RSS Feed MenuMidweek, I published a piece on the potential strengths and weaknesses of a second Huckabee candidacy for president. Yesterday, Gov. Huckabee responded with a vigorous emailed defense against three of the questions I raised. With the governor’s permission, his rebuttal is posted in full below.
- David Frum
* * *
Hi, David—usually I like your stuff and typically don’t respond to things written about me no matter how off the wall they are (and there are plenty of those things.) But because I respect your usual good writing and attention to facts, I must say that I was very surprised at the column this week. You raised some interesting questions, but I have to take exception to your answers, which would have been decidedly different had you obtained the answers from sources other than those which were manufactured during the campaign by political opponents and then repeated as “fact” from that point forward. On 3 questions you raise, I hope you’ll indulge me a first person response:
Is he appropriately discerning on policy? Huckabee based his presidential candidacy in large part on his advocacy of the so-called Fair Tax, a national retail sales tax that could supposedly substitute for the income tax and put the IRS out of business. This idea is not half-baked — it has not even approached the vicinity of the oven. (See here for a devastating critique by Bruce Bartlett.) Huckabee’s advocacy of such an idea warns of a lack of policy skepticism, a susceptibility to schemes that sound good on first hearing — dangerous attributes in a president.
–It’s unfortunate that you have not read the actual Fair Tax bill introduced in Congress by Congressman John Linder or the book he co-authored with Neil Boortz. The Fair Tax was the result of nearly $20 million of research from some of the top economists from Boston University, Harvard, and other credible universities. What doesn’t approach the oven is the laughable “analysis” by Bartlett, who obviously failed to understand the Fair Tax when he decided to condemn it. Most of the critics who deem it to be bad policy reflect something between total ignorance and misinformation to the point of gross distortion. I am more than willing to defend in details the tenets of why it would be better economic policy to cease penalizing productivity and burying business people in compliance law in exchange for a simple and transparent tax on consumption.
• Is his religious appeal wide enough? Faith-based politics is fine. But Huckabee’s support in 2008 often seemed sectarian. He says his words were taken out of context, but at least once in the campaign he seemed to criticize Mitt Romney’s Mormon faith. This too-narrow religious appeal offended not only many American Mormons, but also a much larger group, Catholics, who readily inferred: “Huckabee, a Baptist, seems to disapprove of Mormonism as non-Christian. What must he think of us?”
I have not been critical of Mormons nor of Mitt Romney’s religion. I’ve repeatedly stated that I did not think that Mitt Romney’s religious views or affiliation were a reason to vote for him or against him. I have spoken often of my absolute admiration of Mormons in public office such as Michael Levitt, Orrin Hatch, and Jon Huntsman. My conflicts with Romney had NOTHING to do with his religion or mine. It had to do with his inconsistency on issues ranging from guns, abortion, taxes, health care, same sex marriage, mandates of the government, etc.
• Is he socially out of touch with modern America? On gay rights the country is moving toward a new consensus. On stem-cell research, the consensus in favor seems as solid as ever. Huckabee has chastised Indiana governor Mitch Daniels for suggesting that the country needs a “truce” on divisive social issues. Does that mean Huckabee will reopen these divides — with conservatives increasingly breaking off the smaller half of the wishbone?
Actually 2 polls this year (Gallup and Pew) reveal that for the first time since 1973, the prevailing view is pro-life and most interestingly because younger women are more pro-life than their mothers or grandmothers. As for same-sex marriage, it’s been on the ballot in 31 states, including CA and Maine (hardly right wing red states) and in EVERY state where people have decided, traditional marriage is upheld. It is most noteworthy that in both African American and Hispanic populations, the support for traditional views of marriage is significantly higher than in the white population. As for stem cell research, I enthusiastically support stem cell research—just not the increasingly discredited embryonic version. It has been a common tactic of the left to confuse adult stem cell research with embryonic stem cell research, which is as honest as saying that approval of married adults having sex is the same as approval of 4 year olds having sex.
You are an influential force and worth hearing, but when the instrument is playing the song “off key,” it lessens the appeal of the musician. You normally play well. I want you to hit the right notes!
Sincerely,
Mike Huckabee
easton // Jul 9, 2010 at 7:01 pm
Here is the Bartlett criticism of the Fair Tax:
(The New Republic) This column was written by Bruce Bartlett.
The basic theological tenets of the Church of Scientology are well known: a fanatical hatred for psychiatry coupled with a creation myth that involves an evil alien ruler named Xenu and his sundry galactic allies. The basic tenets of its tax policy are somewhat less familiar. But Scientologists promulgated and, at one point, heavily promoted a proposal that would replace all federal income taxes with a national retail sales tax (NRST). And the theology and tax policy aren’t entirely unrelated: Xenu used phony tax inspections as a guise for destroying his enemies.
In a strange confluence, the Scientologist proposal happens to be nearly identical to one of the trendiest conservative tax proposals of the year, the so-called FairTax, which has been endorsed by John McCain and Fred Thompson, as well as second-tier presidential candidates Mike Huckabee, Tom Tancredo, Duncan Hunter, and Democrat Mike Gravel. Georgians John Lindner and Saxby Chambliss have introduced FairTax legislation in the House and Senate that would establish a 23 percent national sales tax.
But, when you mention any hint of the nexus between Scientology and the NRST – as I did briefly in a recent Wall Street Journal op-ed – you’ll be denounced by FairTax supporters as a smear artist. This retort, however, is simply evidence that these FairTax supporters don’t know the history of their own proposal. That’s too bad. Perhaps if they understood its origins in Scientology, they might have a greater appreciation for its inherent flaws.
The story of the FairTax’s provenance is one that I can tell with some firsthand knowledge. In 1993, fresh from a stint at the Treasury Department, I spent a few months at the Cato Institute. I was filling in for Steve Moore – now an editorial writer at The Wall Street Journal – who took a brief leave from his job as director of the think tank’s fiscal studies program to advise former Texas Representative Dick Armey. It was there that I was visited by a man named Steven L. Hayes, the founder of group called Citizens for an Alternative Tax System (CATS) that promoted the NRST, and who was, as Moore pointed out to me, a prominent Scientologist.
It wasn’t hard to figure out the Scientologists’ motives for hawking the NRST. The IRS had refused to recognize Scientology as a legitimate church – a fact that seemed to enshrine their popular reputation as a “cult.” To remedy this situation, Scientologists waged war against the IRS. At various points, the Church attempted to infiltrate the tax authority and even hired private investigators to examine the private lives of IRS officials. And the same impulse behind these measures led them to devise the NRST. One church spokesman told National Journal’s Paul Starobin, “We thought, If this [discrimination] is happening to us, there must be a lot of people to whom this is happening.’ … How could some positive changes be made?” Since nearly every state has a sales tax, it would be a simple matter to get them to collect a federal NRST, rendering the IRS instantly superfluous, a ripe target for abolition.
As Starobin told the story, CATS wooed the Texas political elite, including Robert A. Mosbacher Jr., the son of George H.W. Bush’s secretary of Commerce. Mosbacher urged Hayes to reach out to Jack T. Trotter, an attorney close to Texas Representative Bill Archer, the ranking Republican on the tax-writing House Ways and Means Committee. Although Trotter and Hayes held several meetings, nothing came of it. According to Starobin, Trotter feared that the Scientology connection would turn off too many potential supporters. (Hayes, for his part, has always denied that the church played any role in his group after helping found it.) But Trotter was hooked by the sales tax idea and wanted it expanded to include the payroll tax as well. He formed Americans for Fair Taxation (AFT) in 1995 to promote the CATS proposal, but without the taint of Scientologist involvement. AFT promoted the FairTax for a decade, elevating the plan to its current popularity.
By the time that Trotter had shunted the Scientologists aside, the church was losing interest in tax reform. In 1993, the IRS finally recognized Scientology as a legitimate religion, ending the rationale for a vendetta against the tax collectors. CATS basically withered. Its last tax return, filed in 2005, showed contributions totaling $1,725. A year later, the group appeared to be completely defunct. (Interestingly, in 2003, the group’s tax returns listed my old colleague Steve Moore as a director.)
A brief digression: A few years after I encountered Hayes, he gained notoriety by suing an anti-Scientologist organization called the Cult Awareness Network (CAN). When CAN declared bankruptcy in the wake of this suit, Hayes purchased the organization’s assets and name at auction. Overnight, CAN ceased to be a thorn in Scientology’s side.
