Shlaes on the "Fair Tax"

Wednesday, December 12, 2007

I would have preferred an article that voiced opposition to all government confiscation of property (i.e., taxation as such), or at least took a more consistent stand against the welfare state. Nevertheless, Amity Shlaes raises some objections to the "Fair Tax" which pro-capitalists will find worth considering.

Says the author of The Forgotten Man: A New History of the Great Depression:

The FairTax does away with the income tax, corporate taxes, estate taxes and just about any other federal levy. It also kills off the Internal Revenue Service. Under the FairTax, Washington would apply a single national sales tax on purchases, whether a DVD player, or a new house. To take the edge off the pain for lower earners, the FairTax offers them a monthly rebate. [A welfare state element like this in an allegedly free-market reform is a red flag, as if proposing a new way to tax isn't a red flag in and of itself. --ed]

...

[T]his catalog of features doesn't mention one thing: the rate. That's because a national sales that captures the sort of revenue Washington needs requires a 30 percent rate. [She notes, as I have, that the 23% rate proponents cite is really a 30% rate. --ed]

...

A third and significant FairTax problem also has to do with Europe. Europeans introduced their own version of the Fairtax, the value-added tax, while they talked of curtailing the income tax. But when the time came, they retained that levy, generating the double-tax burden that corrupted Europe in the first place.

To avoid such a dual system the U.S. really has to pass that constitutional amendment, and the chances of that are, well, real low. What else? Even the FairTax needs enforcers, so while the IRS may go, another form of tax police will emerge.

...

The other source of the FairTax's appeal is more subtle. Tax increases are coming one way or another. Medicare Part D, as well as Social Security, will simply require those increases, not only because of statutes but also because Americans expect ever-greater entitlements.

Even a construct as sturdy as the FairTax can't withstand those expectations. Put the federal tax beast in the FairTax cage, and you'll find the states are the ones raising rates. Or that the bill for it is postponed and shifted to younger generations, as the Social Security burden has been.

So the choice is simple. The country can start thinking about reforming entitlements soon, starting with ratcheting down those expectations. Or it can cheer the Fairtax Bus through November and into law. [bold added]
As one who once fell for a different primary season tax gimmick, I agree with Shlaes. This idea is a gimmick. It is an attempt to evade the fundamental problems posed by the nature of the welfare state as a mechanism for the redistribution of wealth. (The problem of enforcement, which proponents soft-pedal, is just one way this problem rears its ugly head.)

I will say one thing. While it is now highly unlikely we could repeal the 16th Amendment, it is precisely the kind of cultural and political climate in which such would become inevitable that we must work for if we are to ever see a return of low taxes (See PS.), self-reliance, and economic freedom to America. This is a daunting task, but it will never be accomplished by the evasive quick fixes of the "Fair Tax" brigades or by the resignation of nominally pro-free market economists who discount the need to intellectually defend capitalism.

So, sure, we can't fix the Constitution or the tax code, or rid ourselves of the welfare state.

Yet.

-- CAV

PS: On re-reading this, I realized that I slipped here. Just to be clear, any return to low taxes worth fighting for will be on the way to no taxation. A much smaller government, limited to its proper functions, can and should be funded voluntarily.

Updates

12-13-07
: Added a PS.

10 comments:

Darren said...

That is a great point, Gus. Fair tax supporters have a lot of valid complaints about the IRS, our tax code, and the increasing size of government, but it's like they don't dare look for the root cause of all those problems.

It reminds me of about the time, years ago, when I started to realize that Objectivism was something to take seriously. I had an argument with my sister (who was an Objectivist before me) about financing government roads and schools. I took the "it's better for society if we're educated and have roads" argument, but I really had no answer for her when she brought the issue down to individual rights. I didn't concede that day, but as I thought more about her argument I realized she was right.

I didn't just stop there, though. I knew that if it was wrong for people to force others to pay for roads and education, what about for medical care? What about retirement and Social Security? What about sports stadiums? Once I was shown the root problem one or two issues, I found a principle that I could apply to all issues.

It's pretty powerful, but at the same time it's scary. One issue could be enough to require you to completely tear down and rebuild your beliefs. This is just a guess, but sometimes I wonder if that's the reason why a lot of people seem to refuse to think *deeper* about what they believe. If Fair Tax supporters really thought enough about their valid complaints about our tax system to realize that 1.) the use of force never works, and 2.) the Fair Tax is just as bad as our current system when it comes to forcing individuals to comply, wouldn't they have to admit that the Fair Tax is not the answer? And wouldn't they have to change their minds about many other issues?

It's much easier to slap a Fair Tax bumper sticker on your car.

Gus Van Horn said...

