Posted on 02/17/2008 7:34:33 AM PST by DivaDelMar
In his December 24, 2007 Tax Notes article, “Why the Fair Tax Won’t Work,” Bruce Bartlett purports to critique the FairTax, a proposal to replace almost all federal taxes with a retail sales tax plus a rebate. In fact, Barlett’s article has little to say about the FairTax and even less to say that’s accurate. Instead, most of his article misstates research on the FairTax, criticizes unnamed proponents of the FairTax, lambasts unattributed views of the FairTax, and engages in political punditry. This paper takes a close look at Bartlett’s “analysis,” exposing his repeated use of straw men for what it is rhetoric disguised as economics. (1)
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Bartlett begins his critique by accosting unnamed messengers (referenced by “FairTax advocates”) for supposedly suggesting that consumer, producer, and factor prices would be unaffected by the FairTax, with workers simply keeping the income and payroll taxes that would otherwise have been deducted from their paychecks.
Clearly, such an outcome is inconsistent with elementary economics, and no serious student of the FairTax would assert such an outcome. Nonetheless, Bartlett’s devotes, by my count, some 31 paragraphs, including a primer on the Great Depression, to demolishing this straw man. (2)
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Bartlett’s second concern lies in the calculation of the FairTax rebate. He takes issue with the proposal’s treatment of childless households, suggesting that the size of their rebates are too large. From this Bartlett surmises that Congress would raise the rebates to households with children thereby “greatly increasing the cost of the rebate.” But if the rebates to childless households are too large, the solution is not to make everyone’s rebate too large, but rather to cut rebates to childless households and, thereby, reduce required FairTax revenue.
Bartlett’s next “critique” is even less memorable. He claims that Americans won’t perceive their monthly FairTax rebate check as progressive even though the rebates will be a much higher percentage of the resources of the poor than they will be of the rich. Instead, he says, households will view the FairTax as proportional because everyone will have to pay the same FairTax rate when they spend their money, no matter the source of their money. This is no different from claiming that people judge tax fairness based on their marginal rather than their average tax rates. Were this the case, marginal tax rates under our current tax system would presumably be set to rise monotonically with income, which is certainly not the case. (4)
Bartlett’s contention here is symptomatic of a pervasive failure to stick to economics. Bartlett’s expertise does not, to my knowledge, extend to psychology or political science. So when he asks his readers to accept his assessment of perceptions or his judgment of political reactions, I, for one, start feeling queasy.
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Bartlett’s first significant economic critique of the FairTax appears five pages into his article, where he states “… there would be an enormous shift in the tax burden from the wealthy to those with lower and middle incomes.” (page 1245) As proof of this proposition he reproduces a table (his table 5, p. 1245) generated by the Treasury’s Office of Tax Analysis entitled “Distribution of the Federal Tax Burden Under the FairTax.”
Notwithstanding its source, there are two major problems with the Treasury’s analysis of the FairTax’s progressivity. First, the Treasury produced this table in response to a request from President Bush’s Advisory Panel on Federal Tax Reform. The Tax Reform Panel was charged with considering reform of the personal and corporate income taxes. Its purview did not extend to reforming the payroll tax. As a consequence, although the Treasury referenced the FairTax in the table, the Treasury completely ignores one of the most progressive elements of the FairTax, namely the elimination of the highly regressive FICA tax. Bartlett mentions that the table considers replacing only the income tax. But he fails to mention that were the table to include replacing the payroll tax, the FairTax would look much more progressive....
THIS IS AN EXCERPT. The Full paper is available at: http://www.fairtax.org/site/News2?page=NewsArticle&id=9321
As long as there are democrats, the fair tax is a VAT.
Have you read the book and tried to understand it?
As the long as the Income Tax (sic) is enshrined in the Bill of Rights..(now there is a chuckle worthy topic) then any law imposing the Fair Tax can be coupled with increased income (sic) taxes, there is no getting around that fact.
