Thursday, October 20, 2011

The "Used" Loophole in the Fair Tax

After Libertarian Sean Shepherd appeared on the show very ably defending the Fair Tax, Attorney Mark Small and I began discussing a troublesome loophole I have never previously seen discussed when the Fair Tax issue is debated.  Since the 30% federal sales tax would only apply to "new" goods, what exactly is a "new good?"  What if you have a car that is 50% new and 50% used?   What if it is a new TV but it contains parts from an old TV?  What if it is a computer that has a new motherboard, but everything else is old?

The Fair Tax would seem to be a boon to seller of used goods and parts.  It seems inevitable that a federal government  agency would have to get involved determining defining what is a "new" good and what is a "used" attorneys. That also means jobs for attorneys in litigating the various determinations and trying to keep clients out of trouble.

Below Mark discusses his take on the loophole.  It is copied in its entirety from his blog.
Mr. Haney from "Green Acres," and a hypothetical about the Fair Tax

Yesterday, October 19, 2011, 6:05:14 AM
Mark Small

Let's say the so-called Fair Tax is enacted. As I understand the Fair Tax, new goods are subject to taxation. Used goods are not.

What constitutes a "new good"? Let's look at automobiles. One new tire on a used car does not a new car make. On the other extreme, one used tire on a car fresh off the assembly line, I think most people would agree, does not make the car "used." What about "refurbished" cars? The State---and I use the word in the general sense of sovereign---would have to monitor such things. A company could drop rehabbed bodies onto new frames with new engines and voila! They could say the car was used. There would be no tax. Sure, the parts underneath the body would be new and subject to taxation, but remember, part of the Fair Tax consists of getting rid of the IRS. The State would need a policing/collection agency for such things. In the meantime, the auto industry, already in bad shape, would go down the tubes. Only the rich---a little more than one percent (1%)---would be able to purchase cars brand-new. They probably would own the companies that would rehab the cars I described. They probably also would obtain tort immunity from Congress for any products liability claims, if they even had to do so. After all, the goods sold were used.

Take this example across the board. We suddenly become a country of Mr. Haney's from "Green Acres," driving around in beat-up pickup trucks selling (a bill of) used goods.


Nicolas Martin said...

It isn't surprising that someone from the misnamed Libertarian Party would support the "fair tax," but few genuine libertarians do.

The Flat Tax Is Not Flat and the FairTax Is Not Fair

The Fair Tax Fraud

Downtown Indy said...

Seems to me the Fair Tax would be a major boon to recycling. A 'green' tax, if you will.

Downtown Indy said...

Why don't we pay state taxes only, and the federal government deal solely with taxation/revenue generation with the states? Having just 50 states to deal with instead of 200 million taxpayers seems to make sense. The 'IRS' could consist of one or two people instead of tens of thousands.

Indy Rob said...

The idea of a fair tax (or a sales tax) is regressive since the wealthy spend a smaller percentage of their income on taxable goods. IE, someone making $50,000 per year most likely spends almost all of their income on taxable goods, someone making $200,000 most likely spends less than four times as much on taxable goods. The exact difference depends on the goods that are tables and the ones that are not.

Indy Rob said...

I hate auto correct. ...
The exact difference depends on the goods that are taxable and the ones that are not.

Paul K. Ogden said...

IndyRob, while the "prebate" helps out on that, the Fair Tax is still regressive by definition.

Nicolas Martin said...

"The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax." -- Economist Murray Rothbard.

Josh said...

I agree that the if the fair tax doesn't tax used goods, it promotes the recycling of goods. That is a strong benefit of the program, and would help the concept gain the support of many people, if it was promoted as a benefit of that tax plan.

I also agree with Ogden, though, that every company in the world would try to find a reason to label their product as "used" to give them a competitive price advantage. Crafting laws that would solve this problem would be a burdensome task.

To get the fair Tax passed, I believe the initial tax rate would have to have lower shock value than the most commonly presented 23% inclusive tax. To make that happen, and to solve the problem Paul presents in this blog, I think Fair Tax supporters should be open to the idea that used goods be taxed as well.

Dutchman3 said...

I fail to understand all the angst over what is new and what is used. Are all of you aware that "used" simply means tax previously paid, and "new" means no tax paid as yet. All services are new, and have to include the 30% tax on the cost of the service. There are no used groceries, no used restaurant meals, no used heating oil or gas for your car, nothing used at Wal-Mart or any of the other "big boxes". The opportunity to buy used is really quite limited.

And, after a short transition period, normal supply and demand pressures will restore the current new/used price relationship. In other words, if you don't frequent Goodwill now, there would be no economic reason to do so after the Fairtax is implemented. There would be no cash windfall for buying used. If you are willing to lower your standard of living in order to spite the federal tax collector, go right ahead. But buying your underwear at Goodwill has no appeal for me!

Nicolas Martin said...

Oh, and we all know that a future revision wouldn't eliminate the "used" exemption because politicians are fully satisfied with original revenue expectations.

Jees, how naive can people be? As we have seen in the past 50 years, Republicans and conservatives are endlessly so.