Saturday, October 1, 2011

The FairTax and the Constitution

The FairTax and the Constitution

With respect to taxation, the Federal Constitution provides the following:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Federal Constitution, Article I, Section 8, clause 1 [Sec. 8.1]

No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

Federal Constitution, Article I, Section 9, paragraph 4 [Sec. 9.4]

No Tax or Duty shall be laid on Articles exported from any State.

Federal Constitution, Article I, Section 9, paragraph 5 [Sec. 9.5]

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Federal Constitution, Amendment X

The Taxing Powers of Congress

In Sec. 8.1, the people granted Congress the power to impose four types of taxes. Based on the usage of similar language in Sec. 8.1, Sec. 9.4, and Sec. 9.5, reasonable people can agree that the word "tax" connotes taxes in the category of direct taxes and the words "duty," "impost," and "excise" connote indirect taxes.

The last portion of Sec. 8.1 mandates that the category of indirect taxes must be uniformly applied.

Reasonable people can probably also agree that the FairTax proposal falls under the general category of indirect taxes, either a duty or an excise.

Except for the taxing powers granted to Congress in Sec. 8.1 and the prohibitions placed on those powers by Sec. 9.4 and Sec. 9.5, all other taxing powers are reserved to the several States, as granted by the people in their own State constitutions, by the Tenth Amendment.

The States have been exercising their taxing powers, as the States have seen fit, for many years with respect to the category of taxes labeled sales, use, or consumption taxes.

Does the FairTax Fall within the Taxing Power?

Leaving aside the prohibition placed on Congress by Sec. 9.5, how can the FairTax claim to be within the powers granted to Congress in the Constitution?

As observed earlier, the FairTax is clearly an indirect tax. The mandate to Congress for indirect taxes is that indirect taxes must be uniform.

The FairTax proponents loudly proclaim that the FairTax is progressive because of the optional rebate (or pre-bate). A progressive tax is clearly not uniform because different people will pay different amounts based on their levels of consumption and whether or not that consumption falls into a favored category. In fact under the rebate formula, some people may even experience a net gain because their unfavored consumption falls below the starting level at which the FairTax becomes, effectively, a tax.

We now have another (Mike Huckabee was the first) Republican presidential candidate, Herman Cain, promoting the FairTax as part of his campaign. There has also been a recent hearing in Congress, where Mike Huckabee, among others, presented testimony in support of the FairTax scheme.

With our current focus on limiting the Federal government to the powers granted in the Constitution, can we simply overlook the argument that the FairTax is unconstitutional because Congress is not granted the power to impose a duty or excise that is not uniform?

Notably, it is the rebate feature that makes the FairTax palatable to most, but it is also the rebate feature that, arguably, causes the scheme to fail constitutional muster.

Besides the rate, one might look even deeper into the scheme where it outlines the articles that are not subject (favored) to the tax, notably, articles that are not "new" and education. Clearly the exemptions provide more evidence of lack of uniformity.

The obvious rebuttal is that the common rate, twenty-something percent, makes it uniform. But as with other acts of Congress or State legislatures, the judiciary should look beyond the nominal tax rate to the effective rate, which is, in its very nature, designed to be anything but uniform.

The preceding argument is based on the issue of uniformity of indirect taxes as mandated by the Federal Constitution. Would anyone like to respond in that limited scope? I'm not particularly interested in the pros and cons of the FairTax versus the income tax and the other taxes that it proposes to replace. Let's just stick to the powers granted to Congress, if you please. My wish is for constitutional arguments, not policy arguments.