Fair Tax Crankery
Kevin Drum says the idea of a national sales tax replacing the income tax is pure “crankery” and cites a Bruce Bartlett column in yesterday’s WSJ as proof.
Despite my strong intuitive sense that a consumption based tax is more fair and efficient than one based on income, I’m prepared to admit that I don’t understand the economics and logistics of implementation enough to truly assess the costs and benefits. It may well be, for example, that a too-high sales tax would encourage a huge black market. And it may well be that state income tax filing requirements, the need to rebate money or otherwise exempt the very poor, and other hurdles will offset many of the supposed efficiency advantages.
Bartlet’s argument, however, is simply nonsensical.
His subheadline asks the rhetorical question, “Does adding 30% to the price of every house sold sound like a good idea to you?” He then goes on to argue that the specific FairTax proposal advocated by Mike Huckabee would require a 30 percent surcharge on everything to be revenue neutral.
That sounds horrible, right?
But . . . um . . . it’s revenue neutral. So, we’re already paying the equivalent of a 30 percent surcharge on everything? The only difference would be that, rather than having the amount of we pay tax hidden by collecting in multiple ways and then having an arcane filing system nobody without a CPA actually understands is that it would be transparent. Why’s that a bad thing?
But there’s more! Because FairTax would make government pay taxes on the things it buys, too, government spending would increase by 30 percent!
Well . . . no. That’s just a change in bookkeeping.
How so? The government would pay 30 percent in taxes on all the things it buys, right? Yup. To whom is it paying? Why, itself. That means the money really isn’t changing hands. It’s like a small business owner paying himself a salary.
Okay, how about this, then: “It’s also worth remembering that state sales taxes now average 6%, which means that the total tax rate will be 36% on retail sales.”
Right . . . . But, we’re already paying an average 6 percent state sales tax? And the equivalent of 30 percent to the federal government in this revenue neutral scheme? So, the net difference between this unconscionable plan and the current one is . . . zero?
Okay, but wait. In order to take care of the poor, we’d have to rebate some of their money. This would require “incredible complexity and intrusiveness of tracking every American’s monthly income–and creating a de facto national welfare program.”
Gosh, a complex and intrusive system whereby the federal government tracked every American’s income? There’s no way in hell we’d put up with that in the Land of the Free and Home of the Brave! We’d probably give it some Big Brotherish name like Internal Revenue Service to tip us off to how sinister it was.
But it’s a de facto welfare program! Nobody would want that in a country of rugged individualists! Unless you consider a progressive system of income taxation wherein the top quintile pays 26.8 percent of their income and the bottom quintile pays only 5.4 percent a de facto welfare program, in case that’s what we have now.
Okay, here’s one for you: FairTax “was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service.”
Gee, Scientologists are whackos. Anything they support must be bad! Then again, Hitler was responsible for the Volkswagon and the Autobahn. And, for that matter, Tom Cruise is a Scientologist and he’s made some very entertaining movies. So maybe there’s a reason they call ad hominem an argumentative fallacy?
Of course, there are all manner of flattened tax systems aside from the Scientology-Huckabee one. For example, a “flat-rate tax would add significantly to economic growth” and would be “the difference between GDP doubling in 33 years instead of 36 years.” Just ask Bruce Bartlett.
Well, a high national sales tax would discourage consumption. This may indeed be better than an income tax, which discourages work (at the margins). Of course, a carbon/pollution tax would be better than both because it discourages pollution.
Let’s start with a revenue neutral increase in the federal gas tax offset by payroll tax decreases, before we scrap the entire taxation system just because the Overlord Xenu wants to.
The point about the income monitoring is that one of the purported benefits of the FairTax is that it does away with the expensive bureaucracy of the IRS, including all that, uh, income monitoring.