The reason I brought up the Scientology connection in the first place was not to create guilt by association. Rather, it was to explain that CATS had one very specific goal: the abolition of the Internal Revenue Service. Anything else that the NRST might accomplish was entirely secondary. And, in the rush to rid the world of the IRS, the plan’s authors neglected some important details, not to mention some key facts.
For starters, the FairTax is deceptively calculated. When you think of a 23 percent sales tax, you think of paying an extra 23 cents on the dollar. That’s how every sales tax in the world works. The FairTax, on the other hand, doesn’t represent 23 percent of the pre-tax value of the item you bought, but the post-tax value of the item. So, under FairTax, you wouldn’t pay $1.23 for a $1 widget – but $1.30, since the 30-cent tax is 23 percent of $1.30. How straightforward!
The legerdemain doesn’t end there. Unlike every other sales tax in the world, the FairTax actually applies to everything – every pencil, every tank – the government buys. Unfortunately, the FairTax proposal doesn’t take into account this increase in government spending. Thus, it will either provoke a massive cut in federal spending or a massive increase in taxes.
And what about the poor who bear the brunt of this highly regressive tax? The FairTax would track every household’s monthly income and then cut checks to minimize the pain, a logistical challenge that will ultimately resemble some welfare state nightmare. What’s more, this would cost gobs of money, forcing further cuts in spending.
For these and other reasons, every reputable tax expert who has ever looked at the FairTax has concluded that the true tax rate would have to be much, much higher than 23 percent (or even 30 percent) to work – and, even at that unrealistically low rate, the plan would inspire massive tax evasion. In short, the FairTax is a crackpot scheme from beginning to end. That would be true even if the Scientologists hadn’t authored it.
buddyglass // Jul 9, 2010 at 7:17 pm
Some thoughts:
1. Like everyone else, I’m pleasantly surprised by the tone of Huckabee’s response.
2. Having read Bartlett’s critique of the FairTax, I have to agree that it’s not compelling. Then again, I’m a fan of the FairTax. At least from my cursory reading, it seems like Bartlett ignores the employer matching component of payroll taxes when he cites statistics about the current tax burden.
3. I agree with Bartlett that the 23% figure is misleading and confusing. I wish the FairTax folks would just say 30% instead, which is what it would actually be.
4. As much as I would like to imagine that the FairTax enjoys broad bi-partisan support, it really doesn’t. Look at the co-sponsors of the House and Senate bills. They’re 90% Republican.
5. While his support for the FairTax is probably the main reason I’d consider supporting Huckabee, a number of other things make me uncomfortable. For one, he seems to be a big fan of the “border fence” and a “strong arm” blockade against illegal immigration. (I’m all for reducing illegal immigration, but I don’t think that’s the way to do it.) Also, he associates with some pretty fringe elements on the evangelical right. See this blog post by Brink Lindsey, research director at Cato:
http://www.brinklindsey.com/?p=138
easton // Jul 9, 2010 at 7:21 pm
My own other comment about the Fair tax. If enacted I would move to a border town and do all my shopping across the border, saving all the taxes, unless you are going to have Federal tax inspectors assess taxes for every can of coke bought it would represent a boon to Mexico and Canada.
ktward // Jul 9, 2010 at 7:23 pm
The money quote from Bartlett:
… every reputable tax expert who has ever looked at the FairTax has concluded that the true tax rate would have to be much, much higher than 23 percent (or even 30 percent) to work – and, even at that unrealistically low rate, the plan would inspire massive tax evasion. In short, the FairTax is a crackpot scheme from beginning to end. That would be true even if the Scientologists hadn’t authored it.
ltoro1 // Jul 9, 2010 at 7:44 pm
I agree that there are some things about the Fair Tax that don’t make sense. For instance how do you handle retail sales tax on a home? At the same time I am not impressed with Bruce Bartlett’s new found love of a VAT.
sinz54 // Jul 9, 2010 at 7:46 pm
easton: My own other comment about the Fair tax. If enacted I would move to a border town and do all my shopping across the border, saving all the taxes,
That would not be necessary for most nonperishable purchases. Just purchase the products online from a website based in another country.
On Ebay.com, I’ve bought plenty of items from Australia and various Asian nations. True, the Fair Tax law would probably require us all to pay the tax on such items “voluntarily”–just as we must now do for items bought out of state, if we live in a state with a sales tax. But that has proven unenforceable.
sinz54 // Jul 9, 2010 at 7:51 pm
ktward: … every reputable tax expert who has ever looked at the FairTax has concluded that the true tax rate would have to be much, much higher than 23 percent (or even 30 percent) to work – and, even at that unrealistically low rate, the plan would inspire massive tax evasion.
If Huckabee wants a fair consumption tax, he should consider a Value-Added Tax (VAT) like they have in some European nations.
Unlike the Fair Tax, a VAT is collected at each stage of the economic process: A company manufacturing silicon chips pays for the raw materials and pays a VAT on them too. That company sells its chips to a computer company which pays a VAT on the purchase of those chips. The computer company sells its computers to a business which pays a VAT on the purchase of those computers. Etc.
And unlike the Fair Tax, a VAT is not intended as a complete substitute for income taxes. But imposing a VAT would enable the capital gains tax rate to be reduced; and/or the revenue from the VAT could be used to help balance the Federal budget.
sinz54 // Jul 9, 2010 at 7:57 pm
easton: Perhaps if they understood its origins in Scientology, they might have a greater appreciation for its inherent flaws.
That is ridiculous, a classic ad hominem fallacy–AND it’s a smear too, known as “guilt by association.”
Gee, I thought liberals used to call those kinds of tactics “McCarthyism.” What ever happened to that anyway???
I don’t care what Scientologists think about anything. The Fair Tax either stands or falls on its merits. It doesn’t matter if Scientologists like it or physicist Stephen Hawking likes it or Dems like it or Repubs like it.
After all, I’m willing to examine all of Obama’s proposals on their merits, regardless of the bizarro far-left-wing loons who swoon over him and them.
easton // Jul 9, 2010 at 8:03 pm
The VAT tax is proven to work, they use it in Europe and in China.
sinz54, yeah, I thought of that, but I don’t buy things on the internet much, except plane tickets. I don’t like my credit card info out there. But I will be completely honest and say I would avoid that tax in every manner I could. And it would be a huge boon for Mexico and Canada, and imagine the smuggling. So it is unworkable and will never be passed, hence Huckabee truly did make a mistake by endorsing the idea. Now he always back off of it by saying it is something we should “study.” and I am pretty confident he will at some point. His pollsters alone would tell him it is a no go.
busboy33 // Jul 9, 2010 at 8:51 pm
“That is ridiculous, a classic ad hominem fallacy–AND it’s a smear too, known as “guilt by association.”
Gee, I thought liberals used to call those kinds of tactics ‘McCarthyism.’ What ever happened to that anyway???”
I’d point out that trying to imply liberals are somehow co-opting McCarthy’s tactics (hinted at by the multiple question marks) is an attempt to smear liberals by association sinz, but given your demonstrated interest in the process I figured it would be unecessary.
R. George Dunn // Jul 9, 2010 at 9:57 pm
Bruce Bartlett has come out supporting the conservative nationalists we have,, the DC GOP. David Frum here has stirred his articles in support of these nationalists who own the nicname RINO. Some have come back to the Constitution, but not all. The reason these good ole boys want to keep the tax system we have is to control for benefit of lobby funds into their sesspool.
The flat tax being pushed by these had Armey and his freedom Works taking FairTax down to hide the fact that Fairtax is not only the preferred tax system, but is the number one priority of the Teaparty Patriots.
Governor Huckabee has been very gracious to Mitt, by not defining his character which … The Romneys of the world do not want FairTax cause it will hurt their empires they set up when they got Reagan to open up free trade and leave the Federal tax burden on the USA manufacturer with the tax built into the production cost thus giving a 23% handicap to imports.
Thank you David for this Forum and exchange you have honored us with Governor Huckabee, Michael~
Erstwhile Repub // Jul 10, 2010 at 2:29 am
“Like everyone else, I’m pleasantly surprised by the tone of Huckabee’s response.” Buddy Glass.
Surprised? How so? Anyone who has read Governor Huckabee’s books and blogs and heard him speak on radio or television would recognize the same tone of reasoned intelligence he always uses.
