Sunday, December 09, 2007

A Fair Tax of 30%? Nope.

Nota Bene: Read the Combox. The discussion is technical, but enlightening.

Charlie Sykes doesn't like the Fair Tax.

Fair enough (cough.)

But let's not hinder the conversation with un-sustainable allegations on the proposed rate.

A refresher:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn.

In other words, it is a tax on consumption, not on earnings.

The proposed rate is 23%, not 25%, not 30%.

As the FairTax gains more national attention, questions have again arisen about whether the FairTax rate is 23 percent or 30 percent. In the toxic environment that often accompanies public policy debates, has even been accused by some of misleading the public, even though full descriptions of "tax-inclusive" and "tax-exclusive" calculations abound on our Web site.

The link shows a table which demonstrates that the number is, in fact, 23%.

Those who object to the Fair Tax are usually those whose interests lie in maintaining the existing system, or those who are pumping for the Flat Tax (usually described as taxing 15% of personal earnings to replace all existing taxes.)

IIRC, Charlie likes the Flat Tax, not the existing system. I think he's wrong--I think the FairTax is genuinely "conservative" as opposed to "libertarian."

But let's get the numbers right.

For that matter, get something else straight: ONLY the Fair Tax promises to virtually eliminate the IRS. The Flat Tax will perpetuate it--and the megafleets of tax lawyers and accountants who will argue endlessly over jots and tittles...


steveegg said...

I have to quibble over the rate. It is both 23% and 30%.

If one looks at it on a tax-inclusive basis, as income taxes are, it is the lower 23%.

However, if one looks at it on a tax-exclusive basis, as every other excise tax that I'm familiar with is, it is 30%.

In any case, be it a 23% inclusive VAT, a 30% exclusive VAT, the bloated current system, the 10%/25% bi-level Ryan-Thompson plan, or Forbes' 17% flat tax, it's too high because government spending is too high.

James Wigderson said...

In other words, think about how we calculate adding a sales tax now. If the rate is 5%, then for every dollar you spend you add 5 cents for a total of $1.05.

Under the Fair Tax, the rate is really 30% because for every dollar you spend you add 30 cents for a total of $1.30. Where the Huckabee people and the Fair Tax people get 23% is by saying 30 cents is 23% of $1.30. That's great if you're figuring a sale's mark-up, not so great if discussing taxes in the way sales taxes are normally discussed.

There's other problems, too. By converting completely to a sales tax, the IRS becomes even larger as it watches every economic transaction both at the seller and at the consumer when the consumer asks for the "rebate" under the Huckabee plan.

Finally, there's the additional problem that the income tax and other taxes will still be available for politicians to use. You're likely to see more than the 30% GDP going to federal government promised by the Fair Tax proponents.

Far better to have a flat income tax, keep the housing deduction, and remove corporations from the tax rolls (pointless double taxation, really).

Anonymous said...

Well, steveegg, the FairTax is not a VAT. For a discussion of how FairTax is superior to a "flat tax" (which is a VAT), I'll turn it over to Dan Mastromarco:

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”

FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

( Source May republish in whole or part. - Ian)

Peter said...

A fixed Fair Tax of 20% would be acceptable to me if and only if the 16th Amendment to the U.S. Constitution is repealed. Otherwise, you'll have the national sales tax and a progressive income tax to boot. Without that power, the PIGs will never do away with the social architectural ability of the income tax.

Dad29 said...

Repeal of the 16th is part of the deal, but 20% is NOT--

However, when corporate income taxes are deleted as proposed, prices will drop accordingly. Remember that there are at least 2 corporations paying income tax on almost anything you buy--before you buy it.