The Political Basis for the FairTax

American Thinker ^ | 05/22/2011 | Robert E. Dell and David G. Tuerck

[SeekAndFind]

As the current debate over fiscal reform suggests, very few proposals for fundamental changes in tax policy have the potential to command support across the ideological spectrum.  The "FairTax" is the great exception.  Correctly understood, the Fair Tax Act (HR 25, S13 with 67 cosponsors), which would replace almost all federal taxes with a direct tax on consumption, should appeal to conservatives, progressives, and libertarians alike. 

Let's start with conservatives.  The FairTax enjoys more support from this quarter than any other tax reform proposal, including the flat tax and the reforms outlined in Congressman Paul Ryan's Path to Prosperity.  The latter two reforms provide for large personal exemptions and do not specifically tax imports.  By taxing a wider base with a lower comprehensive average marginal rate, on the other hand, the FairTax encourages more new hiring and faster economic growth.  Several dynamic simulation studies suggest U.S. GDP could be 10% higher in a few years under the FairTax than under the current tax code.

But the FairTax should appeal to progressives as well.  It eliminates subsidies to Cadillac health plans and millionaire mansions, along with the regressive Social Security tax.  It makes the wealthy pay taxes on their consumption while permitting the poor to consume tax free.  It eliminates every vestige of corporate welfare that is embodied in today's tax code.

A 2006 study by Kotlikoff and Rapson comparing remaining lifetime tax rates under the current system versus the FairTax for households of varying age and income levels showed the reduction in tax rates to be greatest for the lowest earning households.  For example, a single woman aged 60 making $25,000 per year and facing an effective tax rate of 14.1% under the current system would instead have a negative 6.2% rate under the FairTax, due largely to the effects of the FairTax prebate (a government subsidy financed through the tax itself) and elimination of the payroll tax.  The FairTax is arguably more progressive than the current system, the flat tax or the Ryan plan.

A study by the Beacon Hill Institute concluded that if we group taxpayers by expenditure per capita, the average taxpayer in the top decile loses under the FairTax (with lower levels of after-tax consumption than under the current system).  The relative treatment of the lifetime poor versus the lifetime rich under the FairTax, once understood, make the tax cuts for the rich argument against the FairTax ring hollow.

A tax is more truly progressive if its burden falls most on the people who consume the most.  Progressive economists such as Robert Frank have argued that rising income inequality due to disproportionate growth in the incomes of the statistical top 1% of income earners is not an egalitarian concern per se.  The problem is that the spending habits of the increasingly rich create "expenditure cascades" that make it harder for middle-class families to make ends meet and increase their sense of relative material inadequacy.  The FairTax is an answer to this problem.

Libertarians, for their part, should celebrate the end of income tax withholding.  As FairTax proponents Neal Boortz and John Linder have put it: "[I]ncome taxes are seized. Consumption taxes are paid."  Equally celebrated should be the end of the practice of ratcheting up the tax rates on top earners in the pursuit of new revenues and of selling tax expenditures to special interests for votes or campaign support.  The FairTax calls for one universally transparent rate to be paid by everyone on all final consumption.  Thus, everyone acquires an economic interest in all government spending decisions and the tax code disappears as a playground for special pleaders.  There should be a natural convergence of conservative, progressive, and libertarian pundits who oppose the blatant cronyism that goes on now.

No tax system is perfect.  Substantive criticism of the FairTax has centered on transitional issues and the rate necessary for revenue neutrality.  But much of the detractive criticism amounts to pointing out small holes in a barn door without acknowledging the utility of the barn to the horses inside.  The main objective of any tax system should be to keep marginal rates low, since, as marginal rates rise, wealth destruction rises disproportionately.

Conservatives worry about a FairTax political bait and switch; the Wall Street Journal editorial board has expressed such skepticism.  If the Sixteenth Amendment to the constitution is not repealed (as is called for in the FairTax legislation), the country could end up with both an income and a sales tax.  But the legislation also contains a provision that would repeal the FairTax and reinstate the income tax if the Sixteenth Amendment is not repealed within seven years to prevent both from being in existence at the same time.  The best insurance against such an outcome, however, is a broad, bipartisan understanding of the virtues of the FairTax.

