The understanding of America’s system of government comes hand-in-hand with the understanding of America’s economy. Ever since the 16th amendment was ratified, the government has had copious amounts of money at their disposal. With that money, the government has funded the Federal Reserve and all their banks, Fannie Mae, Freddie Mac, countless other GSE’s, and given subsidies to many businesses. The reality is that the contemporary government works with its constitution and its money.
Many agree with the idea of a Fair Tax. That is, no income tax. If the government were not integrated with the economy, that would seem like a fair way to tax the people. What people forget is that the economy relies on the government to supply the Fed with money, give subsidies to many businesses that would otherwise not be able to survive, and support huge GSEs like Fannie Mae and Freddie Mac. When the economy is in a recession, the federal government has always played the leading role in turning around the economy.
The Fair Tax is basically a sales tax, which relies on the sales of goods to be obtained. Here is how the Fair Tax would not be reliable: Say, we have a working Fair Tax. We then experience a recession as foreign markets surpass ours and investment goes to foreign businesses. With the investment in American companies dropping, a recession ensues. With a recession comes less consumption, as people are more likely to save during a recession. Less spending means less tax collection, and less money for the government. The government now cannot sponsor those GSEs (which millions depend on), give subsidies (which many industries depend on), and cannot afford to drop Fed interest rates in the fear of major inflation, all because the government has not collected enough money.
Now, let’s say the Fair Tax is revoked and the 16th amendment is ratified. The government, now in the aforementioned recession, is taxing income. People may stop spending, but people will not stop working, so we don’t lose tax collection. Now that the government has some funds, they can subsidize, sponsor those GSEs, and drop the interest rates a bit, because they will have the money to dispense rather than having to print more money. This would stimulate the economy and lead it away from recession.
Clearly, the income tax is the safer option.
Ron Paul and Mike Huckabee are sponsors of the Fair Tax. Politically, it makes sense, because people do not want to be taxed. As explained above, it would not work very well. If people understood how the economy and the government work together, it would not be a good political move to support the Fair Tax. We need to educate.