As for progressive taxation – your figures are misleading – they don’t seem to include the payroll tax, which is for all intents and purposes just another part of the income tax, except that it’s flat up to a certain income and then disappears (nobody’s social security ever gets cut off once they’ve taken out more than they put in, so don’t tell me it’s just ‘your money’).
But it’s just one variant of the system proposed by a minor candidate. It would likely make more sense to exempt certain products (foodstuffs and medicine being the most commonly cited) from taxation than to have a negative income tax on top of the sales tax.
It’s a dedicated funding mechanism for a welfare program for old folks, though, not part of the general scheme, under the way we currently advertise it.
I was just judging the article on its own merits – IF you take their contention that this tax would involve a negative income tax as a given, then it’s a problem because you wouldn’t in fact get to eliminate the IRS or their collection/monitoring system. Frankly, a per-capita rebate makes more sense, and is part of some of these schemes, but brings along its own potential for abuse.
It’s advertising only. “taxation theater” if you will. We pay social security recipients today out of today’s tax dollars; we do not set aside one lousy dollar for today’s workers; and we do not ever stop or even reduce payouts to retirees who have gone way past the end of their contributions. The only fair way to view the payroll tax is as part of the federal income tax – at which point the supposed super-progressivity goes away, which is, of course, why dishonest conservatives don’t do it.
Is there going to be a 30 percent tax on the sale of, say marketable securities in this system?
First blush, 30% does sound awfully high. But if you look at VAT taxes around the world (a close kin to sales tax), you find up to 25% tax and an average that looks to be in the neighborhood of about 20%. On top of that, you have the 25% income tax paired with 50%+ income taxes. So while we can discuss the merit, it would seem that it at least passes the real world test of being done somewhere.
One thing to note is government outlays are less than 20% of GDP. So a combination of a flat tax and sales tax should be doable in the 20% range.
Just found this,
In 2006,
revenue from corporate income tax is 1.98% of GDP
individual income tax is 7.57% of GDP
Social security revenue is 6.60% of GDP
excise tax is 0.60% of GDP
Other taxes is 0.71% of GDP
for a grand total of 17.45% of GDP
Another question, am I going to get a refund of the income taxes I paid on my savings that I didn’t get to put in an IRA or 401k? If not, I’m going to have paid both an income tax and VAT on that income.
On the flat tax: it isn’t the marginal tax rate that counts, it’s how you calculate income. There is simply no way to get rid of all of the deductions (too many battles with too many interest groups). And there’s no way to keep a flat tax flat. This is politically unrealistic.
On a national sales tax: there’s probably one in your future, in all likelihood in addition to the income tax. In 2018 or 2019 Social Security payments will start coming out of general revenues.
Boortz himself takes Bartlett to the woodshed.
Personally, I don’t know if I’m for the plan, or not. But I figure anything that upsets the far left that much, deserves some serious consideration.
Ah, logic. I can’t wait for Bithead to get behind the Stabbing Toddlers in the Eyes with Scissors Act, since that would upset the leftards.
How was that any less logical than vehemently opposing something simply because the Bush administration is for it, as we have seen from democrats, these last eight years?
Fair tax, Flat tax, don’t matter neither will happen. If the Income tax is eliminated, alot of tax lawyers, CPAs and financial managers would have to find other(more honest)work. Can’t have that. So all of this is a thoretical discussion of little use.
Not to say we wouldn’t ever see a consumption and income tax.
Cheers,
Bill
“Whatever you say, I’m against it.”- Groucho Marx
Can you say, “Hit piece,” Mr. Bartlett? According to the his WSJ article:
Bruce Bartlett (hereinafter referred to as BB – with apologies to a true great, BB King): “It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service”
Me: This seems like a scientific approach to the review of FairTax; Scientologists are kooks, the FairTax must be a kooky idea.
BB: “In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.)”
Me: Hmmm, I wonder what income tax rates begin to look like, if calculated, “externally” – as a percentage of what’s left of taxpayers’ income? Care to tell us THAT, BB?
