The Oxymoronic "Fair Tax"

Sunday, August 26, 2007

Back in 1996, I supported the candidacy of Steve Forbes, which centered around simplifying the income tax through a "flat tax". My rationale at the time was based partly on the notion that this simplification of the tax code would at least reduce the intrusiveness of the IRS and partly on the naive assumption that this would represent a first step by the Republicans towards reducing spending as well as taxes.

A decade later, I have been disabused of the notion that the Republicans really care about reducing the size of the welfare state. Nobody is talking about a flat tax anymore, but this might be due to the fact that, politicians being what they are, the bloom came off that rose when they realized that the idea was not popular enough to win an election. But at the same time, nobody is talking about spending cuts anymore, either.

The political debate has, thanks to the adoption of the welfare state by the Republicans, shifted away from rolling back the welfare state as have noted before. And yet, as I also noted, the Republicans continue to enjoy an undeserved reputation as defenders of economic freedom.

Furthermore, it remains easy to hate the IRS, so despite the electoral non-viability of the flat tax, some Republicans who want to run against the IRS have come up with a new gimmick: the "fair tax". Just the name should clue you in that the Republicans have no opposition on principle to taxation: What's "fair" about the government confiscating your money?

But this Wall Street Journal article shows that it's even worse than that. The idea is being sold with a mountain of lies, damn lies, and statistics. Worse still, it incorporates an element of wealth redistribution that would make any Democrat proud:

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

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.) ...

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.


Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income. [bold added]
Not to defend income redistribution in any way, but wouldn't Americans still have to file reports subject to audit to make sure people were not lying about their income in order to get these rebate checks? This wouldn't even really get rid of the IRS as far as I can tell.

Oh, and there's more:
A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion [e.g., non-collection --ed] were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).
As I noted, the public debate ceased being about reducing spending long ago: Just look at the emphasis of this article -- in a presumably pro-business publication -- on how impractical Linder and Chambliss's proposal is as federal income replacement! Granted, that is the focus, but the remarkable fact remains that it would take a 57% sales tax to replace the federal income tax. I can't believe something wasn't said about the need to cut spending!

The obscene amount of wealth our government seizes to finance the welfare state is, thanks to this debate, being made impossible not to notice. It will, however, be up to those of us who understand the nature of capitalism and who value our individual rights to interject that this is inexcusable and that Americans can and should change this by demanding, at least for a start, a reduction in size of the welfare state.

This is a chance -- no thanks to the "Fair tax' Republicans -- to bring the public debate on the welfare state back to where it belongs: on how to eliminate it.

-- CAV


Inspector said...

I had someone post a bit on this on the 'Paradise forums. I didn't like it - I knew I smelled a rat.

Thanks for this; I'll link up to you.

Ian said...

Can you say, "Hit piece"?

Bruce Bartlett (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,, 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 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 to 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.

Gus Van Horn said...

I'll grant that bringing up the Church of Scientology is a cheap shot. Heck. Let's even suppose for the moment that your lengthy attempt to offer a point-by-point rebuttal to Bartlett answers him.

So what? You haven't answered my fundamental objection to the premise that any tax can be "fair".

Furthermore, the web site you point to focuses on how this measure would replace the current income tax system, and makes much of its income-redistribution element ("prebate"). It also does not raise any fundamental objection to the welfare state.

The best that could be said for a national sales tax (or, incidentally, for a flat tax) is that by making everybody aware of the enormous drag on the economy that the welfare state has become -- by making them pay the taxes -- we might finally see people willing to talk seriously about getting rid of welfare programs.

This benefit is removed by the progressivity of the proposed tax, which also starts a new welfare program in the form of its "pre-bates" -- except that now the government is sending checks to much of the middle class, too.

As for your rebuttal, I haven't the time to answer it point for point, but you're way out to lunch on at least one point: Given that one need not actually run a business to earn cash income, I don't buy your idea that only people who run (what the government now regards as) businesses would have to file income reports. I could see the government simply deciding that the definition of "business" needs changing -- e.g., to include waiters perhaps -- in order to close this "loophole". Too bad that "closing loopholes" is an explicit goal of your site.

So workers get to "keep their entire paycheck", What difference does that make if they can avoid taxes only by never buying anything?

For all your verbiage and the volumes of research on that site, one question remains completely unanswered and buried in the snow: "By what right does the government take my money from me by force?"

Inspector said...

Here you go, Gus - as promised

Gus Van Horn said...

Your commenter has a point: The WSJ article does have some flaws, among them being that nthe "prebate" is based on family size according to some advocates.

HOWEVER, my central objection -- that this is not a move away from the welfare state -- stands.

David said...

Gus, your main complaint is really a non-sequitor. It is as if you said, "the Fair Tax does not address my fundamental issue of the fact that my pet dog is unwashed."

The FairTax was not designed to solve the problem of either excessive taxation per se, nor of the welfare state. These are, of course, serious problems - and most of the supporters of the FairTax would agree that they must be addressed. I would personally argue that many other situations need to be addressed too, and the FairTax does not address them. Porkbarrel spending, for example, or the weakness of the dollar.

FairTax was designed to address the hideous inequities and problems created by our means of collecting taxes. It does not claim to be either more or less. It is designed to cease our punishment of productivity, and end various hidden taxes. It is "Fair" not because it reduces government - which is a seperate debate - but because it affects people equally, killing the idea of tax loopholes and favors.

I see this line of reasoning a lot, and I find it quite mysterious; as if people were arguing "we should not end corporate welfare, such as farming subsidies, because it doing so does not cure traffic congestion". The only rational argument can be made about whether the fairtax would be better or worse than income, payroll, corporate, estate, gift, and other such tax collection schemes. It has nothing to do with the weather, the cleanliness of your dog, or the government's hard spending ways.

Oh, and as to your latter point about generating income, and reporting it - the FT does not tax income, so it appears to be moot.

As for taking money by force: the FT is clearly more of a "voluntary" tax than the income tax is. At least, with the FT, you can always buy after-sale items in order to not pay it to the government (though of course, the FT will tend to bid up after-sales prices, so you will instead be paying a bit extra to the seller).

Gus Van Horn said...

If a building is on fire, should you evacuate its occupants and put it out? Or should you have everyone move to the top floor so that all occupants are burned equally?

Whether people are being burned equally or not is *not* a separate problem from the fact that the building is on fire. It is caused by the fact that the building is on fire.

Our income tax as it is today, takes income from large numbers of people before they see it, and it penalizes the wealthy. Both of these things are based on the ideas that (1) it is the job of one citizen to finance the medical care/groceries/transportation of others. and (2) the government should force us to do this.

Once we get the body politic clear that both of those ideas are false and deadly, the problems of taxation and the existence of the welfare state will slowly begin to disappear on their own, and the whole question of how "best" to take money from ordinary citizens by force -- I mean, collect taxes -- will go away with it.

I oppose taxation as such. All monies collected by the government should be paid voluntarily. (And despite your assertions to the contrary, this is not at all the case in any way with the "Fair" Tax. Furthermore, your notion that people would be able to dodge this tax "after sales" is wishful thinking. Half of the fair-taxers are against "loopholes" and will close this one so fast your head will spin.)

I have bigger fish to fry than to quibble about how to collect taxes when we should be fighting for no taxes at all. The whole fair tax crusade is a waste of energy, a distraction from real problems, and potentially will only increase the size of government.