Controversial Aspects of the FairTax Reform - Research Paper Example

In The Wealth of Nations, Adam Smith, the father of modern economics, laid out certain criteria for judging tax structures and tax policies. Specifically, he felt that equity, explicitness, simplicity of compliance, and economy of administration should be the cornerstones of any tax system. The current federal tax system is criticized as being too complicated and unfair (Slemrod, 58). Efforts to simplify the current tax system, e.g., the Tax Reform Act of 1986, are often viewed as ineffectual in creating a fairer or simpler system (Hite and Roberts, 121). For example, the President’s Advisory Panel on Federal Tax Reform (2005) points out that “our current tax code is a complicated mess. Instead of clarity, we have opacity. Instead of simplicity, we have complexity. Instead of fair principles, we have seemingly arbitrary rules. Instead of contributing to economic growth, it detracts from growth” (20).

Consequently, many federal tax reform plans have been proposed, including a variety of consumption-based plans such as a flat tax, a value-added tax (VAT), and a national retail sales tax. The idea of replacing the federal tax system with a national retail sales tax has been increasingly discussed in the United States since the 1990s. Among the various national retail sales tax proposals, the FairTax legislation introduced by House Representative John Linder and Senator Saxby Chambliss has attracted more cosponsors than any other fundamental tax reform bill. The legislation’s formal name is the Fair Tax Act of 2007 and a number of congressional committees have heard testimony on it.

It is important to emphasize that in its essence FairTax is a retail sales tax, a form of consumption tax that is imposed on the final sales of goods and services to consumers. Like other consumption taxes, the retail sales tax does not tax normal returns to savings and investments, and thus, may lead to greater economic growth than our current tax system (the President’s Advisory Panel on Federal Tax Reform, 2005). Currently, there is no national retail sales tax in the United States through sales taxes are assessed by every state except Alaska, Delaware, Montana, New Hampshire, and Oregon (Yelvington, 8). Hawaii has a similar tax although it is charged to businesses instead of consumers (Yelvington, 8). Boortz and Linder (2005) provide a fairly comprehensive list of benefits under the national retail sales tax which is currently receiving the most attention, the FairTax Plan (29-33). The following are examples of the benefits which they present.