The Fair Tax has its moment in the sun. Could there be more to come?

Those who say that the Fair Tax rate will have to be much higher than 30%/23% ... are all assuming that Congress will never levy the tax on things like medical services, food, houses, etc.

Are you sure about that? According to Bartlett, to get to the 30%/23% rate they count revenue from the government taxing itself on its own purchases, which is a rather transparent shell game. Also, as I understand it, the number makes no allowance for changes in behavior to say nothing of fraud. E.g. if new homes are taxed 30% and resold homes are not taxed then obviously there will be a lot less construction of new houses and more renovation of previously marginal old homes. If cars and other big ticket items are taxed at 30% why not take a trip to Canada and buy them there instead? And so on. On the fraud side, as I understand it, the way it is structured is a positive invitation to fraud compared to a value added taxes used elsewhere (e.g. Europe or Canada).

I would agree that there would be incentives to fraud and tax shifting. There already are in the current tax code, but they might be more dramatic under a national sales tax.

As for the government taxing itself, Larry Kotlikoff and a bunch of people from Suffolk University attempted to address this and other criticisms in a paper (pdf) in 2006. An excerpt (which I'll admit that, after several readings, I still don't fully understand):
The FairTax redistributes real purchasing power from state and local governments to their state and local income-tax taxpayers. It does so by reducing factor prices relative to consumer prices and, thereby, reducing the real value (measured at consumer prices) of state and local income tax payments, which are assessed on factor incomes (namely, factor supplies times factor prices). Gale (2005) and the Tax Panel (2005) recognized this loss in real state and local government revenues in claiming that these governments need to be compensated for having to pay the FairTax. But what they apparently missed is that this loss to these governments is exactly offset by a gain to their taxpayers. Were state and local governments to maintain their real income tax collections - the assumption made here - by increasing their tax rates appropriately, their taxpayers' real tax burdens would remain unchanged and there would be no need for the federal government to compensate state and local governments for having to pay the FairTax on their purchases. The second is that H.R. 25 does not preclude state and local governments from levying their sales taxes on the FairTax-inclusive price of consumer goods and services. This produces significantly more revenue compared to levying their sales taxes on producer prices.

I'd add that the progressive tax system used now also attempts to account for greater use of the commons by those who have greater resources.

A "Fair Tax" doesn't seem to do that.

Also, it would seem to me that a higher sales tax would tend to discourage purchases (even with a rebate for the poor-who'd still have to pay the tax). As our economy is driven by consumption, this could potentially crash it all. To me, this "Fair Tax" looks like a reframed supply-sider's wet dream.

Lindbeck also argues that with the payroll tax gone, low-income workers would stand a much better chance of saving up money and rising out of poverty.

Huh? According to Bartlett, the FairTax compared to the current income tax would increase the burden on the bottom four quintiles and decrease it on the top quintile (see Table 5). No surprise there. The game the FairTaxers play to pretend otherwise is to pretend that everyone spends 100% of their income. But that's hokum (see the BLS numbers in Table 3): people making $1 million a year spend a much smaller percentage than people making $10,000 a year.

As for the talk of G5's and Bentleys, that makes about as much sense as Huckabee's talk about a "magic wand" (shall we call it the FairyTax?). And I'm not sure in what alternative universe "consumption is wealth". Run up your credit card bills to make yourself richer? What's next, the Sun goes round the Earth?

Justin, thanks for the reply. I don't fully understand that quote either. Kotlikoff et al seem to be saying that prices will go down by the amount of the FairTax and so it will be a wash. I'd better watch out: apparently, my inflation-lined treasuries are going to have a roughly negative 30% return when Huckabee waves his magic wand.

As for my second comment (currently in moderation), looking at Bartlett's Table 5 again I'm confused. It appears not to take into account payroll taxes. On the other hand, it shows the FairTax raising exactly the same amount as the income tax whereas I thought it was supposed to replace both.

Federal employees pay the income tax today, is that a shell game?

The Fair Taxers mean to replace both income and payroll tax, so that Table 5 of Bartlett's, which compares the Fair Tax burden to the income tax burden, is a non sequitur. My impression is that the Fair Tax would reduce overall federal taxes on the bottom couple of quintiles and the top 5% or so, and increase them for everybody else (which doesn't strike me as the kind of thing that would be a winner at the ballot box, but what do I know). Bartlett does make the good point that a consumption tax would weigh heavily on the young, who are borrowing to buy houses, cars, etc. But he seems to mix some seemingly unfair criticisms in with his valid ones.

