and save the rest. Your total federal tax burden would go down by approximately 60%. It would go down by an even greater percentage if you had gains on the sale of investments, since they aren’t subject to the Fair Tax. Fair?

Other arguments for the Fair Tax are that it is simple and that it is easy to administer (thus the elimination of the IRS). I don’t agree with either of those arguments, but I’ll leave that discussion for another day.