BB: “This is only the beginning of the deceptions in the FairTax.”
Me: Oh, like their website, FairTax.org, hasn’t already thoroughly debunked most of these “straw men” that have been floated (all, that is, except this newest Scientology angle – and I doubt that they’ll spend much time on that one – preposterous).
BB: “the federal government would have to pay taxes to itself”
Me: The idea here is to prevent government from competing with the private sector. But why even mention this, when later you say, “but its tax collection will also be … higher.”
BB: “The FairTax rate, however, is not high enough to finance the higher spending it imposes.”
Me: Didn’t do your research: “…The Beacon Hill Institute at Suffolk University and Laurence Kotlikoff, Professor of Economics at Boston University, have teamed up to provide a sound methodology for estimating the FairTax base and computing the FairTax rate. Their paper demonstrates that the 23 percent rate specified by the Fair Tax Act (HR 25) is eminently feasible and suggests what led Gale and the President’s Advisory Panel on Federal Tax Reform6 to reach the opposite — and incorrect — conclusion. ( See Paper .)” See also: Tax Panel rebuttal + Wm Gale rebuttal
BB: (Regarding the blanket 30% increase attributed in multiple places in your article, “tanks,” “newly-constructed homes,” the added amount that would be paid by “state and local governments.”)
Me: Nowhere do you point out the price efficiencies that would be gained under FairTax. Kotlikoff and associates found that these ranged from 20% – 30%, and averaged them to 22% across the economy. Thus, we’re ALREADY PAYING an embedded 22% in our retail prices. If you believe in market competition (do you?), then you must allow for the elimination of these embedded taxes – which means relative price stability (due to lower costs of doing business – for every business entity contributing at every stage of production). Thus, representing an add-on of 30% is blatant demogoguery.
BB: “Aside from the incredible complexity and intrusiveness of tracking every American’s monthly income — and creating a de facto national welfare program — the FairTax does not include the cost of this rebate in the tax rate.”
Me: The only purpose for tracking income, is for social security payouts. That “incredible complexity and intrusiveness of tracing every American’s … income” – last time I checked – is what the current income tax system, and theIRS, are all about. FairTax bases “prebates” on family size. Prebates are sent to ALL American families to untax the necessities, thus eliminating wasteful bureaucracy,and corruption-producing tax code rules and regulations.
BB: “the FairTax does not include the cost of this rebate in the tax rate.”
Me: Somebody told ya wrong – like Prego spaghetti sauce, “It’s in deah.” That extra 5% you then introduce is the amount that Kotlikoff DEDUCTS from the 23% to derive the rate sans prebate.
BB: “Rejecting all the tricks of FairTax supporters…”
Me: Hey, you calling me a trickster?
BB: “…professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.”
Me: Then, why hasn’t William Gale, and the president’s Tax Panel, delivered their economic methodology (substantiating higher quoted tax rates) to Kotlikoff or FairTax.org? Hmmm?
BB: “Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits.”
Me: Huh? What’s to deceive? Individuals do not file income tax returns. Businesses don’t either; businesses will file basically an expanded state sales tax return. Individuals would keep financial records, but not for the purposes of filing a return. And working families would not be subject to audit unless they ran a business.
BB: “the idea of making April 15 just another day, this seems to be a major selling point for their proposal”
Me: Duh. Like that’s bad to get out from under the thumb of an intrusive government that has been proven arbitrary in the manner in which it administers the current tax code?
BB: “In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.”
Me: Sorry, BB. Your commentary is too bad to be credible. Next time, at least familiarize yourself with the research and rebuttals to the demogoguery that is sure to assail it.
Readers should expect these assaults on FairTax to increase as this eminently workable – in fact, URGENTLY REQUIRED – tax plan gains adherents.
It’s not that we’re opposed to everything the Bush administration does, we’re just opposed to bad ideas. The fact that those are the only ideas the Bush administration has isn’t out fault.