In other words, any way you want to tax it, it come out to be - one day we will all own an outhouse because a toilet will be too expensive!!
Fair Tax ping!
See post #9. I never knew Kotlikoff has come out so cleanly that wages must fall for prices not to rise. But there it is.
ping
The prebate goes to all, not just the poor. The Prebate will allow all to buy essentials effectively tax-free.
The Fair Tax is 23% on a tax inclusive basis. The tax-inclusive basis is analogous or comparable to the way we conceptualize the income tax.
The Fair Tax is 30% on a tax EXCLUSIVE basis. That is the way we typically conceptualize sales taxes. Let’s do the math to demonstrate:
If you have $1 to spend, you can buy .77 worth of goods and you will pay .23 in sales tax. On a tax-inclusive basis, that is a 23% tax. 23/100 = 23%.
On a tax-exclusive basis, where the value of the goods purchased serves as the denominator or the basis upon which the tax is calculated, the rate is 30%. 23/77 = 30%.
SAME NUMBERS, DIFFERENT ways of calculating the rate provide different results. THERE IS NO INTENT TO DECEIVE.
Let’s approach this from a different perspective. I you want to buy an item that costs $100, how much do you have to earn under the income tax system to permit you to buy the $100 item? If your marginal effective Federal Tax Rate is 23%(15% FIT, 7.65% FICA/Medicare(rough justice 8%)), the answer to that question is $130. Let’s do the math.
$130 gross x 15% = $19.50
$130 gross x 8% = $10.50(rough justice)
NET PAY: $130-$19.50-$10.50 = $100
IS that a 23% tax or a 30% tax?
False. Please cite the section of the Fair Tax Bill that gives the sales tax enforcement agency (The STATES, not the IRS) the right to audit consumers.
And that differs from the current system, how, exactly? Congress can raise the income tax rates anytime it cares to and we are virtually powerless to resist. Not so with consumption based taxes.
From Federalist No. 21:
“...It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ``in political arithmetic, two and two do not always make four.’’
If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country....”
Oh please, you are promoting a sales tax, and everyone adds the sales tax to the amount. Computing a tax the non standard way is meant to deceive.
The Bill was written to include a prebate, instead of exempting certain items, for several reasons.
1. Giving the government the power to determine what is or is not a necessity transfers power back to them by giving them an opportunity to sell “exemptions” in exchange for campaign cash. Taxing everything while providing a prebate removes the power of K Street lobbyists.
2. Providing every legal resident with a prebate provides the greatest possible choice to the individual. My market basket of necessities may be and probably is different from your market basket of necessities. With the prebate, we are free to choose what we wish to purchase effectively tax free.
3. Without the prebate, the tax is truly regressive and the Democrats would NEVER allow it to pass.
In summary, the prebate provides the individual with the greatest possible choice, removes the influence of lobbyists and allows the Fair Tax to be more progressive than our current system.
Incorrect. The rate is quoted both ways to facilitate comparison to the income tax. A 30% sales tax is equivalent to a 23% income based tax. There is no intent to deceive, rather advocates wish to provide a valid basis of comparison. A 30% sales tax is NOT equivalent to a 30% income tax and those who don’t think about this at any depth would equate the two. In a rush to judgment, without a valid basis of comparison, most would dismiss the proposal out of hand as a tax increase. That is false.
I will not benefit. As a CPA/Tax Attorney/Estate Planner, my business will suffer.
My interest in seeing the Fair Tax enacted is simple. It is the best thing for the country and it will free my children and grandchildren from the insanity and slavery of the income tax.
And what is your interest in preserving the status quo?
why should the poor be exempt from sales tax on “essentials” while the middle class and rich are not.
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Everyone gets the prebate ,, whether you’re working at McDonalds or if you’re Donald Trump... it is simply based as a percentage of the income denoted as the “poverty line” for each family size.
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