Just how fair is the 'FairTax'?
We'll explain this bit about "embedded taxes" in a moment. But first, let's consider what Boortz and Linder appear to be saying. Prices at the store are the same. Your boss stops taking all that money out of your paycheck. Uncle Sam is sending you money instead. And, oh yeah, the government is still up and running.
This just can't happen. "It is practically and logically impossible for the government be collecting the same amount of money as before and have everyone suddenly be better off," says Daniel Shaviro, a tax law professor at New York University.
Part of the problem is the way Boortz and Linder are using the idea of embedded taxes. In an eight-year-old study paid for by AFFT, Harvard economist Dale Jorgenson noted that because the taxes paid by everyone in the chain of production are embedded in the cost of goods, prices could decline an average of 20 percent if all those taxes were scrapped. The FairTax Book devotes an entire chapter to this idea.
What The FairTax Book fails to mention is that prices can only fall this sharply if companies cut wages. I asked Jorgenson about this, and he agreed. Say your salary is $100,000 a year today, but you take home $80,000 after taxes.
Your company is still paying that extra $20,000. In a FairTax world, it will save that money, and be able to lower its prices accordingly, only if it can reduce your salary to $80,000. In other words, your take-home pay is the same as before. Sure, you'd get to "keep 100 percent of your paycheck," as Boortz and Linder repeatedly write, but it would be a smaller paycheck. That's kind of a big thing to leave out.
I pressed the point with Boortz and Linder. Boortz denies that the book intentionally overpromises. The introduction, he notes, emphasizes that "this book isn't about saving a penny in taxes." But he concedes that the book is confusing about this, and vows to correct it in later printings. Fair enough.