Sorry Crust. Our comments passed each other in the night. I'll see if I can get in touch with Bartlett and figure out that discrepancy.

F the fair tax and F Huckabee

I would agree that there would be incentives to fraud and tax shifting. There already are in the current tax code, but they might be more dramatic under a national sales tax.

Note that we are comparing current actual receipts with projected receipts under a changed tax regime. So while it's of course true that fraud and tax shifting already exist, that doesn't really address the issue that the FairTaxers are coming up with an artificially low rate by ignoring this. Also, these are I think likely to more dramatic under a FairTax as I argued above.

I think the fair tax has about as much chance of happening as stopping illegal immigration (pronounced "none").

As with the illegal invasion, the current tax system is supported fully by both parties and both the right and the left in the real Washington. It provides the perfect combination of obfuscation and trickery to provide the right with juicy esoteric corporate tax breaks and the left with a bottomless bureaucracy to rule.

And for both sides it creates a perfect power base from which they can control and manipulate American citizens instead of the other way around.

The lobbies of lawyers, accountants, businesses and government bureaucracies that reap huge gains from the current, intentionally indecipherable tax system are lined up on both sides of the Potomac to immediately discredit any possible alternative to the madness.

Yes, the current abominable system needs to be completely scrapped. No, it isn't going to happen until the public DEMANDS it. Change can only be driven from the grass roots. It won't come from any public servant.

Steve Forbes's flat tax is a much better idea by the way. But I doubt any of us will live to see that, or any other real tax changes happen. It is as elusive as Detroit's "green" concept cars...touted for decades, but never actually produced.

Turd:
Federal employees pay the income tax today, is that a shell game?

In a word, no.

If they eliminate the income tax on federal employees that will be genuinely lost revenue (unless e.g. they cut government salaries by an amount equal to the lost revenue). If they introduce a sales tax and the government charges itself then the sales tax paid by government increases both revenue and expenditure by an equal amount, hence the shell game (assuming prices are unchanged). Per Justin's reply to me above, apparently proponents try to address this by saying that prices will go down. But that would require 30% deflation, which is a virtual impossibility.

Justin, thanks for all the replies and thanks for covering this issue in the first place. (Not sure if this is in response to my request or not. But either way, thanks.)

Ah, I couldn't remember who had written that comment a couple of weeks ago asking me to look into it. That was indeed what got me to start paying more attention.

What would all the tax attorneys and accountants do for a living?

How many people is that?

How would that upheaval be managed?

Longer term it would be great to have (presumably) smart segment of the population producing something other than 1099s and court briefs, but the consequences of the transition bears thought.

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Do any states use such a system?
Are their rates of growth better? Unemployment?
If this is the wonder proclaimed, there should be empirical evidence.

The fair tax claims to "fairness" has many loopholes. For example claiming that the poor would have an opportunity to save more by voluntarily restricting their consumption : the reason the poor are called poor is precisely because they already restrict their consumption to the bare minimum. If they could make the same small income and live in Thailand, they'd be rich. If they could travel in time and take their little money to 1950s USA they'd be rich. They're poor not because they don't have a lot of dollars, but because their place in society puts the burden of the rat race for scarce but vital resources (housing, energy, food, health care) predominently on their shoulders. In other words, inflation (starting with the 30% increase in the price of everything, and compounded by the checks that the poor would get from the government under the fair tax system) would take care of any saving margin that the poor would have.

I like the principle of the current progressive income tax system because it allows to create specific incentives through tax deductions and tax breaks to steer the decisions of those that really have choices about what to do with their money. You can have individuals make a choice about whether they would prefer to contribute to the common good through giving their money to the government or directly through the effects of their own initiatives when these bring deductions and tax credits. You can shape society in the long term by enticing people to save for their own retirement, health expenses, or to become homeowners. You can offset the costs of having children and maintain healthy demographics. With tax breaks you can put real checks in peoples' hand, while it's very difficult to lower a sales tax and have observable effects on the cheap.