As for associating with “fringe elements”– One of Huckabee’s many strengths is that he is able to work with anyone. As governor in Arkansas, remember, he was able to make huge improvements in education, infrastructure and healthcare in Arkansas–but it was by working with a Democrat majority so downright hostile to him they nailed his office door shut when he took office as Lt. Governor. He has interviewed people on his television show with whom he has deep fundamental disagreements–e.g., Bill Maher–and shown them the same respect and courtesy he extends to everyone (a nice contrast to the usual talk show shouting matches that!), and he retains his integrity (a nice contrast to the majority of politicos who are staunchly pro-life when talking to one audience and firmly pro-choice when campaigning to another.)
I like the Fair Tax, too. Enormous improvement over the IRS.
buddyglass // Jul 10, 2010 at 3:33 am
@easton
I would move to a border town and do all my shopping across the border…
If the FairTax were enacted then the price of goods in border towns would rise to some level slightly below the after-tax price of goods in the U.S. Simply because there would be more demand. Suppose you live in a border town and your groceries cost $100. They cost $100 across the border. FairTax is enacted. Now your stuff costs $130. So you go across the border and buy them for $100. If I’m the Mexican grocer selling you the stuff for $100, and I know you have to pay $130 in the U.S., I’m sure not going to keep charging $100 for very long.
As a side note: groceries and other goods are ALREADY less expensive on the Mexican side of the border. Sometimes significantly so. Why haven’t you moved down there to take advantage of all the cheap stuff? Most likely because quitting your job and uprooting yourself in order to save a few bucks on groceries really isn’t something most people would do.
Another side note: In the post-9/11 era, crossing the border is kind of a pain in the butt. Even if I already lived on the border, I’m not sure I’d want to spend an hour per-trip just to save ~10% on groceries.
@sinz
That would not be necessary for most nonperishable purchases. Just purchase the products online from a website based in another country.
Depending on what you’re buying, shipping costs are going to kill whatever benefit there is to buying from an international retailer.
@Erstwhile
Surprised? How so?
Mainly surprised in that a big-name politician would deign to respond to Frum directly, in email, and address his points, rather than simply slam him indirectly through the media. I didn’t mean to imply that I expected Huckabee to flip out or anything.
With respect to Huckabee working with “fringe elements”: Some fringe elements ought not to be associated with. At all. I put hard-core Christian Reconstructionists (like Hotze) in that category. And I say that as an evangelical Christian.
deb2012 // Jul 10, 2010 at 7:08 am
Wonder how long it would have taken to end state sponsored discrimination against African Americans with that mantra…. eventually there will be enough LGBT to tip the scales. This is a matter of time and the religionistas thru history push back hard against just about every fairness doctrine known to man.
Ken Hoagland // Jul 10, 2010 at 8:07 am
Memo to Bruce Bartlett:
Just Do the Math
By David G. Tuerck
In the November 13, 2006, issue of Tax Notes, my
coauthors and I published an article (the BHI/Kotlikoff
study) in which we hoped to resolve issues related to the
FairTax proposal, under which the federal government
would replace almost all existing taxes with a sales tax.1
Our article was aimed largely at correcting and updating
findings reached byWilliam G. Gale in his earlier critique
of the FairTax.2
We hoped that our article would elevate the discussion
of the FairTax, which is gaining increased attention in
national politics. We also hoped that, by presenting the
underlying mathematics in painstaking detail, we could
dispel the confusion that had long lingered over the
calculation of the FairTax rate.
Now, in a recent article, Bruce Bartlett launches an
attack on the FairTax in which he lapses into the same
confusion that we (and Gale before us) had attempted to
dispel.3 Bartlett singles out our study for criticism, accusing
us of duplicity in our efforts to work through the
mathematics involved.4 In the process, he brings his
readers back to square one in getting things right.
Although some of Bartlett’s arguments are substantive,
much of his article is directed at how people
(proponents, voters, politicians, analysts) perceive the
FairTax. Perceptions are important, but they should be
based on fact, rather than error. The problem is that
Bartlett’s article is strewn with errors — errors that he
could have avoided simply by comprehending what we
— and Gale — had already put before him.
Although Bartlett covers many issues and in the
process makes many mistakes, I will limit my comments
here to his attempt to work through what he calls the
‘‘distributional consequences’’ of the FairTax. This is no
easy task insofar as Bartlett barely sketches the mathematics
that underlies his reasoning on this issue or any
issue. It means revisiting many issues already addressed
in our article. It also means engaging in some mathematics
and, in effect, correcting Bartlett’s mathematics (or
what his mathematics would show if shared with us). It
is important, nevertheless, to undertake this task because,
left unchallenged, Bartlett’s article will only sow further
confusion.5
Of Bartlett’s mistakes, I will focus on six:
1Paul Bachman, Jonathan Haughton, Laurence J. Kotlikoff,
Alfonso Sanchez-Penalver, and David G. Tuerck, ‘‘Taxing Sales
Under the FairTax: What Rate Works?’’ Tax Notes, Nov. 13, 2006,
p. 663, Doc 2006-21659, 2006 TNT 219-51. This and other Beacon
Hill Institute studies may be found on theWeb site of Americans
for Fair Taxation (see http://www.fairtax.org) and on the Institute’s
home page, http://www.beaconhill.org.
2William G. Gale, ‘‘The National Sales Tax: What Would the
Rate Have to Be?’’ Tax Notes, May 16, 2005, p. 889.
3Bruce Bartlett, ‘‘Why the FairTax Won’t Work,’’ Tax Notes,
Dec. 24, 2007, p. 1241, Doc 2007-26563, 2007 TNT 248-33.
4Id. at 1249-1250.
5Also, Bartlett’s views are getting increased attention from
the media. See, e.g., Jonathan Weisman, ‘‘Criticism Aside, ‘Fair-
Tax’ Boosts Huckabee Campaign,’’ The Washington Post (Dec. 28,
2007), p. A04, available at http://www.washingtonpost.com/
wp-dyn/content/article/2007/12/27/AR2007122702155.html.
See also Brian Mooney, ‘‘In Spotlight, ‘Fair Taxers’ Push Cause,’’
David G. Tuerck is chair of the Department of
Economics and executive director of the Beacon Hill
Institute at Suffolk University in Boston. Tuerck led a
team of economists at the Beacon Hill Institute in a
series of studies aimed at determining the economic
effects of the FairTax national sales tax proposal.
In this article, he criticizes a recent Tax Notes article
by Bruce Bartlett, entitled ‘‘Why the FairTax Won’t
Work’’ (Tax Notes, Dec. 24, 2007, p. 1241, Doc 2007-
26563, 2007 TNT 248-33). Tuerck identifies six mistakes
made by Bartlett in attempting to identify the distributional
consequences of the FairTax. These mistakes,
according to Tuerck, arise over Bartlett’s understanding
of the price effects of the FairTax, his interpretation
of the purpose of the FairTax rebate, and his assessment
of the burden of the FairTax on government.
The author wishes to thank Alfonso Sanchez-
Penalver for his invaluable assistance.
Copyright 2008 David G. Tuerck.
All rights reserved.
(Footnote continued in next column.) (Footnote continued on next page.)
TAX NOTES, February 4, 2008 639
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
• misstating the calculation of the effective tax rate
under the FairTax;
• concluding that the removal of existing taxes in
anticipation of the FairTax would reduce prices;
• observing that imposition of the FairTax would raise
prices by the inclusive rate, rather than the exclusive
rate;
• implying that the FairTax rebate is intended to
compensate consumers for rising prices;
• alleging duplicity in how BHI/Kotlikoff handles the
rebate in calculating the FairTax rate; and
• erroneously claiming that the FairTax would impose
a burden on the federal government and on state
and local government.
In proceeding, I will assume that the reader knows the
fundamentals, about which more may be learned by
reading the BHI/Kotlikoff study or consulting the Web
site of Americans for Fair Taxation. The FairTax is intended
to be revenue neutral and mildly progressive. It
would maintain existing federal government programs in
real terms while also providing a rebate to every household
approximately equal to what that household would
pay in taxes if it were at the poverty level. It would be
imposed on both personal and government consumption
expenditures. Its goals are to remove the bias of the
existing tax system against saving, expand the economy,
and simplify tax administration and compliance.
One matter that comes up repeatedly in connection
with the FairTax is the distinction between an inclusive
and an exclusive tax rate. The architects of the FairTax
have calculated that the tax rate would be 23 percent on
an inclusive basis (which, we find, is close to the correct
rate) and 30 percent on an exclusive basis. It’s important
to understand the distinction between those concepts.
