HOSTILE ARGUMENT: WHY DO WE TAX FOOD, CLOTHING, HOUSING, AND MEDICINE? THAT’S UNFAIR!
This Grassroots Corner continues a series on dealing with hostile questions, comments, and myths that people may raise about the FAIRtax. Many of these suggested responses will be good comebacks for you to have in your pocket when you need them. However, some of these suggested responses can be too long to insert into an actual conversation. You may want to boil them down to where they'll be more useful when you're talking face-to-face with someone attacking the FAIRtax.
This week, we take on the myth that the FAIRtax is unfair to the poor because it taxes sales. Sales taxes generally, and rightfully so, are considered “regressive taxes” that have a more significant impact on people at the lower end of the economic spectrum than on the well-to-do.
To illustrate the point, imagine Steve Forbes, Bill Gates, Jeff Bezos, and a single mother on “SNAP” (Supplemental Nutrition Assistance Program, formerly “food stamps”) in line at the grocery store with identical carts of groceries. If there were sales tax on groceries – which there generally is not – Steve, Bill, Jeff, and SNAP Mom would all pay the same amount in tax. At first glance, this may seem fair.
However, social justice warriors rightly point out that when expressed as a percentage of each person’s income, the amount of tax charged on a cart full of groceries is insignificant to Steve, Bill and Jeff, but represents a much larger portion of SNAP Mom’s income. In other words, a straight sales tax hits poor people a lot harder than it hits rich people.
Most states with sales taxes address the regressivity problem by exempting basic necessities like groceries, clothing and medical supplies. Also, most states with sales taxes do not tax rent or services, just tangible goods.
As most of you know, the FAIRtax would be charged on the retail purchase of all new goods and services. There are no exceptions, so the FAIRtax would be included in the prices of basic necessities like food, clothing, rent and medical care. So, how does the FAIRtax keep from imposing a significant burden on SNAP Mom? There are actually two ways.
First, the FAIRtax eliminates the federal payroll taxes. Chances are that SNAP Mom is working for a paycheck while Steve, Bill and Jeff are living off their investments. That means that even if SNAP Mom doesn’t make enough to have to pay income tax, she is still losing 7.65% of her income to the payroll taxes that support Social Security and Medicare while Steve, Bill and Jeff are paying nothing. The FAIRtax eliminates those payroll taxes. That gives SNAP Mom a significant break while also making sure that Steve, Bill and Jeff are now contributing to Social Security and Medicare whenever they buy things.
Next, the prebate will refund to all four of them the taxes they paid on their spending up to the poverty level. Again, an insignificant amount to Steve, Bill and Jeff, but a life saver for SNAP Mom.
Still, some people believe that it’s not fair to make low-income people pay the FAIRtax when they purchase necessities like food, clothing and medicine. Why not exempt those items from the FAIRtax? As noted above, low-income people will pay the FAIRtax on those items at the cash register, but the prebate gives them their money back. They pay no FAIRtax out of their own pocket.
Now, consider what taxing food, clothing, medicine and rent accomplishes. It captures much of the underground economy. For example, an undocumented person likely works for cash under the table and pays no income tax or payroll tax. Those who live by less than legal means don’t pay taxes either (even though Federal law requires that people report the fair market value of anything they steal on their tax return).
However, these people still have to buy food and clothes and have a place to live. By taxing food, clothing, and rent, the FAIRtax changes criminals and undocumented workers from tax evaders into taxpayers.
Another reason not to have these exemptions is that wealthy people consume essential goods of higher quality. By exempting food, clothing, medicine, and shelter from their sales taxes, states are effectively giving the rich a tax break. By including those items in its tax base, the FAIRtax eliminates that break.
A final concern for granting exemptions is the erosion of the tax base. For example, whenever Congress grants someone a tax break, there are always others who want a break as well. As more and more items are granted an exemption, the tax base shrinks. As the tax base shrinks, those still in the tax base pay a higher rate to cover the shortfall that the exemption creates.
With the FAIRtax, eliminating exemptions provides for the broadest possible tax base and lowest possible tax rate. If Congress starts giving exemptions to the FAIRtax to special interests such as purveyors of green eggs sold on Tuesdays, Thursdays, and Saturdays, consumers will quickly realize that they are having to pay a higher tax rate on everything else to cover the shortfall.
It makes far more sense to apply the FAIRtax to all retail purchases, including basic necessities, and fix the regressivity problem with the prebate than it does to have an endless and ever-changing list of exemptions. It’s a lot simpler too.
I would love to hear from you about squeezing this explanation into a soundbite.
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