(It’s a joke, don’t try to analyze it).
Any idea that one could have only a tax applied on consumption is nonsense for me: indeed, people who have already money would only have to avoid to consume so as to accumulate more and more money, since he would no longer pay any tax except the minimum on food and energy.
Please, Roger. The “people who already have money” are going to stop spending it because of a sales tax? Money is of no use until it’s spent, at which point a consumption tax will apply.
I’ve read this article as well as Bartlett’s and all the comments but didn’t see one where a comment raised the issue of competition in the “Global Marketplace”.
Taxing wages / income embeds the tax into the price of the goods being placed for sale. So any business in the United States enters the global market with a handicap. If we do not correct this the only jobs available in this country will be those which must be done locally and cannot be moved to a better (cheaper) locale. If you’re a plumber or electrician or barber you don’t have to worry. Everyone else should look out.
How so? Imported goods would be subject to the identical tax. Exported goods would be subject to whatever tax the importing country imposes on them.
GREAT Rebuttal article! For someone who doesn’t know a whole lot about the Fair Tax you were right on target. Looking at the responses to your rebuttal, I can’t understand why people don’t comprehend the “Revenue Neutral” concept. The first response to you was something about a high sales tax discouraging consumption….ummm What? To repeat a point you made in your article…the 30% tax is already built into CURRENT pricing, the Fair Tax removes those taxes from the price….and places that 30% back into the product in the form of a Sales Tax….the price paid STAYS THE SAME. Second – Everything is already in place to collect the tax, sure it may need some tweaking and beefing up a bit to handle the volume…but it’s already there. Third – There is NO reporting or tracking of income involved in the Fair Tax. The only information needed from each household will be the total number within the household. The Pre-bate is based on the Government Established “Poverty Level”. The bottom line is that there is currently, NO, Simpler, Fairer, dollar for dollar replacement of the Income Tax currently proposed, by ANYONE. Also, I’m not aware of any Fair Tax tie to Scientology, but it couldn’t be any worse than the assertions by some that Federal Reserve is actually a conglomeration of Private bankers, or that the I.R.S. and it’s rules are not actually backed up by True U.S. Law, but by misleading court decision’s made by confused judges.
Ugh has it right above – how is it fair that the $1000 I have saved in my bank account over a period of some months (and have been taxed on once already) now gets taxed at a 30% rate when I decide to spend it?
So, when the Fair Tax is passed use your $1000 to go buy something USED.. which will not be taxed. Anything saved after the Fair Tax is passed won’t be taxed until you spend. Besides, how is it Fair under the current system that I’m taxed MULTIPLE times for the same dollar (which I thought was un-constitutional)? It blows my mind that people would be upset about this, One Time, possible draw back when under the current system people can work hard all of their life, being taxed as they earn their money (multiple times), build up some sort of estate or assets to pass on to their children, just to have half of it taken away (through another tax) when they die. And your going to complain about a 1 time drawback during a change over period to a MUCH better system. Where’s the perspective? The current system is unfair, inadequate, and broken and more Tweaking (as people like Romney and Guiliani suggest) will only make matters worse over time. One of the reasons we’re where we are is all of the loopholes that the Politicos pine for in the current tax code, these benefit some sometimes and hurt others other times, and in the end hurt the United States as a whole ALL of the time.
Dennis – how are you taxed multiple times on the same dollar? What does the estate tax have to do with anything? And I’ll reiterate my first question above, will the sale of, for example, publicly traded stock in a corporation be subject to the sales tax?
Ugh and Kalthalior, I went to FairTax.org FAQs 16 and 29:
16 Q. How does the Fairtax help seniors who have paid taxes on their retirement savings or invested in Roth IRAs?
A. Simply put, the FairTax is a revenue-neutral proposal, raising no more money than does the current system. The FairTax only changes where the money is raised, not the amount.
