Tourism, Borders, and the FairTax
Another one in the mailbag, from reader Jason Coyne:
I think the questions on the fairness (or not) of the fairtax have been really helpful to explain the program to the masses, and the answers really clarified some aspects of the FairTax to me, particularly Quadrupole’s commentary on all funds eventually being spent, so Mr Rich doesn’t really have a tax exemption, just a deferal.
One area that remains problematic for me though:
How will the FairTax affect tourism and purchases in border locations? For tourists to the US that have an income tax, they are effectively being taxed twice, making purchases in the US much more expensive. This would tend to depress tourism, wouldn’t it? For visitors from areas with high VAT taxes, the impact would be less (depending on the amount of the VAT) but still not as advantagous as under current terms. If you could prove you were not a resident, would you get excluded from the tax? Or can you apply for a refund (with receipts perhaps) if you are a visitor?
Closely related, what about people who live within shopping distance of Mexico or Canada. The FairTax would create some incentive to do your grocery and clothes shopping over the border and skip out on the tax. Customs could handle some of this, but certainly not all of it. Especially if your purchases fall under the existing guidelines for amounts that are allowed as a souveniers.
Responses?
I seem to recall The FairTax Book had a bit to say on these topics.
For example, it points out that our current prices contain around 22% in embedded taxes that would be largely if not fully eliminated after implementation of the FairTax — meaning that prices not change much at all.
Many of these “border town/tourist” scenarios go away when you realize that the FairTax is taking the place of existing embedded taxes that would be repealed.
I’m sure some of our readers will have more input.
Under the FairTax tourists are taxed for their purchases in the US. There are no tourist refunds or exemptions. Will this cut into tourism? It’s hard to say. Even with the FairTax many consumer goods in the US will be cheaper (priced CDs in the UK lately
? ).
If you travel abroad and purchase goods for personal use (as opposed to business use) you will be FairTaxed on them at the border when you import them.
Several quick responses.
Border towns - Things are already cheaper there now! There is no embedded tax. Not really a big issue either way.
Tourism - even if you understand about the embedded tax cost in current pricing, most people have a hard time believing that market forces will quickly squeeze that 22% back out of the cost. While it may be amost a cliche at this point, Wal-Mart is the posterchild for driving the costs as low as possible. Someone will always be willing to drive the profit margin down to 4 or 5% profit for a bigger share of the market. Tourists will see very little change in prices after a correction period. Every market will have a different period of adjustment, but I doubt it will be longer than 6 months.
To me this is a wonderful idea.
1. You will be hitting all the illegal immigrants increasing the tax base.
2. You hit the tourists as well increasing the tax base.
3. As long as the refund check for “groceries” is limited to those with proper citizenship.
Think... Who wouldn’t mind illegals and tourists paying for our Social Security?
Love the idea! I just have to find whom to support in Ga for the fair tax.