People usually think of sales taxes on a tax-exclusive
basis. Consider an item for which the price, exclusive of
the sales tax, is $1 and the price inclusive of the sales tax
is $1.30, with $0.30 going to government as tax revenue.
The tax-exclusive rate is 30 percent, computed as $0.30/
$1. But this implies a tax-inclusive rate of 23 percent (=
$0.30/$1.30). Generally, the relationship between the
tax-exclusive and the tax-inclusive rate is given by this
equation:
where te is the tax-exclusive rate and ti is the tax-inclusive
rate.
This algebra is important because it reminds us that
(ignoring other taxes such as excise taxes), the price of a
good, inclusive of the tax, always exceeds the price,
exclusive of the tax, by te (30 percent under the FairTax).
Likewise, the price exclusive of the tax is always ti (23
percent) less than the price, inclusive of the tax. Although
this algebra is well understood by most students of the
issue, Bartlett manages to get it wrong at several points in
his article.
So let’s consider what Bartlett has to say.
The Effective Tax Rate
One of Bartlett’s arguments has to do with the ‘‘effective’’
tax rate that income earners would pay under the
FairTax. It is in making this argument that he makes his
first mistake.
Effective tax rates are calculated to show the ‘‘sacrifice’’
imposed by a tax, given that there is often a
difference between the statutory tax rate and the tax rate
that measures this sacrifice. Consider the following: Joe
currently has a gross income of $50,000. He gets a
deduction against his gross income of $10,000 so that his
taxable income is $40,000. If the statutory income tax rate
is 25 percent, his tax bill is $10,000, leaving him with
$40,000 in after-tax income. But the effective rate is not
the same as the statutory rate. We compute his effective
tax rate by expressing his tax liability as a fraction of his
gross income, which yields a rate of 20 percent.
Alternatively, we could set up the calculation as
follows:
Computing his effective rate using this equation we
get
= 20%
$12,500 – $2,500
$50,000
, as before.
The numerator in Equation (2) is the difference between
the amount that the taxpayer would pay on his
earnings if there were no deduction and the amount that
he can deduct from his tax liability, given that there is a
deduction. We can think of the numerator as his net tax
payment.
To look at the calculation in a different way, consider
Joe’s standard of living. Assume 50,000 widgets are
produced. If Joe buys only widgets and if the price of a
widget is $1, then, under the income tax, he gets to
consume 80 percent, or 40,000 of these widgets, leaving
20 percent, or 10,000, for the government. The goal of
computing the effective rate should be to determine how
the tax, whatever it is, impinges on his standard of living.
Here it impinges on his standard of living by allocating to
government 20 percent of the widgets produced.
Suppose then that the income tax is abolished and that
a sales tax is put in its place. Assume the statutory sales
tax rate is 25 percent (expressed on an exclusive basis).
Also assume that there is no rebate, that the taxpayer’s
gross income remains unchanged, and that the price of
goods rises by 25 percent.6 He spends $50,000 on consumption,
of which 20 percent, or $10,000, is taxes. If we
The Boston Globe, Jan. 1, 2008, available at http://www.
boston.com/business/taxes/articles/2008/01/01/in_spotlight
_fair_taxers_push_cause/.
6Note that this is the ‘‘tax-exclusive’’ rate (0.25 = (0.20/1-
0.20)). Below, we refer to the case in which prices rise by the
tax-exclusive rate as one of full monetary ‘‘accommodation.’’
(1) t = e
ti
1 – ti
(2) Effective Rate =
Gross Tax – Deduction From
Gross Tax
Gross Income
COMMENTARY / SPECIAL REPORT
640 TAX NOTES, February 4, 2008
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
apply these facts to Equation (2), we get exactly the same
result as before, that is, 20 percent.
In this instance, there is no ‘‘Deduction From Gross
Tax,’’ but the formula gives the correct answer, insofar as
Joe still has to sacrifice 20 percent of all the widgets
produced.
A widget previously cost $1 but now costs $1.25. Joe’s
$50,000 buys him exactly 40,000 (= $50,000/1.25) widgets,
leaving the remaining 10,000, or 20 percent of the total,
for the government to consume.7
Now, to make the example more realistic, let the
government offer a tax rebate. This will require a higher
statutory rate. But suppose that the rebate is just high
enough to make it possible for Joe to maintain exactly the
same standard of living that he enjoyed under the income
tax and previously under the FairTax without a rebate.
Then, surely, we have to say that his effective rate would
still be 20 percent.
To see that it would, assume that the government
decides to set the tax-exclusive rate at 30 percent and to
provide a rebate of $2,000. This implies a tax-inclusive
rate of 23.08 percent, just as under the FairTax.8 Joe now
has $52,000 (the previous gross income plus the rebate) to
spend and pays a ‘‘gross tax’’ of $12,000 (= 0.2308 ×
$52,000).
Joe can still buy 40,000 (= $52,000/1.30) widgets, and
the government still gets 10,000 widgets.9 Thus we expect
the effective rate to remain unchanged. And, indeed, it
does. Subtracting the rebate from his gross income, his
net tax bill is $10,000, which, divided by gross income,
yields an effective rate, again, of 20 percent. The effective
rate remains the same even though the statutory rate is
higher.
Americans for Fair Taxation, the object of much criticism
from Bartlett, uses a similar method, he points out,
to compute effective tax rates for hypothetical taxpayers.
10 But Bartlett would change this method. He would
divide the gross tax by the sum of earnings and the rebate
as follows:
Under the FairTax plus rebate, Equation (3) would
yield an effective rate of 23.08 percent (= $12,000/
($50,000 + $2,000)), which, in this instance, is the same as
the statutory rate. This, he argues, is closer to what
taxpayers ‘‘think of’’ in terms of the effective rate.11
His reasoning is doubly confused. First, he suggests
that proponents of the FairTax use Equation (2) rather
than Equation (3) because Equation (2) yields a lower
rate. But suppose we applied Equation (3) consistently to
the income tax and the FairTax. Then it is the income tax
that would yield the higher rate, at least for these
examples. Using Equation (3), the rate under the income
tax would be 23.81 percent (= $12,500/ ($50,000 +
$2,500)), which is greater than the rate (20 percent) under
the FairTax without the rebate and greater than the rate
(23.08 percent) under the FairTax with the rebate.
Second, Bartlett’s method makes it impossible to compare
the burden imposed by the FairTax with the burden
imposed by current law on an apples-to-apples basis.
Bartlett apparently believes that people think of the
effective rate in a way that makes this comparison
impossible. But if they do, we should encourage them to
think in terms of Equation (2) rather than Bartlett’s
specification. It seems counterproductive to provide numerical
illustrations that could encourage readers to
think only in the nonsensical way Bartlett suggests. By
trying to reinvent the calculation of the effective rate,
Bartlett steers the reader into a mistake of his own
making — his first mistake.12
Three Additional Mistakes
Bartlett criticizes two prominent FairTax supporters,
Neal Boortz and John Linder, for making a muddle of
their argument concerning the effect of the FairTax on
prices.13 Bartlett criticizes Boortz and Linder as follows:
One problem with analyzing the distributional consequences
of the FairTax is that its supporters
sometimes argue that after-tax incomes will rise by
enough to pay the higher prices for goods and
services once the 23 percent is added to the prices
people pay today. At other times, they argue that
prices will fall once income taxes currently embedded
in prices are removed, implying a free lunch in
which everyone is better off and no one is worse off.
Actually, it’s a double free lunch because not only
do you get to keep all the taxes currently withheld
and pay no more for goods and services now, but
you get the rebate as well.14
While Bartlett is right about Boortz and Linder, he
goes on to botch his own analysis of the effect of the
FairTax on prices.
He writes:
7Note that, in this example, as under the FairTax, the
government pays the tax-inclusive price, $1.25, for widgets. The
government gets $12,500 (= 50,000 × $0.25) in tax revenue,
which it uses to buy its 10,000 (= $12,500/1.25) widgets.
8We show how we get this rate in the discussion that follows.
The example implies that the government has determined the
family consumption allowance, discussed below, to be $8,666 (=
$2,000/0.2308), which is bigger than the comparable number
under the FairTax but used here for illustrative purposes.