The Ryan plan and the flat tax are no less susceptible to political demagoguery than the FairTax.  Political candidates able to deliver a clear and consistent defense of the FairTax, such as Saxby Chambliss (R-GA) and Marco Rubio (R-FL), have successfully overcome attack ads and advanced their careers in the process.

In 2005 eighty academic and business economists formally endorsed the FairTax.  It is entirely conceivable that libertarian philosopher Robert Nozick and his longtime intellectual rival, egalitarian philosopher John Rawls, if they were alive today, could shake hands on the FairTax.  The philosophical differences between the average Democrat and the average Republican are trivial by comparison.

Robert Dell (robdell@comcast.net) resides in Atlanta and is coauthor of the forthcoming book, Back from Serfdom.  David Tuerck serves as executive director of the Beacon Hill Institute and professor and chairman of the Department of Economics at Suffolk University in Boston.

[EternalVigilance]

Bump.

[Jacquerie]

Only the Fair Tax and repeal of the 16th will save our country. The income tax cannot be reformed. It will continue to be the primary leftist vehicle to promote so called social justice.

For 130 years we prospered under tariffs on imports and excise taxes alone. The FT would be return toward those days of truly voluntary taxes.

[Rapscallion]

Not a chance it will pass. Congress would become unable to pass out tax favors for campaign bribes,

[fireman15]

I have got a problem with the name “fair tax”. It sounds like something that a leftist think tank or a bunch of enviro-wackos came up with. It is a name that implies to me that the originators believe that the public is made up of a bunch of fools who can be swayed by idiotic slogans. This might actually be the case, but I still think it is insulting. Why not just call it The Federal Sales Tax?

[KarlInOhio]

Not a chance it will pass. Congress would become unable to pass out tax favors for campaign bribes,

Sure they will. It will just be vastly more obvious when they are writing the changes on a nearly blank slate. For example: the NRST rate for an electric vehicle shall be 0%. The NRST rate for ethanol fuel shall be reduced in proportion to the amount of ethanol used.

[Durus]

After reading quite a bit about the Fair Tax I've come to the conclusion that it doesn't solve all of the problems of our current tax structure. I don't think that an income tax is a horrible thing, nor a sales tax, nor property taxes...but we have all of these. We have a direct income tax both Federal and State, State sales tax, gas tax, rooms and meals tax, property tax, taxes disguised as fees etc. Despite all the taxes that the Fair Tax doesn't alter, the fair tax jumps through hoops to be revenue neutral. While this is to make it conform to Federal law, if they are already proposing to change the constitution, changing that law is not an additional hurdle.

Let's face it, we give government too much money and they spend it foolishly. We need to decrease the amount given to government, and have a complete cap on deficit spending.

In order for me to support an overhaul of our tax structure (and I suspect I'm not alone) it has to be a comprehensive plan that remarkably reduces taxation (both Federal and State), gets rid of the IRS to the largest extent possible, and gets rid of corporate taxation.

While that is going on States and Towns need to have their tax structures and spending policies completely overhauled. I'm sick of stories of little old ladies and down on their luck folks losing their houses for not paying property taxes. The inference there is that the state really owns all property and we need to pay them rent. Property taxes should be banned or at least the penalties should not include loss of said property.

[Roninf5-1]

All taxes are theft. Aside from that I don’t care how fair or low taxes are or if the budget is balanced the real problem is out of control government spending. Money equals power. The government at all levels has way too much power and influence because it injects money endless rivers of money into every facet of society. 3.5 Trillion dollars is a lot of juice. In a truly free society the government should be begging for money and barely have enough money to keep the lights on.

[SeekAndFind]

How about evolution instead of revolution?

Here’s a proposal ( please critique it ) :

You will be given the choice of filing taxes two alternative ways :

1) The flat way with ZERO deductions.

OR;

2) The traditional way which will require you to conform to the current tax code.

The flat tax will guarantee NO IRS audits. It will require you to pay a FLAT 10% of your income with NO DEDUCTIONS.

If you make $10,000, your income tax will be $1000.