Oh and by the way what are the flat tax/sales tax countries ? Socialist countries. In France there is a 20% sales tax and a 12% flat payroll tax. On the other hand half of the households are exempt from income tax and the nominal income tax rates are effectively similar to the US ones. So if you think of flat taxing as a the American way of doing things, maybe you should think again.

I'm not sure I agree with the economic sense of the FairTax or not. However, of this I'm sure. The squeeling of 50,000 unemployed lobbyists would be heard round the world. Call me a cynic, but we've got a better chance of a really slick bob-sled run in hell.

I for one am willing to go to war to prevent a national VAT tax. It is the most regressive of all taxes. I believe that the French invented them, they at least make great use of them, but of course their economy is more fair and prosperous than ours. VAT taxes in my opinion are extremely immoral they hurt the weakest among us the most.

emanon, Joseph Bertozzi: Oh, don't worry. I suspect the lobbyists and tax attorneys (certainly the corporate ones) would continue to be very well employed under the FairyTax.

I'm not sure about states, but there are countries that are using a flat tax system with great success.

Can't name one off the top of my head, but I know at least one or two are in Eastern Europe.

emanon you are correct in that point. One of the many serious problems with the current system is the brain drain it causes. How many billions of man hours are spent by some brilliant attorneys and accountants figuring out ways to navigate and bypass the tax system that could be so much better spent on a useful endeavor that might actually add some *real* benefit to society?

Not to mention the billions of hours the public is forced to needlessly spend on their taxes each year.

The cost just in these terms is immense. It's shameful!

It is all unnecessary. The same amount of taxes could be raised with a system that requires practically no time for the average citizen at all.

Not that I am agreeing that the current level of tax collections is appropriate! It is far to high in my view. But that is a separate discussion.

The current tax system generates a load of income for entire segments. People are asking how this would affect tax preparers, accountants and lawyers? Don't forget all those 401k's 403b's IRA's and other programs we all participate in to avoid taxes presumably those would not be needed either. I simply can't see our government doing anything that would eliminate this sector of our economy. Governments build bureaucracy, not remove it, this is a simple fact of life that will not change. Removing all the confusing tax rules and setting a flat or otherwise “fair” tax also removes much of Washington's ability to affect the economy. Fraud and tax evasion will become the new national pastime.

The so-called "Fair Tax" is just a back door for a flat tax. A flat tax, by nature, even a back-door flat tax like a national sales tax, will impose more or less the same tax rate regardless of income level. To keep current revenue levels, that means the rich will pay a lot less than they currently do, and the poor will pay a lot more. That is, of course, why the rich, and their corporate stooges at Time Magazine, love to talk it up, while uncritically calling it a "fair" tax. But it's a laughably unworkable idea.

I dont get the comment that the Fair Tax promotes tax evasion. Isn't that already a national passtime?

What percent of the population gets paid "under the table" and pays no tax (think illegals)? What percent of the population fudges their tax deductions? What percent of the population pays contracts cash to get some discount (I am sure they report it . What percent of cash businesses report their full income? on, and on, and on.

Yes some people will still do these things, but there is a HUGE amount of untaxed money under the current system that hides. Under the fair tax, a lot of that would go away.

Would the current tax cheats find ways to cheat under the fair tax? Sure. More, less, the same? I have no idea. But, under the current system you have to try to catch each and every person that is cheating. That is nearly impossible. The fair tax puts the burden on the business doing the sale. Now you just have to try to catch them when they cheat. Still hard, but more managable.

It's about time the Fair-Tax is getting time in the mainstream media!

The country would benefit GREATLY from it's implementation.

Checkout http://www.fairtax.org and look up Neal Boortz's book on the Fair tax. It's a great read and explains it completely.

Boortz has a new Fair Tax book coming out next month that responds to all criticisims of the plan.

I hope that eveyone who is bagging on this concept will take the time to get educated before tearing it apart! Be intellectually honest!!

A group of rich Houston businessmen got together to make the world a better place? Wanna bet? Yeah, for themselves and their spawn. Every idea new tax idea, flat tax, fair tax, is intended to end the progressive tax. They're not satisified with their capital gains tax rate or their exclusion from the regressive social security tax. They don't want to pay any tax and they work full time to buffalo the masses to have their way. Is all money transferred out of the country going to be considered spent, so when they buy a yacht in the Bahamas, they'll pay US tax on it? Will they be paying a 30% tax on every stock they purchase? Wow, maybe this will work.