9The government collects $15,000 (= 50,000 × $0.30) in tax
revenue ($12,000 from Joe’s consumption and $3,000 from its
own consumption) of which it uses $2,000 for the rebate, leaving
it with $13,000 to buy widgets at $1.30 apiece.
10Bartlett, supra note 3, at 1243.
11Id. at 1244.
12In fact, Bartlett (supra note 3, at 1244) shows that he is triply
confused when he suggests that the effective rate, as defined in
Equation (3), assumes that taxpayers save the rebate, whereas
the statutory rate assumes that they spend the rebate. In fact,
neither calculation has anything to do with what people spend
or save but with the size of the rebate relative to the other terms
in his (incorrect) equation.
13Neal Boortz and John Linder, The FairTax Book (New York:
HarperCollins/Regan Books, 2005).
14Bartlett, supra note 3, at 1245.
(3) Effective Rate =
Gross Tax
Gross Income + Rebate
COMMENTARY / SPECIAL REPORT
TAX NOTES, February 4, 2008 641
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If the FairTax imposes a 23 percent tax on goods
and services, it looks as if it is largely a wash. Their
prices will fall by 22 percent once all taxes are
abolished and the FairTax will add about the same,
so the final consumer cost will be no higher than it
is now, at least on average. If this is true, however,
it is hard to understand why there needs to be a tax
rebate to compensate for the burden of the tax,
since it appears as if there is no burden.15
Then, in speculating further on what might happen to
prices, he considers the possibility that prices might rise,
rather than fall:
However, if prices rise by 23 percent to allow
workers to avoid cutting their wages, they aren’t
really better off. They have more disposable income
because of the abolition of withholding, but everything
costs more because of the inflation necessitated
by imposition of the FairTax.16
Bartlett makes three mistakes here. First, he buys into
the very mistake that Boortz and Linder made by saying
that prices would fall when current taxes are removed. In
fact, the removal of current taxes would, in and of itself,
leave prices unchanged. Second, he implies that, given
constant wages, prices would rise by the inclusive rate ti
when in fact they would rise by the exclusive rate te.
Third, he misconstrues the role of the rebate. In fact, the
rebate has nothing to do with what happens to prices.
To see how Bartlett errs, we have to do some math.
Assume that there are just two kinds of consumption,
personal consumption C and government consumption
G. Assume also that under current law, G is financed by
revenue from a tax tinc imposed on income and that all
after-tax income is consumed. There are no transfer
payments.
We then introduce two equations:
where tinc is the rate at which income is taxed and Y is
production in real dollars, and
where M is the money supply, P is an index of market
prices, and V is the velocity of money.
For our purposes, it is convenient to rewrite (5) as
Consider a simple example. Let production consist
only of widgets and let Y equal $1,000, M equal $1,000,
and V equal 1. Thus P equals 1. In this world, the price
paid by consumers (the market price) is just equal to the
price received by producers (the producer price). We can
set the market price and the producer price of a widget at
$1.
The income tax tinc is 20 percent, so that government
raises $200 in revenue, which it uses to buy 200 widgets.
Consumers (who are also workers) are left with $800 in
after-tax income, which they use to buy the remaining
800 widgets.
Now let’s address Bartlett’s second mistake. Consider
what would happen if the government simply removed
existing taxes and, perforce, quit spending. The straightforward
answer: With tinc equal to zero, and assuming no
change in M, V, or Y, consumer demand would rise to
absorb all 1,000 widgets, still priced at $1 apiece.17 There
would be no change in prices.
To understand Bartlett’s third mistake, suppose the
government substituted the FairTax for the income tax.
This would require it to compute a FairTax rate that,
when applied to personal and government consumption,
would yield just enough revenue to keep government
purchases constant in real dollars. As above, designate
this rate as ti when expressed on tax-inclusive basis and
as te, when expressed on a tax-exclusive basis. So what is
ti? Well, in this example, 20 percent. In real terms,
government consumption G still equals 20 percent of
total consumption C + G and of total production Y. Of the
total number of widgets produced, government still gets
20 percent and consumers the remaining 80 percent.
The FairTax rate has nothing to do with what happens
to prices, and what happens to prices has nothing to do
with the FairTax rate. To see why, consider the difference
between the market price and the consumer price of a
good. The market price is the price the consumer pays,
inclusive of the FairTax. The producer price is the price
received after he pays the FairTax. The relationship
between the two prices is as follows:
where PP equals the producer price. Before the FairTax,
PP = P, because te is zero. If, under the FairTax (and as it
turns out in this example), ti is 20 percent, then
te = = 25 percent
ti
1 – ti
and P must exceed PP by 25
percent. But that is all. P may rise, fall, or remain the
same after the FairTax is imposed, and whatever it does
depends strictly on how the monetary authorities decide
to adjust M, assuming that they decide to adjust it at all.
Although the monetary authorities could bring about a
fall in P by contracting M, there is no reason to believe
they would do so just because the FairTax has been
instituted.
As to what would happen, we can narrow down the
possible outcomes. At one extreme, the monetary authorities
could hold M and therefore P fixed, so that the
15Id. at 1246.
16Id. at 1247.
17Of course, M, V, and Y might well change. But it’s
appropriate to assume that all three variables are constant
within the ‘‘static’’ framework assumed here.
(4) G = t Y = t (C + G) = Total Revenue inc inc
(5) MV = PY
(6) P =
MV
Y
(7) PP =
P
1 + te
COMMENTARY / SPECIAL REPORT
642 TAX NOTES, February 4, 2008
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market price of a widget remained fixed at $1 and the
producer price fell to $0.80. At another extreme, the
monetary authorities could increase M by 25 percent, the
tax-exclusive rate, so that the producer price of a widget
remained fixed at $1 while the consumer price rose to
$1.25. In either event, the government would still get its
200 widgets and consumers their 800 widgets.
Now let’s consider some additional algebra. First,
assume that the monetary authorities chose to ‘‘accommodate’’
the FairTax by increasing the money supply by
α, where 0 ≤ α ≤ te, once the FairTax is enacted. When α
= 0, we have the case of ‘‘nonaccommodation,’’ and when
α = te, we have the case of ‘‘full accommodation.’’18
Now assume, as Bartlett does, that the monetary
authorities act in such a way as to keep gross wages,
which is to say producer prices, constant. To that end,
they would have to set α equal to te. Why? Because, as
Equation (7) shows, P would have to rise by te so that PP
would remain constant. Thus, prices rise by te, not ti. This
corrects his third mistake.
Bartlett’s fourth mistake is to confuse the purpose of
the rebate with what happens to prices. So let’s assume
that the federal government has determined there to be
some amount B, which represents the ‘‘base’’ for the
rebate. B is the aggregate ‘‘family consumption allowance’’
roughly equal to the family’s poverty level. Operationally,
B is the aggregate of individual household
incomes, set at whatever level government chooses to
compensate households for their taxes.
For example, in the BHI/Kotlikoff study, we determined
that the family consumption allowance for a
household of four in which there are two married partners
is $26,981. Under the FairTax, every household
fitting this description would receive a rebate of $6,206,
whatever its income. There is a different family consumption
allowance for each type of household, depending on
whether the household is headed by married partners or
not and depending on household size. We got B by
aggregating the family consumption allowance across all
of the various household types. In what follows, we
continue to ignore various other complexities, considered
in detail in our study.
So now, we are ready to write down an equation that
permits us to solve for ti:
As before, if there is no rebate and B = 0, then
ti = = 20 percent.
$200
$800 + $200 If government sets the aggregate
consumption allowance B equal to, say, $200,
then the rate would be higher:
Why the rebate? The answer is that some households
have less income than others. Suppose that there are 10
households sharing the 800 widgets. Rich households
might get many (some would say a disproportionate
share) of the widgets. Poor households might get few or
none. But if every household got a rebate of
= $5.00
.25 $200
10
(in real dollars), it could have at least
5 widgets. Because there are only 800 widgets to go
around and because every household now pays a tax of
25 percent, rather than 20 percent, richer households
would end up with fewer widgets than they would have
had without the rebate, but poorer households would
end up with more.
Put differently, the rebate reduces the effective tax rate
for low-income households and increases it for highincome
households. The ‘‘distributional consequence’’ of
the rebate is thus to redistribute income, specifically, to
reduce the effective tax rate (correctly calculated) for the
poor. It has nothing to do with compensating taxpayers
for rising prices or falling incomes. Thus, we have
Bartlett’s fourth mistake.
Who’s Being Dishonest?
