RSS Feed MenuSome days ago, I wrote an article itemizing the strengths and weaknesses of a Mike Huckabee candidacy. I praised the former governor’s intelligence and civility – but worried about his attraction to the bunkum idea of a Fair Tax. Gov Huckabee replied with a full-throated defense of the plan’s merits. Huckabee finished second in the delegate count in the 2008 nomination contest. He has to be considered a front-tier candidate for 2012. The merits (and demerits) of a Fair Tax thus remain unfortunately very relevant.
So we return to the debate with a series of four posts on the Fair Tax plan by a leading student of the tax system, Hirschel Adler. In my opinion, he leaves the concept a smoking ruin. Click here to read the entire series.
-David Frum
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In this last column, I have included a small list of additional problems with the FairTax legislative proposal, any of which are sufficient to reject the FairTax based solely upon the issue raised.
If an investor purchases a new home to rent to tenants, the purchase will not be subject to the FairTax. If a family purchases a new home for the purpose of living in that home, the family purchase will be subject to the FairTax. I refer to this as the ‘family last’ principle. A new home that would cost an investor $300,000 would cost a family $390,000. Needless to say, this is an idea with no defense and needless to say, enforcement after the buyer indicates that the purchase is for investment would be virtually impossible.
The FairTax provides that the federal government must pay the FairTax on its purchases.
Here is the calculation that would be made on the purchase of a B2 bomber: The cost of the bomber is $2 billion. The FairTax would be $600 million. The government would pay the contractor $2.6 billion, including the $600 million FairTax. The contractor would be paid $1.5 million to multiply 30% times $2 billion and the state FairTax administrator would receive $1.5 million to deposit the check and transmit the remaining $597 million to the federal government. Yes, that sums it up, the federal government would pay $3 million dollars for, nothing.
The FairTax provides that the states must pay the FairTax on all non-educational expenses. This additional cost to the states, which is probably unconstitutional, would need to be passed along to the individual states’ taxpayers in the form of higher state taxes. This is a fairly new and continuing problem for the states as the federal government is continuing to add costs to the states’ operations without the states being involved in the decision making. Given the current environment, the chances of a constitutional challenge by the states to this portion of the FairTax proposal is about one hundred percent.
The FairTax changes the calculation of self employment income so that any business which does not sell at retail would secure no social security benefits for its owners.
One must finish the discussion of the FairTax with a mention of whether the 23%/30% rate proposed would collect sufficient taxes or whether the rate would need to be much higher. The proponents of the FairTax are convinced the 23%/30% rate is perfect. Other economists have produced studies which indicate the rate has to be over 50%. This author will leave the economic studies to third parties and finish these four columns with questions about the rate required under the FairTax: Shouldn’t it dawn on someone that since 1995 when the FairTax was first proposed and the FairTax rate was proposed at 23%/30%, that government spending and U.S. deficits have grown by trillions? Given the spending and the new programs that have been put in place in the intervening fifteen years, could anyone believe that the tax rate required for the FairTax has not gone through the roof?
sinz54 // Sep 3, 2010 at 9:22 am
If the Fair Tax ever got close to being passed by Congress, they would certainly exempt the purchase of new homes (for living). That exemption would require a compensatory hike in the Fair Tax on other goods.
And you’re right, the idea that the Federal Government should pay the Fair Tax on its own procurements is absolutely stupid–the money would go out to the contractor as part of the purchase, and then come right back to the Federal Government as tax. The net income of the Federal Government would be zero (or slightly negative due to administrative cost). Yet the phantom revenue from the Fair Tax on the procurement is included in the Fair Tax proponents’ calculations as available revenue. Without it, once more, there would have to be a compensatory hike in the Fair Tax on everyone else’s purchases.
wiseoldowl // Sep 3, 2010 at 10:43 am
Taxing government expenditures is the only thing I believe should be eliminated from the FairTax bill. On one had it is income and on the other it is an expense; a wash. Also eliminating this tax on government would reduce administrative costs. Since it is a wash, there would be no need to raise the consumption rate.
