Fair deal?
In principle, I really like the Fair Tax, not least because it theoretically eliminates the IRS, or at least significantly reduces its size and scope. The Fair Tax also eliminates many of the tax perks that reward government-approved behavior or government-approved friends. Such simplification of the tax process would be real nice and probably a net-positive for liberty.
However, the more I hear about the Fair Tax, the more questions come to my mind. A recent commentary ($) by Reagan/Bush deputy assistant secretary of Treasury Bruce Bartlett in the Wall Street Journal calls several facets of the Fair Tax into question, particularly the tax rate. (for an ungated version of most of the article, go to the Economist's View blog)
While the Fair Tax bill, authored and promoted by Georgia Representative John Linder (R), would add a sales tax of 23% to all items sold, you may have heard opponents argue that the tax is really an effective rate of 30%. Not being an economics major, I've never really understood this discrepancy, but Bartlett gives the clearest explanation I've ever seen:
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.) Calculating it the conventional way that every other sales tax is calculated, with the tax on top of the price, yields a rate of 30%. (This is called the tax-exclusive 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%.
Hum....
Other criticisms are also raised in the commentary, such as the quirky facet of the bill that reimburses households below the poverty line for a piece of the tax to make it less regressive. Read the article for all valuable points. For some rebuttal, check out the comments at the Economist's View's post on the article.
More on the Fair Tax: http://www.fairtax.org/site/PageServer
More on the Flat Tax: http://www.ncpa.org/pi/taxes/tax7.html
2 comments:
Some observations about those things that concern you: (1) "The tax rate is being made to look deceptive." Others making that claim don't understand that in order to compare the FairTax against the income tax, a "tax inclusive" rate is required. (If you REALLY want to get bent out of shape, calculate your income tax rate like a sales tax!) - the dollars to gov't coffers are the same. (2) "...quirky facet of the bill that reimburses households below the poverty line for a piece of the tax to make it less regressive." Nothing "quirky" about this. It is a direct, advance rebate to ALL (not "low income") American families to untax necessities. What is the alternative? You got it: a tax code - that can be gamed by special interests, lobbyists, and politicians. FairTax rids us of these kinds of "built-in corruption generators" with a simple "prebate." Mike Gravel, the ONLY DEMOCRATIC presidential candidate who's a FairTax proponent (wonder why??) has observed that the "prebate" will provide a beneficial cash flow to low income families. If the U.S. can send out SS checks, it can send out prebates.
FairTax.org has put together a complete explanation of the plan at its website - including rebuttals to most everything that most Devils Advocate have thrown at it (but, I must confess, to introduce it as the brainchild of Scientologists TAKES THE CAKE! - somehow I don't think that FairTax.org will spend a lot of time on that one.)
Millions of dollars of professional research have gone into the FairTax consumption tax as a replacement to the income tax. Taxing consumption decreases the power of politicians and lobbyists. The FairTax ends government confiscation and coercion. To the extent that any abuse by theIRS has occurred, I'm sure that far more non-Scientologists have been guests to the abuse. Thanks for the opportunity to present this alternative perspective. Keep up the good posts.
Ian, thank you for the observations and excellent points. I would very much like to see a high-level debate on this and other tax proposals, particularly among the presidential candidates (though maybe they could start by just clearly articulating the real need for tax reform). More information on rebuttals to anti-Fair Tax arguments can be found here.
And thank you for pointing out another good reason to like Mike Gravel.
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