The Political Basis for the FairTax

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.

We really shouldn’t have taxes on income or capital at all.

We only had taxes on people when the FED was created. We had to pay for the interest for using the FED money instead of our own sound money.

Today, that has grown to be a pot to buy votes by stealing from the producers and giving to the looters.

Somehow, this needs to change.

Government has made a mess of the policies they have enacted to replace the Christian duty to help those less well off. Government makes all of us poorer, while destroying the foundations that make a country strong.

Government needs to get out of the way.

Government needs to get out of EVERTHING that is NOT ENUMERATED in the Constitution.

Go AWAY, you thieves!!! Get out of our pockets!!!
Get OUT of OUR lives!!!!

Destroyers and Usurpers!!!!

“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.”

These issues are not intrinsic to an income tax. Suppose there were a 10% flat income tax, withheld by employers and financial institutions. The employer could simply report his total payroll costs and send the IRS a check for 10% of that total. The IRS wouldn’t need to even know who the employees were. Financial institutions would total the gains made by all their investors for the period, and send the IRS 10% of it. The IRS wouldn’t need to know who the investors were. Still an income tax. Still withheld at the source. No individual reporting. No IRS audits of individuals. No information available to base handing out credits, exemptions, and deductions (tax welfare) through the tax code. No political favors to be handed out to groups of taxpayers.

There is no reason why the same mistakes would have to be repeated if we reset the income tax to a flat 10% rate collected at the source so no personal information could fuel the deduction/exemption/credits political machine.

I didn’t forget the self employed, it is just not an advantage that the FairTax has over an income tax.

Under the FairTax, the self employed would still have more complicated tax compliance than employees. They’d still have to report their own income to get SS credits, and they’d likely have to collect FairTax when selling their services or products to end-users. To prosecute fraud of claiming more SS credits than their real income, they would still be subject to audits from an IRS-like agency. These are some of the reasons I think the attempt to wrap SS/M into the FairTax is misguided. Without SS/M and prebates, the FairTax would be revenue neutral at 10% rather than 23%. A 10% FairTax would also have much less cheating and avoidance than at 23%.

A flat income tax collected at the “source” means not just employers, but financial institutions. Easy to do when an investor has gains, but allowing for losses would complicate things, I admit. Probably the only way to do it would be to net all gains and losses annually, whether realized or still on paper. Instead of everyone being subject to audit, however, only employers (including the self employed) and financial institutions would be subject to audit. A much smaller IRS would be focused on 20M tax filers rather than 150M, and using a much simpler set of rules.

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