"The Fair Tax Fantasy"

Townhall ^ | 4/20/09 | Hugh Hewitt

[pissant]

This is a new book that I have co-authored with Hank Adler, a professor at Chapman University's business school, a post he took up after retirement from a long and successful career as a partner with Deloitte.

Hank and I undertook this project because we had --independent of each other and for different reasons-- arrived at the same conclusion: That the "Fair Tax" proposal put forward by my radio tal show host Neal Boortz and Congressman John Linder is a disastrous mirage that far too many Republicans have been drawn too, and for all the wrong reasons. "The Fair Tax" is a hopelessly flawed fantasy, but one with a surface appeal of simplicity that attracts especially politicians in need of energetic volunteers and quick headlines. But if the "Fair Tax" becomes the "Kemp-Roth" of the next few years, the GOP will be rightly punished at the polls as the details of the plan make it to the desks of serious political and economic analysts and from there to large numbers of voters who will examine the plan carefully and reject it almost immediately upon doing so. In short, not only should Republicans and conservatives not endorse the Fair Tax, they ought to affirmatively disavow the plan and press instead for serious and thoroughgoing tax reform, including lower and flatter tax rates.

Fair Tax enthusiasts often call my show and demand that I "read the book," by which they mean one or both of Neal's books. We have, and they do nothing to persuade serious readers of the plans merits, but much to camouflage the scheme's many deeply embedded flaws. Henceforth I'll be able to respond "Yes, but have you read the book that exposes the Fair tax as a destructive fantasy it is?"

[Alex Murphy]

IMO the problem with a "fair tax" is that it's only "fair" to the single wage-earners who have no dependents and no mortgages. Their taxes will go down, but all the married-with-two-kids-and-a-mortgage wage earners will see their federal taxes go up.

Find someone who declares 80-100K gross income on his/her taxes, who also has two dependents under 17 and a mortgage over 150K. Ask them what their effective federal tax rate is, on that 80-100K they earn. It's not 23% - it's more like 15% or less, after they get done claiming all of their federal deductions. A flat tax of 20+% will cost them dearly, and provide yet another government deterrent to the Traditional American Nuclear Family.

As a former employer of mine once told me, "take a good look at the income tax laws, before you tell me there's no such thing as social engineering."

[Terpfen]

I was not including any state tax in my example.

I inserted the state tax in there because it's the only way, mathematically, a 23% tax rate on $100 translates to a $30 add-on. You're going to have to explain your reasoning as to how a 23% rate adds up to $30 on a bill of $100.

[xcamel]

Most of them are here on FR

[Stegall Tx]

I think it’s a bad idea because it’s a disincentive for consumption,

Any less than the income tax is a disincentive for working?

[TADSLOS]

Fair Tax ping.

[savedbygrace]

You certainly have.

Lately, I’ve been thinking that, at this moment, in the midst of a rapidly expanding federal government and a rapidly shrinking private sector, the FT would be a disaster.

[John.Galt2012]

I like your line of thinking. What would be an even better formula is this:
Amount of Fed Budget a State receives = Amount that state pays
Then leave it up to the State to figure out how to pay/tax its poeple.
Effect would be reduction of earmarks/state budget because the politician’s state / citizens are on the hook to pay the money back thereby reducing amount of money requested/required each year.
2. States with high liabilities pay more taxes ie NY or CA

Just a thought.

[surfer]

The concept of property tax as discussed at groundswellusa has several issues.

The most important issue is the tax on the “improvement” to the land. Unfortunately ALL “improvements” to the land depreciate over time so based on external market factors affecting the depreciation rate will adversely impact the “amount” of tax able to be collected, etc. Also it will disproportionately tax people people higher rates for artificially inflated property values from the wonderful stupid programs like CRA.

Land is the only that potentially has the potential to appreciate over the long-haul. Land will depreciate if it has become polluted, etc...but generally will appreciate in value over the long haul.

One small problem with the “land-rent” scenario...who would maintain their properties anymore? It would be better to let your property slide to accelerate depreciation to improve your tax position...once that starts to happen entire regions will suffer.

People will move to new locations and repeat and eventually we will just end up with sub-par real estate and massively depressed areas and no taxes.

Another side effect will be small postage stamp size parcels of land that will be build upon. The whole notion of owning land will become a thing of the past. Land is there here all right...but it is the key to the people maintaining the power over our corrupt government...the last thing we want to do is open the door so the government will ultimately control how much land we will be able to own.

[Terpfen]

The difference between consumption and employment is that one is usually optional. What will happen is that people will pay the higher prices on items they need, like food and clothes, but will cut voluntary consumption. It’s the same effect as a price increase.

[John Valentine]

I think it’s a bad idea because it’s a disincentive for consumption...