Additionally, some erroneously believe that people who have invested in Roth IRAs will never pay taxes on this money again. They may not know it, but they are paying corporate income taxes, employer payroll taxes, plus the associated compliance costs that are hidden in the price of every retail purchase they make. Under the FairTax, these hidden taxes are driven out of retail prices. And note, they elect to pay these taxes through their lifestyle choices.
Furthermore, used goods are not taxed because they have already been taxed once when they were new. Therefore senior citizens, like all Americans, do not lose purchasing power, but gain it instead. Moreover, the FairTax preserves the purchasing power of Social Security benefits and seniors receive a monthly rebate so they don’t pay taxes on the purchase of necessities. Tax-deferred investments get a one-time windfall. Savings invested in any long-term, income-generating asset such as a stock, real estate, or a long-term bond that can’t be called, increase substantially in value. Finally, complex estate planning is an artifact of an earlier age.
29 Q. What happens to the stock market, mutual funds, and retirement funds?
A. Investors prosper greatly under this plan, since corporations face lower operating costs and individuals have more money to save and invest. The reform significantly enhances the retirement savings and/or retirement spending power of most Americans. The purchase of stocks is considered a purchase for investment purposes and not personal consumption so they are purchased tax free. The service fees charged by the broker, however, are personal consumption and therefore subject to tax.
Thanks Ian – Ugh, My Dollar is taxed by Federal Tax 23%, Soc.Sec./Medicare Tax & matching employer percentage 15%. Then that same dollar must pay the imbedded taxes that are built into to products I purchase to build my estate 23%, which, because I’ve worked hard to save and build to be able to pass on to my children ….that same dollar can be taxed when I die at 20% (average percent rate).
The toughest part about the Fair Tax is wrapping one’s head around the complete paradigm shift that it entails. It is not a 30% exclusive tax that is plopped onto goods and services at the retail level. Think of it this way: 23 cents of every dollar spent at the retail level is sent to the Feds. It is inclusive. Remove all the embedded taxes along the way (approximately 22 – 23% of the final cost), replace it with the 23% tax at the register and you have a wash. The good or service costs very close to the same.
Oh, also, the Fair Tax has NOTHING to do with Scientology. Yes, the Scientologists have/had a front group called Citizens for an Alternativee Tax System that proposed a 17% national sales tax in addition to the payroll taxes an other federal levies. COMPLETELY different plan and group.
All of this misinformation is just demagoguery of the issue from people who haven’t taken the time to actually find out what the Fair Tax is.
M1EK;
When you buy bonds , do you consider it savings or spending?
It is unfortunate that the FairTax is so easily demagogued by people who likely have a vested interest in preserving the centralized power bestowed by the income tax. Envy and animosity are bad characteristics and the cornerstone of collectivist politics, sad! It is envy and animosity that are dividing this country.
Can one be free and dependent?
John Blix why is it that you must be so dis-honest just because you disagree with the Fair Tax. Your willing to lie and manipulate facts in an attempt to discourage people from giving the Fair Tax the consideration it deserves. Every line of your post is either a downright lie or absolutely mis-leading. Mr. Blix if you have legitimate facts to debate, let’s do that, you’ll be much more successful manipulating and twisting actual numbers, than to come up with such obvious and blatant mis-information and lies. You must have some SERIOUS ax to grind with those who might threaten your precious I.R.S., are you an Agent? or A D.C. Tax Lobbyist? I can refute..with FACT, everyword of your post, but it’s obvious that your not interested in facts, so I will not waste my time. Anyone who really wants to know the facts can simple spend an Hour or Two reading the Fair Tax book and will see that Mr. Blix has a problem…….he can’t back up anything he’s stated. http://www.fairtax.org to read the entire bill if you like, nothing to hide, no disceptions, unlike Mr. Blix post.
Sir, there is no disrespect intended. But there are no lies either. I encourage everyone to visit both fairtax and fairtaxfraud websites and make up their own minds.
