Federal Taxation of State/Local Government consumption
On another blog, Jim Bennett and Hank Van Gieson had a discussion about the Constitutionality of the Fairtax plan to tax government consumption.
Hank writes in and requests a discussion:
My arguments now draw on what is called “the rule of law” which uses the Constitution and the Federalist papers to determine original intent. Clearly the framers never would have agreed to allow the federal government to tax state/local government operations. And, when Justice Marshall wrote “the power to tax is the power to destroy”, any constitutional arguments should have ended.
Jim, on the other hand, uses 220 years of Supreme Court decisions as a basis for claiming that the Fairtax is constitutional. This is known as “the rule of man”. Many years ago, the Court came up with the doctrine of intergovernmental tax immunity and have been chipping away ever since. Jim quotes many decisions that weaken that tax immunity doctrine in support of his claim that taxing governments is OK.
Clearly, we can never agree on the constitutional issue, so I suggested to Jim that we move to fairtaxblog and examine the basic AFFT rationale for taxing governments in the first place.
The only AFFT rationale I have ever found for federal taxation of State and Local governments was to prevent unfair government competition with the private sector. But, Section 704 of HR25 clearly states that any government agency at any level that sells more than $2500 in goods or services per quarter would be classified as a “government enterprise” and would be required to collect and remit the 23% Fairtax. The playing field would be level and there was no need to tax the over $2 trillion in government consumption in order to prevent unfair competition. So, what was the real point of government taxation?
Unless someone can provide a better rationale for this potentially unconstitutional proposal, it seems most likely that the Houston tax lawyers who created the Fairtax plan simply wanted to keep the tax rate as low as possible. By adopting the rather unusual inclusive definition of the sales tax and adding over $ 2 trillion in government consumption to the Fairtax base, the rate came to just over 23%. Had they not taxed governments, and had they expressed the rate in the normal exclusive terms, the rate would have been over 43%. When added to the average State and Local sales taxes, it’s clear that sales tax rates over 50% would have been required. Was the real reason for taxing governments simply to cover up the real sales tax rate by forcing the States to pay part of the needed federal tax revenue by raising all their rates?
Any comments would be appreciated.