Bowyer FairTax Critique Proves Too Much

January 22, 2008

Radio host Jerry Bowyer criticized the FairTax proposal in the Wall Street Journal last week, in part because it would exempt business-to-business transactions to prevent pyramiding (taxes on taxes):

In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term “business transaction” would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it’s yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

I’m a recovering tax accountant (and not a good one at that) and I’ve got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

This criticism isn’t persuasive; it could be used against our current tax system. It would be more persuasive to focus on features of the FairTax that are worse than the current system.

People pay taxes, not businesses, so taxing businesses is just a hidden way of taxing people. Thus many tax reform plans (including the FairTax) exempt business-to-business transactions from tax. The current income tax system also allows businesses to deduct business expenses. Bowyer cites this as a flaw of the FairTax, but today’s income tax system is rife with these problems.

Bowyer again:

Then there’s the complexity argument. You don’t think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You’re going to put a 30% tax on my home purchase, and my doctor visits and my kids’ tuition? Yeah, great idea.

The danger of lobbyists clamoring to exempt their industry from general taxation is a real one, but one that already exists at both the federal and state levels. Owner-occupied housing is so generously exempted from taxes that it is actually subsidized to the tune of negative 5 percent, for example. I’m not sure how opposing reform fixes a problem we have now.

Incidentally, the FairTax exempts tuition, so Bowyer is wrong there. But that exemption might open the door for all the other special interests claiming that their economic activity is so unique that it justifies exemption.

Finally, Bowyer argues that any discussion of tax reform is meaningless since it will never pass:

None of this matters anyway. We will never make this change.

The FairTax is just one idea and may have its problems, but the fact that it comes up so often shows that people want a national discussion about our uncompetitive, burdensome, and overly complex tax system.

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