The following is for all of you who say the FairTax would need to be 40% or 50% to be revenue neutral. Based on 2009’s GDP, the FairTax at the rate of 23% would have generated more federal revenue than was actually collected, and that includes the current $290-billion lost due to tax evasion and the prebates of $690-billion. Consumer spending for 2009 was $14.119-Trillion not including used goods. Actual receipts were $2.105-Trillion. To figure the amount of revenue the FairTax would have generated you take 23% of $14.119-Trillion which is $3.247-Trillion less $290-billion for tax evasion and another $690-Billion for the prebate and you end up with $2.267-billion. This is $162-Billion more than our current system generated.
GeorgiaTex // Sep 3, 2010 at 12:46 pm
wiseoldowl –
It’s interesting that you would use 2009 as your example, where we had 10% unemployment and a 1.4 trillion dollar deficit! How would we reduce that deficit under the FairTax? The ONLY way to do so would be to increase the FairTax rate, which would reduce consumption even further and worsen the deficit. If you reduced government spending, you would also reduce FairTax revenue (since government spending is taxes), which would also increase the deficit. The FairTax would totally box us into a system of spiraling tax rates, which would make the economy worse.
Let’s pick a more normal year, say 2008. At that time government revenues were $2.5 trillion, and the deficit was “only” $458 billion. http://www.usgovernmentrevenue.com/yearrev2009_0.html#usgs302
There were approximatly 300 million Americans, which translates to around 100 million families. Divide that by $2.5 trillion, that comes to an average annual family tax burden of $25,000 per year. (I think we can all agree that is way too high.) Now add $500 billion for the “prebate,” that comes to an average annual family burden under the FairTax of $30,000.
If the FairTax rate were 23% (tax inclusive), that means that the average family would need to spend $130,000 per year on TAXABLE goods and services in order to generate sufficient tax revenue under the FairTax. (And, remember, that would still leave us with a deficit of $458 billion.) Since the mean family income is only $66,000, that’s a mathematical impossibility.
But let’s assume, for the sake of argument, that if everyone in this country spent every dime they made on taxable goods and services, the FairTax could be made to work. Do you really think that’s plausible?
Don’t you really think that middle class folks are going to gleefully buy new cars and new homes so that they can pay tens of thousand (and hundreds of thousand) of dollars in taxes under the FairTax? Aren’t they going to shift their purchases to used cars and existing homes (or just keep their current cars and homes for as long as possible)?
Do you really think middle class retirees will gleefully retire in American and pay the FairTax on all of their purchases, when they can join the hundreds of thousands who already retire to Central America and would avoid paying a dime in FairTax?
Do you really think multi-millionaire hedge fund managers and movie stars are not going to buy their yachts, private jets, and new luxery villas oversease so as to avoid paying millions of dollars in taxes? Or, alternatively, won’t they just set up individual LLC’s to buy those items as tax-free “business expenses.”?
Do you think folks are going to get their elective surgery (think boob jobs) here in the states and pay thousands of dollars in FairTax when they can just fly overseas to get the same surgery done for a fraction of the cost and no FairTax! (Thousands do it already.)
I could go on and on, but you get the point.
Wiseoldowl — I’m really not trying to bash you, and I certainly am not defending our current system, but there would be a million easy ways to game the FairTax system without even breaking any laws! FairTax supporters are being willfully naive if they think folks aren’t going to take advantage of all of those obvious ways to avoid paying the FairTax (as well as many unobvious ways we probably haven’t even thought of). I know I would, and so would you!
rockinrobbie // Sep 3, 2010 at 12:51 pm
A flat and fair tax combination would work perfectly:
A flat income tax of 15% with a $100k standard deductible (no other deductions allowed). If you earn less than $100k, there is no income tax. If you earn $150k, you’d deduct $100k and then be taxed at 15% on $50k remaining (i.e., $7,500).
A fair tax of 15% for everything over $100. Anything under $100 would be tax free which would cover most essentials like food and clothing (assuming no extravagant spending of $200 caviar or $300 shirts).
