Replies

I see the Squirrels are chattering again, trying to find ANYTHING they might use to combat the onrushing FairTax.

Nightie is even apparently carping about the fact that the Koltikoff paper is a long range study when, in fact, it was intended for that purpose all along. And let's also look at the selectively-extracted quote he gives with almost no context. Here's the entire paragraph:

"To accommodate the FairTax’s insulation of the real purchasing power of Social Security benefits, we raise the size of these benefits by 30 percent, which is the FairTax retail sales tax rate. In implementing the FairTax we also impose an 18 percent permanent cut in government purchases of goods and services starting in our 2004 base year. This may seem like a substantial reduction in discretionary federal spending, but one needs to bear in mind that such spending has increased by 22.2 percent since 2000 measured as a share of national income."

While we're at it, let's also look at some of the other "tidbits" in the paper (where the term "welfare" is used to mean economic well being), to wit:

"Under the current U.S. federal tax system, total effective marginal tax rates on labor supply higher than 23 percent for almost all American households. Indeed, as shown in Kotlikoff 2005), typical middle-aged and middle-income earners face total effective federal marginal tax rates on working of roughly 30 percent. For these and most other households, the FairTax would dramatically improve labor supply incentives.
= snip =
In addition to imposing, in almost all cases, much lower marginal taxes on working and, in all cases, dramatically lower marginal taxes on saving, the FairTax imposes lower average taxes on low- and middle-income working households than does the current system. It does so, in part, by broadening the tax base from what is now primarily labor income to the sum of labor income and current wealth and, in part, by reducing non-Social Security real federal expenditures to help pay for the FairTax rebate. In particular, the reform implies a real reduction in federal purchases of goods and services, which many Americans many view as desirable. In this regard, it should be noted that federal purchases of goods and services, measured as a share of GDP, have. risen by over one fifth since 2000.
= snip =
Low income households who are initially alive at the time of the reform, whether they are young, middle age, or old, all experience welfare gains ranging from 8.3 percent to over 20 percent. Who pays for these substantial welfare gains? The answer is hardly anyone. The initial rich elderly and middle aged as well as some middle age middle-income households are made worse off, but their welfare losses are quite small compared to the welfare gains experienced by the current poor and future generations. One reason the FairTax offers such significant welfare improvements for winners and such small losses for losers is that it significantly improves economic incentives, particularly the incentive to save, and, thereby, reduces economic distortions; i.e., excess burden.
= snip =
X. Conclusion The aging of the U.S. coupled with its high and growing pension and old age health care benefits augers much higher payroll taxes, with potentially damaging effects on the macroeconomy. This prognosis is supported by our base case simulation, which generates more than a doubling of the payroll tax rate as well as a modest, but significant long-run capital shortage. This crowding out of capital gradually reduces real wages per unit of human capital by 5 percent. In combination with the long-run 12 percentage point rise in the payroll tax, the model’s predicted long-run reduction in worker take-home-pay is 17 percent.
The FairTax offers an alternative to this dismal economic future. The FairTax proposes to replace the federal payroll tax,personal income tax, corporate income tax, and estate tax (not modeled here) with a federal retail sales tax plus a rebate. In switching from taxing income to taxing consumption and adding a highly progressive rebate, the FairTax introduces many progressive elements into our fiscal system, removes one very regressive element (the payroll tax), and provides much better incentives to work and save.
According to our model, switching to the FairTax would raise long-run capital intensity, raising long-run real wages by 19 percent compared to the base case alternative. The reform also generates major welfare gains for the poorest members of society, including those now retired and those yet to be born. The remarkable finding of this study is how small are the transition costs associated with this reform. Yes, some initial high- and middle-income households are made worse off, but their welfare losses are minor compared with the gains available to future generations, particularly the poorest members of future generations.
The economic and welfare gains from switching to the FairTax are somewhat smaller if one models the U.S. economy as fully open to international capital flows. But these gains are nonetheless large and very significant.
While our model is highly stylized, it suggests that the FairTax offers a real opportunity to improve the U.S. economy’s performance and the wellbeing of the vast majority of citizens. The winners from this reform, primarily those who are least well off, experience very major gains, and the losers experience only minor losses.