"I wonder if that's the reason why a lot of people seem to refuse to think *deeper* about what they believe. If Fair Tax supporters really thought enough about their valid complaints about our tax system to realize that 1.) the use of force never works, and 2.) the Fair Tax is just as bad as our current system when it comes to forcing individuals to comply, wouldn't they have to admit that the Fair Tax is not the answer?"

Well put. Plus, many of them probably have a pet federal entitlement or two they want to blank out on at the expense of seeing issues like this much more clearly.

The "Fair Tax" is no step in the right direction. It is like a band-aid on a cancerous lesion: The lesion needs to be observed by someone who knows what he's looking at, and removed before it worsens -- not hidden from view for the convenience of those who don't want to look more closely.

Ian said...

Censorship of ideas on this blog, I see. Why wasn't my last submittal posted?

Gus Van Horn said...

Ian,

Your last TWO comments -- I remember you from the last two times I mentioned the "Fair" Tax -- have not been posted because this blog is my private property, and not a billboard for the Fair Tax campaign or, far worse, Mike Huckabee.

Every time you have posted, Mr. Repley, I noticed that what you wrote only accidentally, sometimes pertained to anything in my posts, and seemed more like a mass mailing than an attempt to engage in an actual give-and-take about the issue at hand. I have had people talk past me before, but never sound like mail from my congressman at the same time.

So I searched the blogosphere for a phrase from one of your comments and found exactly the same one posted to another blog that mentioned the "Fair" Tax.

I post comments from people who disagree with me all the time, but they are actually engaging me in conversation, and not simply spamming my blog with an political ad that has a higher word count than the post itself.

If you wish to ramble on endlessly about the "Fair" Tax, start your own blog. Your advertisements, and your marching orders thinly disguised as insults are not welcome here.

Thank you for giving me the opportunity to explain myself.

Gus

Brad Harper said...

The ‘Fair Tax’ is no step in the right direction. It is like a band-aid on a cancerous lesion:

Sure, this system would still sacrifice individual property and productivity for the sake of a collective. Yes, it would still exist as a system of force, funding a federal budget that's 80-90% illegitimate. It would still be immoral, and it is indeed a band-aid.

But, it would likely demolish perhaps the most intrusive and out-of-scope instrument of destruction and force at GovCo's disposal. To ever arrive at the moral, just system that you and I both envision, a major philosophical and structural revolution would have to occur. This movement could be the beginning tug in an effort to yank the rug from under the table… which I think is what really will have to happen to facilitate change.

I do think this would be a step in the right direction for four reasons.

One, many businesses would be relieved of the accounting and administrative burden of our current withholding system, enabling them to focus more time and energy on being innovative and productive. The effects of this relief on small businesses alone could be enormous.

The lesion needs to be observed by someone who knows what he's looking at, and removed before it worsens -- not hidden from view for the convenience of those who don't want to look more closely.

Second, taxation on a consumption basis would highlight, not hide the amount of wealth being forced from individuals. Withholdings facilitate an inconspicuous way to sweep the amount confiscated under the rug. If every consumer has to face the reality of where a large portion of their money goes on a daily basis instead of once a year, I do think more people will start to ask questions.

Third, we the victims would have a greater ability not to sanction our destroyer. In our current system we have very little choice but to sanction it. We have to work to survive and within our current laws then taxes must be "withheld." Outside of risking the wrath of an IRS audit, there's very little avenue for escape. We either have to work, and pay what we’re told; or not work, and perish.

A consumption tax returns power back to individuals… albeit minimal. I have to work to survive, but I don't have to consume at my current rate to exist. My family could live on much less than we presently do. Under the FairTax we could consume less and still produce at our current rate. We could easily cut our monthly burn rate by 60%. That’s 60% more control (less taxation) than we have now without dropping our productivity at all. Currently, the only way you can pay less into the system, other than complicated legal wrangling, is to produce less. The FairTax would dissolve this dichotomy. One could consume less and maintain one’s productivity. Yes, the economy would inevitably suffer from the reduction in consumption, but the beast and its moochers would starve before the productive. Although it wouldn't go down without a fight, this empowerment could serve as a means to starve the beast.

Finally, although it’s definitely not “fair,” as implied by its title, it would at least make it a possibility to spread the tax burden more evenly (again, without reducing production). Currently, the tax burden is grossly skewed towards the top 5% of income earners. There would still be sloth’s who pay nothing at all, but the big chunk wouldn’t necessarily fall only on the shoulders of the most productive as it does now.