The foregoing example leads to Bartlett’s fifth mistake.
Referring to the BHI/Kotlikoff study, Bartlett says:
The cost of the tax rebate that would have to be
paid is also cleverly dealt with in the new study so
as to minimize its budgetary impact. . . . [T]he study
does not show government spending rising by the
amount of the rebate. . . . Rather the cost of the
rebate is dealt with by reducing the tax base. . . . The
only purpose of doing it that way is to maintain the
fiction that the rebate is a reduction in taxes rather
than an increase in federal spending. It would be
more honest to do this accounting by adding the
rebate cost to the spending side of the budget.19
Let’s see who is being dishonest here. First, as equation
(8) shows, we are, in fact, putting the rebate (tiB) in
the budget; we add it to G to reflect the new spending
that the rebate necessitates.
18The monetary authorities would have to consider how the
degree of accommodation, varying from none to full, would
affect the overall economy and how it would affect the wellbeing
of various groups such as retirees. As Bartlett points out,
nonaccommodation might be impractical insofar as workers
would resist a reduction in their gross wages even though their
real wages would remain unchanged. At the same time, full
accommodation would raise prices and thus penalize retirees
who had been paying income taxes on their savings all along. In
the end, whatever the degree of accommodation, there would be
some transitional effects to consider and perhaps ameliorate. All
that said, the degree of accommodation and any price change
that results has nothing to do with rationale for the rebate, the
calculation of the FairTax rate, or the burden of the FairTax on
the purchasing power of consumers or government, figured in
the aggregate. 19Bartlett, supra note 3, at 1250.
(8) t(C + G)(1 + ) = (G + tB)(1 + ), which yields i i
(9) t = i
G
C + G – B
(10) t = i $200 = 25%.
$800 + $200 – $200
COMMENTARY / SPECIAL REPORT
TAX NOTES, February 4, 2008 643
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Perhaps Bartlett would rewrite equation (9) as
ti = G + Rebate.
C + G
But that is the same as writing
ti = , G+tBi
C + G
which follows directly from Equation (8).
Apparently, Bartlett doesn’t understand that it is necessary
to take the further step of writing down Equation (9),
as BHI/Kotlikoff did (in far greater detail), to solve for ti.
The BHI/Kotlikoff specification has nothing to do
with anyone’s zeal for the FairTax. Rather it has to do
with the problem of calculating ti when the rebate, which
influences the size of ti, also depends on the size of ti. Our
method, which is based on one used earlier by Gale,
solves this problem. So Bartlett’s fifth mistake is letting
his own zeal for debunking the FairTax interfere with his
attention to the algebra.
Mistake Number 6
Finally, we have this passage from Bartlett:
The new study also maintains the fiction that the
federal government would pay taxes to itself on its
own purchases and that the tax on those purchases
would not increase spending by the amount of the
tax. . . . Thus they have effectively assumed away
one of the major problems of the FairTax — that it
will raise prices by the amount of the tax.20
Again, as Equation (8) shows, there is no presumption
that prices will rise. That depends on the response of the
monetary authorities. Or to put it algebraically, the
expression (1+α) appears on both sides of the equation
and therefore cancels out.
Furthermore, the assumption that the government
pays taxes on its own purchases is not a fiction but a
reflection of the status quo. To see why, consider what
happens, under current law, when the government buys
a widget. The government pays $1 to the producer, who
then pays $0.20 in taxes, which the government collects
and uses to buy widgets. In other words, for every dollar
the government spends on widgets it gets $0.20 back in
taxes. The total tax take is $200, equal to the sum of $160
(= 800 × $0.20) in taxes collected on production for
personal consumption and $40 (= 200 × $0.20) collected
on production for government consumption.
Now assume that the FairTax is put in place and that
(to keep things simple) there is no rebate (B = 0). At one
extreme, the market price of the widget would remain
fixed at $1 and the producer price would fall to $0.80. The
government would pay $1 per widget, of which $0.20
would be taxes, just as before. At the opposite extreme,
the monetary authorities would permit the market price
of widgets to rise to $1.25, in which case the government
would pay $0.25 in taxes on each widget that it buys.
Nothing has changed in real terms. In either case, the
taxes that government pays itself are worth exactly
one-fifth the cost of a widget ($0.20/$1.00) or ($0.25/
$1.25). Whether market prices rise or remain the same has
nothing to do with the effect of the FairTax on the real
value of government spending.
Bartlett also fails to understand that it would make no
difference if government didn’t tax itself. Suppose the
architects of the FairTax had decided not to tax government,
that is, not to include government spending in the
FairTax base. In effect this would mean repricing government
to remove the taxes already paid on production for
government. Again, nothing real would change. Ignoring
the rebate, we rewrite equation (8) as:
which again gives us:
(12) t = i = 20%.
G
C + G
21
Thus, if government wanted to end the practice of
paying itself taxes on current purchases, it could do so.
Government would no longer have to pay the market
price for goods because it could now buy widgets at the
producer price, which would be 20 percent below market
price. With nonaccommodation (α = 0) market price
would remain unchanged. But government would pay
the producer price ($0.80) and would need 200 × $0.80 =
$160 in tax revenue to continue buying 200 widgets.
Individual consumers would buy their 800 widgets at $1
apiece, paying the needed $160 (= 800 × $0.20) in tax
revenue. With full accommodation (α = te = .25), market
price would rise by 25 percent and consumers would buy
their 800 widgets at $1.25 a piece, paying a total of $200
(= 800 × $0.25) in tax revenue. Government would use the
$200 to buy 200 widgets, as before, paying $1 (the
producer price) apiece.
This example shows (as Gale showed) that the FairTax
rate has nothing to do with whether government pays
taxes to itself or not and (as BHI/Kotlikoff and Gale
showed) whether market prices rise or not.
Bartlett continues to botch his algebra in the following
passage:
It cannot possibly make any sense for the Department
of Defense to pay 23 percent more for a
weapons system because the FairTax has been
added. The revenue just goes to Treasury, another
branch of government. Spending and revenues are
higher to exactly the same extent; it’s a wash, which
is why foreign countries don’t do it.22
First, a tax-inclusive FairTax rate of 23 percent, combined
with full monetary accommodation by the Fed,
would raise the price of weapon systems by 30 percent,
not 23 percent. Second, as shown above, it is an entirely
arbitrary matter whether the Defense Department or any
department of government ends up, in effect, paying
taxes to itself. If, as Bartlett concedes, ‘‘it’s a wash,’’ what,
precisely, is the objection?
20Id. at 1249-1250.
21Equation (11) accounts for the fact that, in this specification,
it is necessary to reduce the cost of government by ti, given that
the government doesn’t charge itself a tax.
22Bartlett, supra note 3, at 1249.
(11) tC(1 + ) = G(1 – t )(1 + ) i i
COMMENTARY / SPECIAL REPORT
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Bartlett is not content to misrepresent the implications
of the FairTax for federal government spending but
manages to do so also for state and local government
spending. Thus he says:
The problem for state and local governments is
worse. The FairTax simply raises their spending
without simultaneously raising their revenue. Realistically,
their only choice is to increase their taxes
to pay the FairTax on their spending. . . . Thus, to
the extent the FairTax forces state and local governments
to raise their tax rates, it becomes a backdoor
means of financing it at a deceptively low rate.23
This argument ignores the fact that state and local
government, like the federal government, is already
paying prices that include federal taxes that would in
turn be replaced by the FairTax. Second, it ignores the fact
that state and local government would be able to maintain
current services at no greater burden to state and
local taxpayers by some simple adjustments in their tax
codes. I explain the need for those adjustments in the
appendix and show how by making them, state and local
government would maintain its purchasing power, along
with that of individual consumers.
So it turns out that Bartlett’s sixth mistake is really a
combination of mistakes:
• falsely arguing that the FairTax would necessarily
cause government spending to rise;
• falsely claiming that government does not currently
tax itself;
• ignoring the fact that whether it taxes itself or not is
irrelevant;
• failing, again, to understand the irrelevance of price
changes for measuring real effects;
• confusing the price change under full accommodation
(te) with the inclusive tax rate (ti); and, most
egregiously,
• falsely claiming that the FairTax represents a burden
on government.
Conclusion
This article has identified six mistakes (and more)
made by Bartlett in his critique of the FairTax and,
collaterally, his attack on BHI/Kotlikoff. Bartlett accuses
BHI/Kotlikoff of presenting deceptive mathematics to
make the FairTax more palatable to politicians. That he
takes this tack is ironic, considering his own inclination to
put political ‘‘reality’’ ahead of principle.
