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Source link: http://archive.mises.org/7636/the-tax-thats-anything-but-fair/

The Tax that’s Anything but Fair

January 10, 2008 by

Tired of reading yours truly on evils of the FairTax? Here is Bruce Bartlett’s newest analysis of the tax that’s anything but fair: “Why the FairTax Won’t Work.” Mr. Bartlett has written a very exhaustive and very thorough critique of the FairTax. Since presidential wannabe Mike Huckabee backs the FairTax, this issue is very relevant. Don’t be fooled because FairTaxers and Ron Paul each want to abolish the income tax. FairTaxers want to replace the trillion dollar income tax with another trillion dollar tax; Ron Paul wants to replace the income tax with nothing.

{ 23 comments }

Fair Tax Doubter. January 10, 2008 at 11:03 pm

Instead of Bartlett’s analysis, I will use 1 paragraph from the analysis of Walter E Williams:

There is no FAIR way to steal $3 trillion from the private sector of the economy. The Fair Tax may be marginally more efficient than the current system but it is not fair. Someone has to pay $3 trillion somehow. The only FAIR way to tax people is to do it less, meaning the government must SPEND LESS. This leaves more resources (mostly in the future) for private business to create wealth.

Ian January 10, 2008 at 11:52 pm

All one needs to do is see what Bruce Bartlett stands for, then take a look at its deficiencies to take the wind out of his FairTax naysaying.

The FairTax Act of 2007 (HR 25/ S 1025) represents a prospective power shift of massive proportions in America. It lays out a practical ideal of voluntary payment of taxes, based on a substantial level of taxpayer choice that the plan affords. Since FairTax untaxes basic necessities (up to socially-accepted poverty-level spending), what is taxed is marginal, and/or desired or preferred, on a broader base of retail products and services. This is to say that the taxpayer may, under the FairTax, choose to purchase used products and avoid paying the tax. And, to the extent desired, the taxpayer may choose to self-perform certain services rather than pay for them. This will stimulate do-it-yourself education, improve citizens’ self-reliance; indeed the FairTax represents the possibility of ushering in a new can-do, citizen psychology that would accrue to greater demands for government accountability – truly, a cultural sea change.

Government is the “necessary glue” that enables the social fabric to cohere. It does this by effecting “rules” that ostensibly provide members with equitable access to wealth and resources. It also must provide ostensibly equitable enforcement of those rules in order to mitigate threats to the social fabric. It is unrealistic to believe that the structures of a national government can be supported on donations, thus the need for taxes. Naysayers love to characterize anything purporting to be a “fair tax” as an oxymoron – but it is not true. The idea of fairness has to do with equitable sharing in the cost by all members who depend upon the social fabric for food, shelter, clothing and post-necessity economic enterprise. And, because of the shift of power from politicians and special interests under an enacted FairTax, the elected will find it more difficult to both enlarge government, and implement any dual system of taxation. FairTax strategist, Dennis Calabrese, discusses how the FairTax repeals the income tax, how it does away with the IRS, and how it addresses other aspects of frequent concern to skeptics.

The FairTax has a much greater opportunity for success to operate as a “self-regulating” mechanism because of increased visibility. One finds that the current system, ostensibly regulated by the Internal Revenue Code, is in fact poorly regulated because of continually increasing complexity (the effect of tax favors from politicians, through lobbyists, to favored corporations and other special interests) stemming from the desire by those holding government position to steer public behavior using tax code “carrots.” We have seen how 100 years of this type of behavior has eroded the Nation’s currency and the purchasing power of working family incomes. “Visionist,” Tom Frey believes the current tax system will simply collapse; and economist Laurence Kotlikoff heralds – short of enactment of FairTax (or an otherwise unlikely change in spending habits) – the U.S. will shortly face an irrevocable economic breakdown. (Kotlikoff believes that passage of the FairTax can stave off the economic ruin we’re facing, but would be surprised to see it happen.)

Frey and Kotlikoff may be right on both counts, and we may not be able to successfully evoke change; but shall we not try?

The research clearly says, “We should!” Witness:

The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces. [BHKPT]

The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan. [THBP]

Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case. [THBNP]

The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be. [ALM]

Consumption benefits [ALM]:

• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.

• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.

Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system. [KR]

Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively. [JK]

Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax. [THBPN]

Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20. [THPDB]

On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base. [TBJ]

The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent. [WM]

References:

[ALM] Arduin, Laffer & Moore Econometrics, “A Macroeconomic Analysis of the FairTax Proposal,” July 2006.

[BHKPT] Bachman, Paul, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck, “Taxing Sales under the FairTax: What Rate Works?” published in Tax Notes, November 13, 2006.

[JK] Jokisch, Sabine and Laurence J. Kotlikoff, “Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax,” National Tax Journal, June 2007.

