Why the Fair Tax Proposal will Never Pass

While I was in Chicago I noticed something really interesting. Hotels that cater to business travelers charge a lot. Breakfasts in the hotel restaurant range from $12 to $21. To use the hotel’s swimming pool and fitness facility the charge is $12 per day. To access the Internet they charge $10 per day. Contrast this with hotels that rely on tourists rather than business travelers. The meals at the restaurants are cheaper; the Internet access and fitness facilities are free.

When I stood outside the fitness facility at the Chicago hotel, I was wondering, “Who would pay $12 per day to use this.” Then it dawned on me. The Federal Government is subsidizing this fitness facility and the expensive meals and the charge for Internet access. Business travelers either get all their travel expenses reimbursed by their employer or, if self-employed, they can deduct their expenses from their federal income taxes. The employer, in turn, also treats these meals and fitness facility and Internet charges as business expenses. The result—the Federal Government is paying part of the increased charges that the business hotel is making.

If the Fair Tax proposal were to pass, there would be no Federal income tax. Therefore, the expensive meals, fitness facility fees and Internet charges would not be deductible business expenses. Now business travelers would have to pay for these expenses from their own pockets. Further, under the Fair Tax proposal, all these expenses would be subject to the Federal sales tax. Suddenly, business travelers would think twice before incurring these expenses. They might start shopping around for hotels where the meals are reasonably priced and where the fitness facilities and Internet access are free.

You can bet that the Sheratons and Hiltons and Hyatts and other hotel chains that cater to business travelers are not going to give up these money makers without a fight. They will realize that the Fair Tax proposal will not be good for their business and they will lobby against the Fair Tax.

There are many other sectors of the economy in these United States that also rely on the federal tax subsidy for part of their income. They will also oppose the Fair Tax. Just think of the housing industry. Without the tax exemption for home owners, people will not be able to afford such expensive houses. Used houses will have a strong competitive advantage over new houses because they would not be subject to the federal sales tax. Land developers and builders will therefore oppose the plan.

And, of course, the elimination of the federal income tax deduction will be disastrous for charitable institutions. I could be generous and assume that people contribute to charities for religious or other reasons and that the tax deduction is not an incentive. However, let’s face it. If people were so altruistic, why did we need the deduction in the first place?

I must concluded that even if the Fair Tax proposal was fair, which I’m not convinced it is, it would adversely affect so many interests in this country that it will never become law.