This addresses all concerns raised against fair and flat tax, is simple and straightforward, and WOULD WORK.
easton // Sep 3, 2010 at 6:19 pm
GeorgiaTex, I would truly love to see it done first at the state level, preferably a state like Idaho or North Dakota, (small population Conservative states) and see how it works out.
I see some benefits for it to be done at the state level since while it would add pricing to housing initially, you wouldn’t have property taxes anymore.I think this could help juke the local housing market for investments since owners wouldn’t be faced with that daily expense forever.
easton // Sep 3, 2010 at 6:22 pm
rockinrobbie, I don’t know about perfectly, you would have to run the numbers.
Personally, 100K is too high. I would prefer a 30K standard deduction. and then a flat tax on every penny earned above it. (no other deductions allowed). And then you won’t need a sales tax.
Why duplicate efforts?
Rabiner // Sep 3, 2010 at 8:59 pm
I still don’t like a flat tax for income. Income taxes should be inherently progressive.
ltoro1 // Sep 5, 2010 at 7:40 pm
Rabiner, why, based on what principle should taxes be inherently progressive?
JohnSteinberger // Sep 6, 2010 at 7:42 am
You establishment RINO’s apparently don’t understand that the income tax punishes economic growth, investment and productivity. The cost of complying with the income tax code is more than $350 Billion per year.
FairTax will immediately improve the economy by re-patriating the estimated $10-15 Trillion in American investment wealth stashed offshore to escape our tax code. Small businesses will be empowered to keep all their revenue and will resume hiring immediately. A study conducted by Rep. Bill Archer a decade ago shows that most foreign manufacturers would build their next plant in America to gain the tax advantage.
The income tax system is all about the government exercising power and control over the people and picking winners and losers in the economy through arbitrary “tax credits”. It is a tool in the Communist Manifesto and must be ended!
We in South Carolina are working on passing a state FairTax bill to serve as a model for the rest of the country!
Kicker // Sep 6, 2010 at 10:03 am
Adler seems upset over the idea of the Federal, or any, government, paying the FairTax. Unfortunately, he is being duplicitous at best. Under the current system, the retail cost of goods and services contains from 18% to 25% of embedded taxes. These are the taxes paid by the businesses involved in producing the goods/services, and passed along to the customer.
Right now, the Federal government pays these embedded taxes, just like everyone else, when they make a purchase.
Under the FairTax, the embedded taxes are removed (because businesses no longer pay taxes on profit and no longer pay the employer portion of FICA), and “replace” with the FairTax.
Adler has done nothing but raise a straw man to try and convince people that the current system of hidden taxes, rampant corruption, class warfare, and tax code manipulation is preferable. And it is, if you are a corrupt politician, K-street lobbyist, or megalomaniac social engineer bent on using the tax code to enforce your personal agenda of “approved” behaviors.
For the rest of us, the FairTax is a simpler, more efficient, less corruptible, and transparent method of collecting the taxes necessary to fund government.
Kicker // Sep 6, 2010 at 10:21 am
Few seem interested in answering a fundamental question…. who’s money is it?
If we, the people, work for the government, then the focus should be on how much of what we earn we get to keep. The government decides what is appropriate, then sets the tax rates to ensure that everyone has enough, but not too much. All other wealth devolves to the government to fund whatever social programs they want. And we, the people, really don’t have much say in the matter…. after all, it isn’t really our money. We work for the government.
On the other hand, if you believe that people are entitled to keep what they earn, and that taxes should be used to simply fund the necessary functions of government, the picture changes significantly. Under this philosophical aegis, we are “buying” government services, and, like any consumer, have the right seek out the best “deal” available, and to know what those services really cost us. And, in the greater sense, taxes are voluntary because we, the people, can decide we no longer want those services.
Under the current system, taxes are definitely not voluntary, many taxes are hidden in the costs of goods and services, the tax code is changed on a regular basis to favor one group over another (without our involvement or consent!!), and the average person has little control over what they pay.
Are we serfs, owned by the government, working for them, and living on the scraps left to us after the governing elites have taken what they want, or are we free to control our own lives, and entitled to the fruits of our labors.