I think this is one case where a movement whose philosophical roots are either not well articulated, inconsistent or even non-existent could serve as a means to a larger end - one with legitimate moral tenants. In other words, I think this could lead us to the same desirable goal… just with less objectively pure premises. It wouldn't be the complete 180 that we should take, but it would be a very prominent shift towards that end.

Cold Steel said...

It is common for FairTax opponents to try to frighten Americans with the prospect of getting both an income tax and a sales tax.

If the FairTax is ever enacted it will be due to massive grassroots and political support. Getting rid of or changing the 16th amendment is not such a big stretch in that situation.

The worst-case scenario is that the 16th isn't changed, and politicians eventually want both a sales tax and an income tax. If so, you need to keep in mind that nothing prevents them from introducing both a sales tax and an income tax now. It is no more likely to happen after the FairTax has slain the IRS and gotten people used to not paying income taxes.

Gus Van Horn said...

Brad,

I understand the appeal of some of your arguments, but as I address your points in turn, I hope you will see why I still do not think that the "Fair Tax" is a good idea.

I. "But, it would likely demolish perhaps the most intrusive and out-of-scope instrument of destruction and force at GovCo's disposal."

Not only will this not do what you wish, but you are forgetting that we, the people, ARE "GovCo". Until public opinion once again scorns the welfare state, measures to limit its scope will fail by popular demand.

But the "Fair Tax" won't even be a step in the right direction. Read on.

II, "One, many businesses would be relieved of the accounting and administrative burden of our current withholding system, enabling them to focus more time and energy on being innovative and productive."

This is true, but only for withholding of FEDERAL income taxes, and ONLY IF the federal income tax is repealed. (Texas hasn't an income tax, but many states do, and presumably require withholding.)

Not only do I agree with Shlaes that it is wishful thinking to assume that the federal income tax will go away, but because of the rebate provision of the "Fair Tax", some method of ensuring that people do not lie about their incomes will still be needed. This means: new paperwork.

And see (III) below.

III. "Second, taxation on a consumption basis would highlight, not hide the amount of wealth being forced from individuals. Withholdings facilitate an inconspicuous way to sweep the amount confiscated under the rug. If every consumer has to face the reality of where a large portion of their money goes on a daily basis instead of once a year, I do think more people will start to ask questions."

Why not simply change the already-exisiting income tax to eliminate withholding, making everyone pay their taxes? This would accomplish the same thing without adding a new federal tax to the books.

IV. "A consumption tax returns power back to individuals… albeit minimal. I have to work to survive, but I don't have to consume at my current rate to exist."

The problem is not sticking it to the man, but you ability to survive and prosper, which the income tax AND the "Fair Tax" both threaten by making it harder for you to trade with other productive individuals.

So you can keep working your behind off and piling up money. So what? If you can't spend your money, it won't do you any good. So Uncle Sam gets less of it. Big deal.

But that's not all. Since nobody has bothered to cut back the welfare state, the government will look for new sources of revenue. Aside from raising or reinstituting the income tax or increasing the "Fair tax", one such source that the Fair Tax does not touch is the printing press.

Via inflation, the government will finance the welfare state by expanding the money supply. Dollars, being plentiful, will suffer the same fate as any overproduced commodity: They will fall in value.

Your huge pot of gold will, at the end of the day, get stolen anyway.

The "Fair Tax" thus not only fails to "stick it to the man" or protect your ability to trade your efforts through money with others -- you will still lose your hard-earned money even if you do nothing but stuff it in a matress.

V. "[I]t would at least make it a possibility to spread the tax burden more evenly "

Perhaps. Until government shortfalls and a few populist politicians, who know that (a) public opinion still favors the welfare state and (b) there are more poor voters than rich voters, re-skew it.

The welfare state is a monster that must be slain by an all-out ideological war on the altruist morality that makes it possible. Half-measures like the "Fair Tax" will distract from the task at hand and at the end of the day do nothing to protect the fruits of our labor.

Hope that helps.

Gus

Gus Van Horn said...

Cold Steel,

Why not have a massive grassroots effort against the welfare state.

A smaller government, needing less money, would tax less.

And see my reply to Mr. Harper.

Gus

Brad Harper said...

Hope that helps.

It does -- I do see the futility of the whole affair, but I guess there's still some appeal in the thought of rocking the boat and the enjoyment of watching the power lusters (congress & k-street) scurry in an effort to wrangle the new system.

As long as people maintain altruistic motives and have no objection to forcefully taking from person A to give to person B, nothing will make much of a difference.

I appreciate your thoughts.

Gus Van Horn said...

Brad,

We would all like to see the power-lusters squirm.

But we wouldn't even get that. They'd come up with ways to get around the obstacles (if any) this throws in their way so fast your head would spin.

Gotta go for the jugular.

Best,

Gus