Fair Tax – At Least the Debate is On
The Fair Tax is a national sales tax that would replace all Federal income, payroll and excise taxes. Some of the debate rages over what I consider tangential issues such as eliminating the IRS. But now the real debate is starting. And there is one sticking point, in my mind, preventing me from whole-hearted support.
In an article at Opinion Journal, Bruce Bartlett, deputy assistant secretary of the Treasury for economic policy from 1988 to 1993, takes issue with the Fair Tax proponents with four main points (you have to wade through many other objections, including a mention of the Church of Scientology!)
Captain Ed has a few illuminating comments well worth reading, but the best response to the issue I’ve seen today are from the Fair Tax Blog and the Cato Institute.
Bartlett maintains the proponents of the Fair Tax are playing a bit of a shell game with the numbers, since the tax is not really 23% as proposed, but 30%:
The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.
Daniel J. Mitchell answers this objection at the Cato Institute article:
It is true that ordinary Americans think of “tax-exclusive” rates when looking at state sales taxes, but the Fair Tax people are seeking to compare their proposal to the current income tax, which is calculated on a “tax-inclusive” basis.
I think the point needs to be made that, for the poor, FICA or payroll taxes are the most regressive taxes we have. Not income tax, which has graduated rates and exemptions. The Payroll Tax dings every wage earner from the first dollar for Social Security and Medicare taxes, and then doubles down by requiring the employer to match the amounts. Current Social Security tax is 6.2% (inclusive) and Medicare is at 1.45% (inclusive) for the taxpayer. But then you have to remember that total 7.65% is matched by the employer for a total, non-deductible, no-way-out-except-death tax rate of 15.3% inclusive. That rate stays the same until you earn $97,500. at which time it disappears, giving the top 20% of wage earners a break.
If the Fair Tax forces employers to pay wages for all that they would normally withhold and match, the employee is already more than half way to the Fair Tax’s 23%, or to Bartlett’s 30%.
Bartlett’s second objection is that even the Federal government would have to pay the taxes, adding to the cost of military hardware, supplies, etc. While its true that the Feds don’t pay “corporate income tax” directly, their vendors do. Mark Bostleman at the Fair Tax Blog issues a fair rejoinder to this:
But having eliminated all of the other taxes previously embedded in the cost of goods not to mention the cost of compliance with the current code, the price of the tank would be substantially lower. Ideally, the cost out the door will be the same in both systems. The debate is how far over or under the ideal it would end up being. But to completely ignore this dynamic is pathetic on Bartlett’s part.
Bostleman does not deal with the most serious problem I have with the Fair Tax proposal, the provision that sends monthly checks to low income people. While most of the “working poor” who earn wages will be money ahead if employers increase wages by 7.65% and stop all other withholding, retired people, unemployed people, welfare recipients, etc., will face dramatically higher prices without the corresponding increase in “disposable income”. The net effect is that the poor will pay substantially more than they do now. The Fair Tax proponents suggest that monthly rebate checks be mailed out to these people. Bartlett says:
Aside from the incredible complexity and intrusiveness of tracking every American’s monthly income–and creating a de facto national welfare program–the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.
This is a serious objection that needs addressing. Much more serious than Hugh Hewitt’s curt dismissal because it removes home mortgage interest deduction and charitable deductions. That reflects Hugh’s practical nature of focusing on what wins the next election. Fair enough, Hugh’s focus is on the things we can do now, and I understand his point. But as an objection it falls into the “ask your mother” category.
Bartlett’s final objection is that it won’t eliminate the chore of keeping track of income and deductions for income tax purposes, as all but 6 states have income taxes. I have two answers to this objection. One, the people more closely control their state governments through elected representatives and can legislate either a flat or fair tax of their own. And two, there is no additional burden to the tax payer who now completes both a state and Federal income tax return; the taxpayer will still save time in the preparation of taxes.
Among the benefits I also see with a Fair Tax is that the underground economy is reduced, with drug dealers paying the same tax as I do (they currently don’t claim all their income … can you imagine?) And it also creates a way for trust fund babies and the truly wealthy who don’t work to help pay for our Federal government. They get a free ride today, as only wage earners are taxed.