That is the PRECISE reason it is a GOOD idea. The whole idea is to encourage saving (investment). That can only come at the expense of consumption.

While there are some good reasons to be concerned about the fair tax idea, this just isn't one of them. Quite the contrary - this may be its biggest plus.

[surfer]

I actually think the Fair Tax has more potential of happening now than ever.

When you truly understand what the Fair Tax represents it makes complete sense to get behind it.

There are some key aspects of the Fair Tax that no other tax approach delivers (non-consumption based).

1) You as an individual are no longer a target of the government

2) The elimination of waste is very high - as in...more of the tax collected will actually end up in the spending budget

3) All illegal money ends up getting taxed

4) 65,000,000 tourists a year will pay into our coffers

5) We would become the #1 place in the world to do business - how many jobs would that create?

6) As an individual you would have complete control on how much you paid in taxes per year, and you wouldn’t be penalized for saving

7) No more double taxation through instruments like the death tax, etc...

8) Our ability to complete on a global level would skyrocket

9) Without a capital gains tax the amount of capital available for business expansion would literally be unlimited

I could go on for quite a while about the benefits...I literally do not see the downside to it. It actually is fair if you accept we must pay some taxes...

[Terpfen]

The whole idea is to encourage saving (investment). That can only come at the expense of consumption.

IMO, the purpose of tax policy should not be to substantially change purchasing habits. Taxes are a necessary evil that should be minimized/eliminated wherever and whenever possible, not a tool to force people to keep their bank accounts in what some gubmint official deems to "correct."

If someone wants to blow their money, it's their decision and responsibility. Tax policy should not be used to alter that behavior.

[Terpfen]

We’re in agreement on your points 3, 6, 7, and 9. However, I think the overall disincentive effect on the consumer side will outweigh the benefits of those points.

[Always Right]

I inserted the state tax in there because it's the only way, mathematically, a 23% tax rate on $100 translates to a $30 add-on. You're going to have to explain your reasoning as to how a 23% rate adds up to $30 on a bill of $100.

Let the fairtax people explain, it is how they do math. They calculate the rate on the gross costs (after tax). $30 is 23% of $130. The fairtax people, not me, calculate the tax rate that way. The do not use the $100 pretax cost to calculate the expense. The fairtax is really a 30% sales tax. That is a fact, not spin. The fairtax rate is what they call an 'inclusive' tax rate. It is the fairtaxers who are spinning this.

[goldstategop]

The income tax is the most intrusive expression of Big Government. It can't be reformed; its got to go. The Fair Tax represents a return to the system of taxation that existed when this country was founded. Its a tax on consumption rather than a tax on income, which is a socialist idea. You should not be taxed on how much or how little you have but instead on what you spend. That's why I support the Fair Tax.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus

[stop_fascism]

Thank you for the serious reply. Your objections have all been answered by land rent taxation proponents. I can’t do their arguments justice, but here is an overview.

The idea of land rent taxation is that you do not tax improvements. So the tax actually encourages improving property to the max. Since the tax on a hovel and a mansion would be the same, if they were placed on an equal parcel of land.

LRT also allows private use of land, as long as the tax is paid. So you are correct, that the idea of owning land would be a thing of the past. However, this is really not a bad thing.

Presently, around 95% of the private land in America is owned by 5% of the population. Much of the land is not being used at its highest and best use. Instead, speculators hold the land waiting for it to “appreciate over the long haul.” Value is an estimate of this appreciation. So we see real estate bubbles followed by busts. That is exactly what led to the current recession. It hurts the economy in the long run. By taxing land rents, it is no longer economically prudent to hold it out of use.

[John.Galt2012]

I think it’s a bad idea because it’s a disincentive for consumption...

As opposed to disincentive for production???

I agree, this is probably the best thing about a consumption tax.
Other than those who are living of their trust funds (wealthy) and/or working “under the table” (illegals and criminals)have to start paying.

[stop_fascism]

Income tax is basically slavery. If you don’t own the product of your labor, you are a slave. We are supposed to be happy that we are only slaves 40% of the time.

The “fair tax” is an indirect tax on the same labor. You’re still a slave, but the government is being nice enough to conceal that fact from you.

[Man50D]

Imagine how fast spending would decrease.

No more federal income taxes taken out of your paycheck means increased purchasing power. All the embedded taxes in everything we purchase that are due to corporations passing the cost of their income taxes into the consumer will be removed. No more taxes on capital gains, estates and savings will all put more money in people's wallets thereby increase spending. Fair Tax ping !

[Finny]

Hugh has lost so much credibility with me -- and I was a major fan of his for years after I first discovered him in late 2000 -- that I'm tempted to think, "If he thinks it's a bad idea ... it's probably a good idea."