[KR] Kotlikoff, Laurence J. and David Rapson, “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation,” NBER Working Paper No. 12533, revised October 2006.

[THBNP] Tuerck, David G., Jonathan Haughton, Keshab Bhattarai, Phuong Viet Ngo, and Alfonso Sanchez-Penalver, “The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model,” The Beacon Hill Institute at Suffolk University, February 2007.

[THBP] Tuerck, David G., Jonathan Haughton, Paul Bachman, and Alfonso Sanchez-Penalver, “A Comparison of the FairTax Base and Rate with Other National Tax Reform Proposals,” The Beacon Hill Institute at Suffolk University, February 2007.

[THBPN] Tuerck, David G., Jonathan Haughton, Paul Bachman, Alfonso Sanchez-Penalver, and Phuong Viet Ngo, “A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the FairTax Plan,” The Beacon Hill Institute at Suffolk University, February 2007.

[THPDB] Tuerck, David G., Jonathan Haughton, Alfonso Sanchez-Penalver, Sara Dinwoodie, and Paul Bachman, “The FairTax and Charitable Giving,” The Beacon Hill Institute at Suffolk University, February 2007.

[TBJ] Tuerck, David G., Paul Bachman, and Sylvia Jacob, “Fiscal Federalism: The National FairTax and the States,” The Beacon Hill Institute at Suffolk University, June 2007.

[WM] Walby, Karen, and Dan Mastromarco, “Promoting home ownership: How the FairTax’s benefits for homeowners exceed the mortgage interest deduction,” Americans For Fair Taxation White Paper, August 2006.

lpcowboy January 10, 2008 at 11:58 pm

Williams misses the point of the fair tax, the elmination of the approximatley 7% overhead in dealing with the current revenue code. This would lead to the substantial economic benifits he misses.

He also seems to miss the fact that the market shifts the tax burden from those who nominaly incur the tax based on the relative power of consumers and producers. In other words, if actors want more money, in practice, you pay their tax at the box office. As applied, the FairTax is no more or less regressive than the current system.

His only other point seems to be with out a VAT, the threat of fraud would mean goverment would have to get by with less money. I consider this a good thing.

While eliminating taxes outright would be desirable, the FairTax is a marked improvement over what we have now, and probably the best thing about the Huckabee campaign.

Ty January 11, 2008 at 1:24 am

Under a fair tax I forsee car dealers leasing virtually all new cars and selling them after a couple thousand miles as virtually new but 30% off new.

I would think that this kind of scheme would pop up everywhere.

Curt Howland January 11, 2008 at 7:41 am

1) It’s a tax. It is not voluntary, regardless of the whining protestations to the contrary.

2) It _must_ bring in the same amount, so every “voluntary” way to avoid paying will vanish, with the result of a bureaucratic nightmare exactly like what makes the income tax so awful.

3) Paperwork hell. Remember to keep receipts for everything you buy, so that when the auditors show up at your door you can prove that you didn’t engage in illegal barter.

4) Unless, of course, the purpose of the tax is to make it mandatory that the little people regress to self-sustaining farms and destroy the division of labor. If that’s the purpose, the flat tax is perfect.

DH January 11, 2008 at 8:19 am

“Paperwork hell. Remember to keep receipts for everything you buy, so that when the auditors show up at your door you can prove that you didn’t engage in illegal barter.”

Curt,

Under the FairTax individuals won’t be audited, it’ll be the businesses’ responsibility to collect and pass along the taxes to their respective state which, in turn, will pass the taxes along to the federal government. Instead of having approximately 300 million households plus 30 million businesses to collect from and audit, there will only be the 30 million. And it will be administered by each state.

This kind of oversight is already mostly in place in most states. And it’s far less labor-intensive to monitor 30 million collection points than 330 million. So that part of the federal gov’t could be substantially reduced.

And since individuals would not have to report the taxes they’ve paid, nor any of their other private information, their lives would be significantly simplified and less intruded-upon.

darjen January 11, 2008 at 8:28 am

There is no such thing as a fair tax.

John Crewdson January 11, 2008 at 8:33 am

It’s this type of misinformation and lack of thinking that hurts us all. If car dealers leased their car, there would still be a sales tax on the lease.

Under the FairTax our tax base would be greatly increased to include criminals, illegal aliens, and tourists in the US.

The poor are now paying high taxes by way of hidden taxes and high compliance costs in our goods and services. The middle class is paying taxes on top of taxes.

Under the FairTax the poor would be paying almost no Federal taxes, the middle class would be paying less than 23% inclusive, or 30% exclusive, because of the effect of the prebate. The wealthy would be paying a slightly higher rate due to higher consumption, and the rich would probably be paying a little more than they do right now.