If you make $20,000, your income tax will be $2000

If you make $50,000, your income tax will be $5,000

If you make $100,000, your income tax will be $10,000

If you make $1 Million, your income tax will be $100,000

NO HOME MORTGAGE DEDUCTIONS, NO CHARITY OR CHURCH CONTRIBUTION DEDUCTIONS, NO DEDUCTIONS PERIOD.

EVERYONE PAYS REGARDLESS OF INCOME.

All these in exchange for no IRS audit.

OR, you can choose to file in the current way with all the maze of deductions and the possibility of being audited.

Let’s give this proposal a shot and see in 5 years how many percent of tax payers will file the flat way versus the traditional way.

This will be a REAL LIVE referendum on which tax system will be most acceptable to most Americans.

We GRADUALLY EVOLVE instead of abandoning the current system in one shot with all its political ramifications.

To make this palatable to the libs, call it the PRO-CHOICE TAX BILL. You CHOOSE which tax system you want to file under.

Tell them we are really pro-choice on almost everything except when it comes to taking the life of an innocent baby.

[achilles2000]

Congress would become unable to pass out tax favors for campaign bribes,”

This, and the ability the income tax gives to violate the privacy of citizens and intimidate enemies, is why the government loves the income tax.

[Durus]

The only critique I would have of your plan is that the same people that would oppose a Flat Tax would oppose your tax plan just as strongly. If you are going to have to overcome that resistance regardless of any sane plan (sane compared to our current system) why bother with a half measure?

[SeekAndFind]

RE: The only critique I would have of your plan is that the same people that would oppose a Flat Tax would oppose your tax plan just as strongly.

______________________________________________________________________________________

My question is WHY SHOULD THEY BE OPPOSED TO IT? No one is forcing them to file the flat way, they can CHOOSE to file the way they’ve always been familiar with. We’re just giving others the choice of filing an alternative way.

I don’t consider it a halfway measure, I call it an evolution... or a practical way to gauge OVERLL TAXPAYER SENTIMENT. It will be practically like a referendum regarding the popularity of the flat tax.

I am quite confident that as people discover the advantage of the flat way of filing, the traditional way ( with its ever increasing lines of tax code, now numbering close to 40,000 pages ) will eventually “whither in the vine” ( to borrow Newt’s phrase ).

[rbb]

” The FairTax calls for one universally transparent rate to be paid by everyone on all final consumption. “

I’m having difficulty buying this. There is no “one universally transparent rate...” because it is NOT paid by everyone on all final consumption.

Homeowners get to enjoy untaxed housing consumption, therefore at equal consumption, renters pay more FairTax than homeowners.

Your results may vary but one thing you can count on is that income will be redistributed from renters to homeowners. Which is great if you’re a homeowner, not so much if you’re a permanent renter.

[rbb]

A flat tax makes good sense to me.

[SeekAndFind]

What do you think of my proposal in Post #9 above?

[webboy45]

The Fairtax has some merit. But some changes would have to be made. Three exemptions are required: housing, medical and religous. And, enforcement would require maintaining the IRS. (NO, the states will not enforce it.) And, an infrastructure will have to be developed for those states that don’t have a sales tax.

By the way, my son, a former state tax auditor, said that auditing of sales is much more difficult than auditing income.

[Durus]

"My question is WHY SHOULD THEY BE OPPOSED TO IT?"

For two reasons.

1. 51% of the population don't pay any taxes at all, and liberals will use that to keep class warfare alive.

2. Even a liberal understands that given an option the overwhelming majority would prefer the flat tax which is why they would oppose the option of choice (at least in terms of taxation). They don't want a referendum. They want to keep the "progressive" taxation scam alive and well.

[JimRed]

Only the Fair Tax and repeal of the 16th will save our country.

That would remove the power to control many of our actions from the hands of the professional political elite, and thus is unacceptable. TERM LIMITS, NOW AND FOREVER!

[JimRed]

Of course, the leftist argument against it (10% flat tax) is that $1,000 impacts a $10,000 income more severely than $100,000 impacts a million. And for once, they are right. (Boy, do I hate sayin’ that!)

The sales tax on purchases becomes voluntary once you go beyond necessities; that’s why I prefer it. But if we’re not careful. we’ll end up with BOTH!

[Durus]

How does 10% of a 10k income impact someone more than 10% of 1mil income?