Which, indeed, he does. Bartlett engages in the disingenuous
game of arguing against an idea by claiming it
to be politically infeasible. When he says that Congress
would never implement the rebate as planned and that it
would be subject to ‘‘political manipulation,’’ he is, in
effect, saying that scholars should avoid confronting
politicians with ideas that would limit their ability to
make bad policy. In that fashion, Bartlett is like the doctor
who won’t tell her overweight patient that he might die
of heart disease if he doesn’t diet — this on the assumption
that the patient wouldn’t stick to a diet anyway.
And it’s worse than that. Bartlett, in giving gratuitous
advice on practical politics, gets the practical politics
backwards. The FairTax does not attempt just to encourage
saving and simplify tax administration and compliance.
The FairTax would make it harder — not easier —
for politicians to manipulate the tax code to the end of
satisfying special pleaders. To extend the earlier metaphor,
it would put elected officials on a diet, insofar as
every additional dollar put toward government spending
and toward the rebate would mean a higher tax rate
visible at every retail transaction and a political liability
to anyone who suggested it. The fact that the FairTax
would restrain, not expand government, is the bitter pill
that policymakers would have to swallow.
Bartlett tries to put down the FairTax as an invention
of the Church of Scientology. But it was not Tom Cruise,
but Thomas Hobbes, who wrote, some 350 years ago, that
‘‘when the impositions are laid upon those things which
men consume, every man payeth equally for what he
useth.’’ I submit that Hobbes’s insight offers the better
foundation for applying economic science to our understanding
of the FairTax.
Appendix
Implementation of the FairTax would cause state and
local government to lose purchasing power unless it
made some adjustments in its tax law. At the same time,
those adjustments would permit state and local government
to maintain the real value of its purchasing power
without reducing that of consumers or of the federal
government itself.
Consider what happens when we add state government
spending to the tax base. Let
where G is federal government spending and SG is state
government spending.
Solving for ti,
Assume that, under the current system, the income
received by consumers is $1,250, that G = $200 (that is, the
federal income tax rate is 16 percent), and that state
governments impose a sales tax at 5 percent, measured
on a tax-exclusive basis. This implies a tax-inclusive state
sales tax rate of 4.76 percent. Further assume, as under
current law, that neither the federal nor the state government
pays the state sales tax on its purchases.
Then after-tax income is $1,050. Assuming that all of
this income is consumed, the state collects $50 in sales tax
revenue. Assume that there is a single good, widgets, and
that the producer price is $1. Then the market price is
$1.05. But, because they do not pay the state sales tax,
both federal and state governments pay $1. This means
that individuals would be able to consume 1,000 widgets,
the federal government would be able to consume 200
widgets, and the state government would be able to
23Id. consume 50 widgets.
(A1) t(C + G + SG)(1 + ) = (G + tB)(1 + ) i i
(A2) t = i
G
C + G + SG – B
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Now apply Equation (A2) to compute the FairTax
inclusive rate, assuming that there is no rebate:
Because we assume that all income is spent, the
FairTax inclusive rate is equal to the income tax rate.
Assume nonaccommodation.24 The producer price decreases
to $0.84 (= $1.00 – $0.16), and income falls from
$1,250 to $1,050 (= $1,250 × 0.84). However, there are now
no income taxes and the individual can consume the
entire $1,050. Because the state sales tax is imposed on the
producer price, state sales tax revenue falls unless the
state adjusts its tax system.
Consider what happens if the state makes no change
in its tax system. Because the sales tax falls on the
producer price, the state collects only $0.042 (= 0.05 ×
$0.84) for every unit sold to the consumer. This also
means that the price the consumer faces is no longer
$1.05, but $1.042 per unit. Therefore, the consumer can
purchase 1,007.68 (= $1,050/$1.042) widgets. However,
the consumer’s gain is the state’s loss. The state collects
$42.32 (= 1,007.68 × $0.042). Because the price paid by the
state for a widget, $1, includes the FairTax, the state can
buy 42.32 widgets, not 50 widgets, as previously. The
consumer can buy 7.68 more widgets, and the state can
buy 7.68 fewer widgets.
However, if the state adjusts its legislation to gain back
the purchasing power lost to the consumer, both the state
and the consumer would be able to buy the same number
of widgets as under the current system. The simplest
corrective is to apply the state sales tax on the FairTaxinclusive
price, that is, $1. The state would once again
collect $0.05 (= $1.00 × 5 percent) on each unit sold, and
the price faced by the consumer would once again be
$1.05. The consumer would consequently be able to
purchase 1,000 widgets (= $1,050/$1.05), just as under
current law. The state would collect $50 (= 1,000 × $0.05),
which would allow it to purchase 50 widgets, as before.
Now suppose the state imposes an income tax instead
of a sales tax. Suppose also that the taxpayer still earns
$1,250 in income, that the federal government collects
$200 in income tax revenue (imposing a rate of 16
percent), and that the state collects income tax revenue of
$50 (at a rate of 4 percent). Since all income is spent, the
consumer buys $1,000 worth of goods, the federal government
buys $200 worth of goods, and the state government
buys $50 worth of goods. In this case the market
price faced by the consumer is the same as that faced by
the state and federal governments, $1, so the individual
consumes 1,000 widgets, the federal government 200, and
the state government 50.
Now we impose the FairTax, and because total consumption
and federal tax revenue is the same as in the
previous example, the FairTax tax-inclusive rate is, again,
16 percent. Assuming nonaccommodation, the producer
price falls to $0.84, and income to $1,050. Once more we
consider two scenarios: one in which the state government
does not adjust the income tax rate and one in
which it does.
If the state government does not adjust its income tax
rate, it will collect $42 in tax revenue (= $1,050 × 0.04).
The consumer’s disposable income will therefore be
$1,008 (= $1,050 – $42). Market price remains constant at
$1, since it includes the FairTax. Therefore, the consumer
buys 1,008 widgets and the state buys 42 widgets. Once
more, the state loses purchasing power matched by a
gain in purchasing power enjoyed by the consumer.
The state has to increase its revenue collections by the
FairTax tax-exclusive rate, 19.05 percent (= 0.16/ (1 -
0.16)). This is not a coincidence; it is because income has
decreased by the FairTax (tax-inclusive) rate. So suppose
then that the state increases the income rate to 4.76
percent (= 4 percent × (1 + 19.05 percent)). The individual
would pay $50 as state income tax (= $1,050 × 4.76
percent), which would make his disposable income
$1,000 (= $1,050 – $50). As before, the individual would
buy 1,000 widgets and the state 50, thus keeping the
purchasing power of both constant.
24As above, the level of monetary accommodation is irrelevant
to our results. Assuming nonaccommodation makes the
illustration simpler.
(A3) t = i = 0.16
$200
$1,000 + $200 + $50
COMMENTARY / SPECIAL REPORT
646 TAX NOTES, February 4, 2008
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
jmh // Jul 10, 2010 at 9:50 am
My background:
I grew up in Arkansas, but I’m not religious. I would be considered socially liberal and fiscally conservative. I’m 35 and have a PhD in chemical engineering, and I work in the field of preclinical and translational drug research.
My state of mind:
I’m personally against abortion, but I see conception as the where life begins as a belief. I cannot force that belief on others, and it is an issue that should be addressed between my wife and myself — Not the state.
I don’t know what Huckabee means by “discredited embryonic version” of stem cell research. This is a slightly more higher-brow swipe at science than Palin dismissing fruit fly research. I’m very weary of the ignorance towards science I see from the republican party.
I have no problems with conservatives, but republicans no longer represent anything conservative for me. I used to perceive this as a trade-off: I could sacrifice on social issues and get fiscally conservative policies, or I could sacrifice on the fiscal side and get ahead on the social issues. I’m not terribly happy with democrats on the social issues of late, but I’ve grown a huge distaste for republicans on fiscal side. Couple that with the culture war stuff, and I just cannot vote for any of the current republican front runners. That doesn’t mean I’m going to try to reelect Obama, it means: either I don’t vote or I vote for democrats.
Perhaps my vote does not matter to the republicans. That’s their decision of course.
ktward // Jul 10, 2010 at 5:21 pm
jmh.