There is no perfect way to do this. Let’s forget about the semantics of it and go with the best system. The FairTax would make the cost of our government painfully obvious, simply because we would see it every time we buy retail. Now the true cost is hidden.

Can we stop insulting each other and deal with the real issue? Let’s get this behind us and move on. If politicians were to try and sell us on our current system we would think them insane.

We are like a frog in a boiling pot. The heat has been turned up so slowly since income tax was first implemented that we don’t seem to notice just how much we’re being hurt.

George Gaskell January 11, 2008 at 8:37 am

Williams misses the point of the fair tax, the elmination of the approximatley 7% overhead in dealing with the current revenue code. This would lead to the substantial economic benifits he misses.

Economic benefits for whom? Do you think the federal government will exercise self-restraint and decline the opportunity to spend that money itself?

Do you really think that the 7% savings will be realized in the form of more money left in the hands of private citizens? That we’ll all be suddenly 7% richer?

Besides, even if it did, and the government’s budget miraculously stayed exactly the same, do you think it even matters in the age of central banking where the Fed controls the money supply?

Please realize that this supposed 7% “savings,” even if it existed, and even if it were not seized and spent by the gov’t, would vanish. It would not increase private wealth by one red cent.

Person January 11, 2008 at 10:14 am

“Tired of reading yours truly on evils of the FairTax?”

Yes, Laurence_Vance, I absolutely am. Because every word you write about the FairTax seems to have been formed under the method, “Decide opinion first, THEN hunt for justification.”

That’s why all of your arguments in your essays about the FairTax have been reducible to one of these:

1) FairTax proponents are bad people.
2) A law other than the FairTax is bad.
3) Taxes are bad.
4) Voters will change the tax code later.

Bruce Bartlet, in contrast, actually makes convincing arguments about how the change in tax incidence affects other economic variables like wages, after-tax wages, and gross margins. It’s actually a pretty reasonable critique.

But what bothers me is: none of that actually matters to you. You didn’t pick Bartlet’s essay because of its innovative arguments. You didn’t pick him because he better phrased general ideas you put forth (you didn’t argue anything he does). You picked him because he’s “on your side”. And when it comes to digging for justification for your pre-ordained conclusion, hey — any arrow is good enough for your quiver.

Curt Howland January 11, 2008 at 10:42 am

> Under the FairTax individuals won’t be audited

Yahoo! Vinny the fence is going to do a _booming_ business, night-time farmers markets, trade-in-kind barter. I love it! and with no audits, I’m free as a bird.

Oh, dear, the tax revenues are down? Well, golly gee, there is only one thing to do: Start auditing individuals.

The “fair tax” idiots do have one thing in common: a complete blindness to the fact that government is not benevolent. Hand government this new weapon, they will use it to _increase_ their power, not restrict it.

The “government won’t…” argument has been used so often, and always turns out to be a lie, why do these tax advocates expect us to fall for it again?

Mike January 11, 2008 at 1:22 pm

Just think of it everyone, with the FairTax(tm) even the governments would have to start paying taxes! Think of how much revenue that would create and save us. How can you not like this idea!?

baxter January 11, 2008 at 2:24 pm

“the taxpayer may choose to self-perform certain services rather than pay for them. This will stimulate do-it-yourself education, improve citizens’ self-reliance; indeed the FairTax represents the possibility of ushering in a new can-do, citizen psychology”

Wow. I couldn’t go on after reading this idiotic comment. It flies in the face of basic economics (Ricardo’s law of comparative advantage).

illumineer January 11, 2008 at 3:26 pm

I’m really tired of all the comments about everyone evading taxes if we adopted the Fair Tax or some verison of a consumption tax. Though the states’ sales tax isn’t exactly the same, if they couldn’t be collected, the states would fall apart. Give me a break about the collection process; besides, there is an incentive built in for everyone to do so (if you’ve read the bill like I have). The income tax is VERY regressive and extremely unfair and the FairTax is not. Period! That’s been proven over and over again. The only people who are complaining about adopting a consumption tax are those who are enjoying some unfair benefit from the current system. Anyone that says otherwise is, quite frankly, lying. Huckabee isn’t explaining the FairTax as well as he should be, but it must be adopted for this country to survive as an equal trade partner. And to those who say we need to fix the government’s wild spending habit first, how does the income tax stop this from happening now? The answer is it doesn’t. Adopting a new tax system isn’t going to stop deficit spending but given the incredible bump the new system would give to our economy, we won’t need to worry about the deficit much after the proceeds start rolling in. Why people are trying to make this so complicated is beyond me unless they have an ulterior motive (i.e. protecting their own butts at the expense of those who don’t have the wherewithall to get out of paying income taxes). It’s a shame we have to characterize this issue as a liberal vs. conservative or any other this vs. that constituency(sp?) instead of looking at the issue logically and with an open mind. Whatever happened to reasonable and well thought out discourse?