Respectfully,
John Blixx
FTF Institute
Mr. Blixx
I have looked at the website you suggest and it took me about 10 seconds to realize that 95% of what was said on that site can be totally blown out of the water with FACT. I would very much welcome an honest debate on facts, and I absolutely guarantee that if you stick to the information on that website, I will utterly blow you and the Lies and Mis-information out of the water. It’s no wonder that most Fair Taxers would respond to some of the nonsense on that site with “Just Read the Book”, because most of the mis-information on that site is SO elementarily dishonest that it’s almost not worth the time to get any deeper than that with you. You REALLY need to do some HONEST Research.
I am a college educated, self-employed, military veteran, have several children, upper middle class, who has worked his way up from poverty, So there is NO WAY I would support anything that even came close to sounding like what you or the website you suggest spouts. I love my family and my country too much to support anything that had a hint of what you espouse. And not only has the Fair Tax been researched (by many highly esteemed and educated individuals) and been proven that it will work, but I HAVE also personally researched the concepts and figures enough to feel VERY confident in what the “Fair Taxers” have presented to the American public.
And just so you know, there are quite a few Democrats who DO support the Fair Tax. Even Mit Romney who hasn’t come out in full support yet, said today before a meeting here in my city, that he can see how the Fair Tax will HELP the poor, and will be a bit tougher on people “like me” (Very Wealthy)…and he’s right, therein lies the rub. If you REALLY understand the Fair Tax you will find out that one of the most attractive things about the plan is that it will take away alot of Influence from the Wealthy who lobby for Tax Loopholes, and power from the power hungry politicians that like to use the loopholes in their search to maintain power or acquire even greater power. Although this is a great aspect of the plan, it also make the Fair Tax a Target from people on Both sides of the political spectrum.
And one last thing you should know…. I personally, although I consider myself a conservative, would Gladly vote for an HONEST Democrat who would fully back the Fair Tax plan without changes, and there are Many just like me out here. There are so many good things for a Democrat to take from this plan, it makes no sense that more haven’t gotten on board. Although I think Senator Gravel is a little too far “out there” for me to use my vote on him, he supports the Fair Tax, and has some Outstanding ideas on how the Fair Tax would help some of the Liberal causes.
Sprinkled liberally throughout these comments is the word “liberal.” I’m baffled by that, and the unreasonably pervasive insistence that all Democrats are liberal, all liberals are Democrats, and all of the above are against the Fair Tax. Please read the article (see link) for the best definition of “liberal” I’ve seen yet. (Some of you may take exception to #6, but that’s fodder for another debate.) And, for the record, I belong to a group of more than 400 registered Florida Dems who are pro Fair Tax. We’re so tired of the labels – they’re pointless because they no longer accurately describe anything – so please stick to the issues without using them. From the many people I’ve spoken with, I believe there are equal numbers of Democrats and Republicans who support (or are opposed to) the Fair Tax. Let’s leave partisanship out of this – it just muddies things.
Susan,
I must be missing something? I looked through all of the posts and didn’t see the word Liberal used in any of the previous posts with the exception of my Last post (used it once) which was referring to some of Senator Gravel’s more “liberal causes”. I also recognized that their are MANY Democrats who support the Fair Tax. My quandry and question is why more Democrat Leaders do not publicly support the Fair Tax? I have talked to Many Democrat Fair Tax supporters and they are just as passionate about this plan as the Republican supporters are and I don’t attempt to paint them all with a wide brush. However, I will not back away from the statement that some / most of the Democratic Presidential Candidates support “Liberal Causes” in the modern political sense of the word. There is another, more appropriate, but far more divisive word for things like Government Provided Universal Healthcare, and that is Socialism (look up that definition in Webster’s Dictionary), but I wasn’t trying to be divisive, just point out the fact that some issues that most Democrat Presidential hopefuls support are too far left for me to vote for them if they were running against a Republican who is equally supportive of the Fair Tax.