I myself left the GOP (and re-registered Indie) during Clinton, when I realized that the Religious Right was no longer simply humored for the sake of votes, but that it was actually driving a large chunk of the GOP platform and successfully installing its own elected officials under the GOP brand. It got worse during GWB, when I realized that the neocons were now granted carte blanche with the perfect POTUS puppet: the neocons and the RR make exquisitely perfect bedfellows.
No one can clean out this mess of a GOP house but their own. I wish them luck. (No sarcasm, I’m sincere.)
As for Frum, I’m on the fence as to whether or not he’s helping to that end, because he is first and foremost, above his identity as US citizen, a hardcore zionist. Which nicely explains his neocon pedigree.
As for the Dems: I can’t bring myself to register as one, though many might take me to task since I certainly vote more frequently for Dems on a State/National level. Simply put: they shoot their own cat selves in the foot too frequently.
easton // Jul 10, 2010 at 6:09 pm
buddyglass, um…too late, I already live in Mexico, so no need to cross the border, and you don’t realize there is something called cross border trade in that it goes both ways. Why would any Canadian or Mexican buy anything in the states?
Sinz54, too funny. I didn’t write what you quoted, I said it was written by Bruce Bartlett. He was a domestic policy adviser to President Ronald Reagan and was a Treasury official under President George H.W. Bush.
All I did was provide the article that I took it Mr. Frum was originally referring to. I happen to agree with you that its origin with Scientologists is not important, however I saw no need or reason to edit it. You definitely jumped the shark by your cracks about “liberals” since I have never heard Bartlett be referred to as such. So if a Conservative criticizes another conservative, it is a liberal smear? At the very least you owe me an apology for attributing that quote to me since I was quite explicit it was written by Bartlett.
Rabiner // Jul 10, 2010 at 7:34 pm
Buddyglass:
“If the FairTax were enacted then the price of goods in border towns would rise to some level slightly below the after-tax price of goods in the U.S. Simply because there would be more demand. Suppose you live in a border town and your groceries cost $100. They cost $100 across the border. FairTax is enacted. Now your stuff costs $130. So you go across the border and buy them for $100. If I’m the Mexican grocer selling you the stuff for $100, and I know you have to pay $130 in the U.S., I’m sure not going to keep charging $100 for very long.”
It’s called arbitrage dude. No the prices would change in border towns unless the majority of their business is from Americans. You act like there is only 1 business selling a good in these towns as opposed to there being competition.
easton // Jul 10, 2010 at 7:54 pm
Rabiner, essentially this whole fair tax scheme is just a parlor exercise. There is zero chance it will be enacted. Democrats would never consider it, nor do even many Republicans. We might as well debate how many Faeries can ride on a Unicorn.
Rabiner // Jul 10, 2010 at 8:37 pm
I got 6 faeries can ride on a unicorn.
But seriously, while I agree with the feeling that the Fair Tax is dead on arrival it is a good thing to look at other taxation systems to critique against the current system. Personally I’d like to see a 5-10% VAT along with a simplified progressive tax system which is more progressive than it currently is.
Adakin Valorem // Jul 10, 2010 at 10:35 pm
RE: VAT… Hiding a consumption tax at each stage of production would be the darling idea for both the progressives and the RINOs. Adding a VAT to our already complex tax code would simply implant just another layer of taxation on an already overburdened economy.
The FairTax (FT) is designed to be revenue neutral. It REPLACES the large number of complex taxes that it abolishes. In addition, it virtually eliminates the compliance costs that, in many cases, exceed the actual tax revenue collected.
As for moving to a border, today’s $100 bag of groceries reflects the embedded tax costs that have already been paid at every level of production. That $3.00 gallon of milk includes the income taxes (and associated compliance costs) of the dairy farmer, the trucking companies that haul the bulk product, the processer and the retailer. On a macro-economic basis, compliance and documentation costs have been estimated to exceed $600 Billion each year. With the FT, all those embedded costs are gone, reducing (on average) the production cost of that product by around 22%. Now, add back the “inclusive” sales tax of 23% and we are back to around the original $3.00 retail price for that gallon of milk. So either before or after implementation of the FT, that $100 bag of groceries will still cost around $100.
Regarding whether the tax is 23% or 30%, is just a matter of is the glass half empty or half full. The FT people use 23% to be consistent with the tax that it replaces. If you are in the 28% tax bracket, when you earn 100% you take home 72%. That the “inclusive” tax rate. Same with the FT. Ignoring the prebate feature, if you earn 100% and spend it all on taxable items, you will have paid 23% of your earnings in tax scored inclusively.
If you really want to be fair, let’s use the conventional “exclusive” sales tax method of looking at the income tax. If you are in the 28% tax bracket “inclusively”, the same amount of actual tax paid on $100 is almost 39% of the $72 that you get to keep.
Again, if you are replacing one tax system with another, would it not be reasonable to use the same unit of measure when doing a comparison? I really don’t care which method is used, only that the unit of measure in the debate remains consistent between the two methods.
buddyglass // Jul 10, 2010 at 11:03 pm
@Rabiner
It’s called arbitrage dude. No the prices would change in border towns unless the majority of their business is from Americans. You act like there is only 1 business selling a good in these towns as opposed to there being competition.
If the market in Mexican border towns doesn’t have many American consumers, then there’s not much opportunity for cheating on the FairTax. If the market in Mexican border towns does have lots of American consumers, and prices on the U.S. suddenly increase by a large amount, then prices on the Mexican side will increase as well. Not enough to equal the new U.S. price, but they would definitely increase.
Rabiner // Jul 10, 2010 at 11:19 pm
Buddyglass:
You’re failing to understand that Mexican businesses have Mexican customers and Mexican suppliers typically. The prices in Mexican border towns regardless of the number of American customers will not be affected significantly as they’re competition with Mexican businesses as opposed to American businesses. American businesses however will have to adapt and lower their prices to compete as a portion of their costumers will take advantage of arbitrage and go to Mexico to purchase equivalent yet cheaper goods.
Can prices increase? Sure there is that possibility.
Will the prices be significant? Highly doubtful.
Adakin Valorem:
The Fair Tax is stupid. It taxes people who are unable to save at a higher rate than people who have the luxury of having large amounts of disposable income. You even say it yourself: “Ignoring the prebate feature, if you earn 100% and spend it all on taxable items, you will have paid 23% of your earnings in tax scored inclusively.” Apparently you like the idea of a regressive tax in this country to pay for all of government, personally I think that is the stupidest thing you could do.
buddyglass // Jul 11, 2010 at 10:55 am
@Rabiner
You’re failing to understand that Mexican businesses have Mexican customers and Mexican suppliers typically.
No I’m not. The fact that these businesses have Mexcican customers is one of the things that would work against a price increase, since the FairTax wouldn’t suddenly increase these customers’ ability to spend. However, if half your customers are American, then your optimal strategy w/ respect to profits is probably to raise your prices.
You point out that any Mexican business will also have to compete against other Mexican businesses in the same border town. But they’re all in the same situation, and would presumably all benefit from raising prices (since Americans would be willing to pay them) in the advent of the FairTax.
Another strategy the city governments might adopt is to finance their own taxation on Americans shopping over the border. For instance, if I’m the city government of Nuevo Laredo and the FairTax is passed, suddenly I have a ton of Americans who want to shop in my town because prices in America just shot up 30%. So I could levy my own special sales tax that applies only to non-Mexican citizens. If I make it 30% then I totally kill any incentive for Americans to shop in my town. If I leave it at 0% then I earn no revenue since there is no tax. There is some point between 0% and 30% where I maximize my revenue. I make it up to local businesses (since my tax will necessarily reduce the number of American shoppers by some amount) by decreasing other local taxes (e.g. property) by the amount I’m now collecting from the Americans.
The important thing to note is that, even under this scheme, there would still be Americans shopping across the border. So some amount of FairTax revenue would be lost. My point is that it wouldn’t be as extreme as you might imagine if domestic prices were to increase 30% and Mexican prices stay constant. Because they wouldn’t stay constant. A side effect of this would be that these border towns would all of a sudden get a giant injection of tax revenue (from Americans) essentially “for free”. This would help to normalize the quality of life between these towns and their American halves, which would probably go a long way toward reducing border violence.
It taxes people who are unable to save at a higher rate than people who have the luxury of having large amounts of disposable income.
It does tax people more who spend all of their income. At the same time, for those people, the prebate is much larger compared to their total income. You can’t ignore that when calculating the FairTax’s progressivity or lack thereof.