illumineer January 11, 2008 at 3:41 pm

I’ve read through Barlett’s analysis and there are so many errors and bad assumptions it’s not worth committing on more than it already has been, and better than I could. Suffice it to say that the current system is the only “evil” system out there and the FairTax is the way to rectify that “evil”. There is no perfect system, but tweaking the current one or replacing it with a VAT, itself already an abject failure as already shown by the depressed European economies using it, is ridiculous at this point. The current system is so unfair and open to abuse that I wonder why I even bother to pay it. Embarrassing that the supposed largest economy in the world (in name only I suspect) is so monstrously huge now that innovation in government is essentially dead due to twisted partisanship. Only the grass roots will save our country now from going the way of Rome.

PR January 11, 2008 at 4:22 pm

I bring this up on every FairTax thread and it never gets answered: Existing savings (Roth IRAs, savings accounts, etc.) that people have already paid income tax on will be taxed again when spent.

Can we stop insulting each other and deal with the real issue?

Good idea! Can you tell that to illumineer:

The only people who are complaining about adopting a consumption tax are those who are enjoying some unfair benefit from the current system. Anyone that says otherwise is, quite frankly, lying.

Anyway, I think the “real issue” is government spending not taxes. In that regard, FairTax is just a big step sideways not worth supporting or opposing. I prefer Ron Paul’s plan to reduce the size of government so we can replace the income tax with nothing.

If the country goes down the tubes, it will be because of the unsustainable welfare-warfare apparatus, not the revenue collection method.

P.M.Lawrence January 11, 2008 at 10:59 pm

PR writes “Existing savings (Roth IRAs, savings accounts, etc.) that people have already paid income tax on will be taxed again when spent”.

This issue did come up in relation to retirees when Australia adopted the GST (VAT) “consumption” tax a few years ago. Special transitional concessions were allowed for them, really only enough to buy off political trouble during the introduction from people just coming up to retirement or only just retired. Economically, the government “gave” back too much in the short term, and in the long term retirees after that didn’t/won’t get enough back, what with bracket creep on income tax and all.

It was this issue that led me to look into how to phase out government age pensions equitably (“social security”, in US jargon), winding back the entitlement age and winding forward a cut off age for not paying in to create an ever larger age window of not being in the system that would eventually grandfather the system itself out of existence. I wrote this up in an article that I got published in hard copy. It may offer food for thought for this issue too.

DS January 12, 2008 at 9:15 am

This sounds like the first step in a Washington compromise: in order to partially implement the “Fairtax” teh compormise solution is that we will get an additional sales tax ON TOP of the current Income Tax.

Unfortunately the Republicans gave up the idea of restraining government spending in the 1990′s (or did hey ever really believe in it at all?) and the Democrats gave it up in 19th century.

As somebody who used to be a Republican I’m tired of silly debates about the “best” way to steal $3 trillion dollars from the United States citizens. At least the Democrats are honest and consistent: they want to grow the size of government and spend more money, which means more taxes. So do th Republicans, they just aren’t as honest about it.

Isn’t there anybody in Washington asking why does the government need $3 trillion in the first place? Heck, why does it even need $1 trillion? Why does it need $1 billion?

Yancey Ward January 12, 2008 at 1:30 pm

Unless someone can convince me the income tax will actually disappear for all time, I will have to decline this offer.

Mike January 12, 2008 at 9:52 pm

Oh Yancey, what are you worried about? Of course we wouldn’t get stuck with a sales tax and an income tax. They’re going to get rid of the income tax and never touch it again, just trust them. What could they need that much money for anyway?

Chad January 13, 2008 at 3:17 am

Unless someone can convince me the income tax will actually disappear for all time, I will have to decline this offer.

I wholeheartedly agree. Unless there was an absolute and irrevocable cutover from one form of taxation to the other, we are sure to end up with both of them at the same time. I do not trust our current federal government to ever end a possible revenue stream with its ravenous appetite for spending.

I propose we end the American Empire and drastically cut federal spending to constitutional levels. Then, neither a federal income tax nor a federal sales tax would be needed, and everyone on both sides of the tax debate would be satisfied.

Vinny January 20, 2010 at 5:43 pm

There is no such thing as a Fair Tax. A tax by definition says someone is getting screwed. The FairTax screws the middle class and gives a rich a lingering kiss.
Sure you get to keep every penny you make. But you spend every penny you make.
You know who else gets to keep every penny he makes? A jamook like Bob Nardelli. Wonder how much he maid bankrupting Chrysler. Don’t be fooled, the more money you have the fairer this tax is.

Janita Ledebuhr December 24, 2010 at 2:22 am

I saw a tv show last week about this. It wasn’t as exciting as your writing.

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