Stan Geiger

"Fair Tax" and Inflation

Reports say the producer price index soared by 1.1 percent in March. That's not good news. We're looking at an inflation rate comparable to that of the '70s. The Fed now finds itself in a war that's hard to win. It must battle both a sagging economy and inflation at the same time---an economic circumstance commonly referred to as "stagflation."

No doubt, the biggest fueler of our current inflation woes is the high price of oil. High fuel prices make the transportation of goods more expensive. That leads to price increases across-the-board. Petroleum prices are also a key when it comes to food---both the production thereof and the packaging.

The problem is, I'm not sure much can be done about oil prices in the near term.

China and India comprise another inflation problem that isn't likely to go away anytime soon. Those two countries house roughly a third of the world's population---and they are becoming consumer nations.

We have been fortunate over the past couple of decades; we haven't faced any real inflation problems. But folks that were around in the '70s can remember that annual inflation rates of 8, 10 or 12 percent are not a pleasant thing for the average family.

Meanwhile, we have this "fair tax" proposal, which would create a 23 percent federal sales tax. I see this as a good time to discuss the relationship between sales taxes and inflation.

A sales tax is a percentage tax levied against the price of a good. Inescapably, when the price of a good goes up, the tax a consumer pays for purchasing that good goes up. If the cost of a $1,000 basket of goods goes to $2,000, your taxes double.

As things currently sit, the federal government primarily taxes income. There is an 18-cent federal fuel tax, but most tax revenue collected by Uncle Sam comes from taxes on income. The "fair tax" would do away with all taxes on income and tax only spending.

Even in calm inflationary times, prices go up. So going to a national sales tax would create a situation whereby the average family would face an inevitable annual tax increase. Either that, or a family would just flat have to quit spending money---which, of course, isn't feasible.

I know, the "fair taxers" say people wouldn't pay taxes on spending up to the poverty level. But I'm not sure what that means. I've heard of poverty-level income. And it's pretty easy to set up an income tax that doesn't tax poverty-level income. But what, exactly, is poverty-level spending?

A spokesman for the "fair tax," last night on KOTV, said "nobody" would pay taxes on spending up to the mythical poverty level. So I guess that means even rich folks would have an exemption---even though "fair taxers" claim, wrongly, that rich people would pay more in taxes if we replaced income taxes with a consumption tax.

The "fair tax" plan is as full of holes as a block of Swiss cheese. But the inflation effect is one of the biggest problems I see.

Let's say a working fellow goes from one year to the next with no pay raise. And let's say we see an inflation rate of 10 percent in that year. This fellow is already hurting. His pay didn't go up. His cost of living did---considerably. But at least his federal taxes didn't increase. I mean the way things work today, barring any changes to the law, if you make the same money from one year to the next, you pay the same amount in taxes.

With no income taxes and a 23 percent national sales tax in place, however, things change dramatically. His pay stays flat, his cost of living increases by 10 percent, and, to cap things off, his federal tax liability increases.

It could be even worse. Many times a fellow has a good job, and things are rolling along nicely. Then along comes a merger, or an outsourcing, or whatever. The good job disappears. The fellow in question can't find another job that pays as well, and is forced to take a cut in pay.

With the "fair tax" in place, it would be quite possible for a fellow to make less money from one year to the next, experience an hefty increase in his cost of living, and pay more in federal taxes, all at the same time. Isn't that a lovely scenario?

Lest we forget, sales taxes already exist. In Tulsa, one pays city, county and state sales taxes. The inflation effect is working on your tax liability even as I write.

The state, for example, releases its tax collection numbers on a quarterly basis. Sales tax collections, it seems, are up every quarter. Why is that? Is that because of brisk economic activity---as politicians love to claim---or is that simply because of constant price increases that produce more and more sales tax revenue?

The latter, me thinks.

We should not be looking to add to our portfolio of sales taxes. To the contrary, we should be looking to get rid of the sales taxes that already have us saddled.

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