Answer the question, and the choice of a tax system become easy.
Kicker // Sep 6, 2010 at 10:41 am
GeorgiaTex
A wise man once said that a little knowledge is a dangerous thing, and such would appear to be the case here.
Your analysis is seriously flawed in a number of ways. For instance, the FairTax rate is set at 23% based on Total Consumption Expenditures, roughly equal to Gross Domestic Product, not on personal domestic purchases. This includes not only the purchases of individuals, but also of governments, and those business purchases not related to production.
In 2008, this number was about $14.6T. If we applied the FairTax rate of 23% to this number, we end up with a total tax collection of $3.4T. The federal budget in 2008 was about $2.9T, so if you added in the $.5T for the prebate, you would have had essentially a balanced budget in 2008 under the FairTax.
Of course, this ignores the positive growth effects of the FairTax. It’s estimated that GDP will grow an average of 5%/yr over the ten year period following the FairTax. This means that if government spending can be kept to less than 3%/yr, the US debt can be nearly “wiped out” over a ten year period. (And I didn’t even count the $.4T/yr saved by eliminating the IRS and the current tax code!!)
Rather than “forcing” the public to pay exorbitant tax rates to pay off our ballooning debt, the FairTax would spur the economy, create jobs, control corruption Washington politicians, rescue Social Security, and pay off the National Debt.
fairtax98 // Sep 8, 2010 at 6:03 pm
We (each and every American) needs to know what their government costs. The FairTax will show them. When all Americans find out that the government requires 30% of every dollar spent, there should be objections. The Obama administration has increased spending. If we enact the FairTax we could see if it collects enough or not.
Any income tax is equivalent to a thief grabbing a portion of your paycheck before you see it. Would you allow a thief to do that? Oops, you already are. Freedom means taking home your GROSS pay!
GeorgiaTex // Sep 8, 2010 at 7:02 pm
fairtax98 says: If we enact the FairTax we could see if it collects enough or not.
And what if we DON’T collect enough? What then? Oh, I know, you’ll say just spend less. I guess we’ll just tell Social Security recipients that it’s time to fend for themselves. Kick the Medicare patients out of the hospitals. Don’t bother paying our soldiers. If a politician wants to propose those sorts of cuts, he can go right ahead. But unfortunately, having a hope-and-a-prayer tax plan (which is what the FairTax is) still won’t fund the government.
Kicker — Federal government spending is a complete wash under the FairTax. It won’t add one dime of tax revenue for the simple fact that every dollar the FairTax generates from federal government spending requires the government to pay that dollar in tax liability. In other words, the government takes the dollar from its right pocket and puts it in its left pocket. It doesn’t generate any net revenue.
Now, the FairTax would generate net revenue from state government spending, but the catch there is that a state government can only get money to spend is by taxing its citizens. Thus, regardless of whether you believe the FairTax rate is based on “Total Consumption Expenditures” which included government spending, ultimately the money to fund government spending would need to come out of our pockets. And, as I’v shown (as has the Brookings Institution, Rice University, the Joint Committee on Taxation and others), the magical 23% rate would be woefully inadequate.
And you inadvertantly point out another major flaw in the FairTax. Since taxes would, to a certain extent, be “voluntary” under the FairTax, most of us will volunteer to pay as few taxes as possible (which would be easy to do given the loopholes inherent in the FairTax). When we all voluntarily reduce our taxes, the government gets even less money. Maybe you’re fine with that, but the FairTax proponents insist that the FairTax is revenue neutral. Unfortunately, it’s not even close to being so.
wiseoldowl // Sep 9, 2010 at 8:25 am
Georgia Tex says “And what if we DON’t collect enough? What then?
If we don’t collect enough, we will be no worse off than we are now. Our current tax system will barely cover one half of 2010’s fiscal spending. As a matter of fact, the FairTax at 23% would have collected more revenue than our current system thus far for 2010. There are only two ways to balance a budget, either increase taxes or reduce spending. The tax system with the greatest transparency has the best chance to control the latter and that is the FairTax.
If we eliminate all the programs our federal government should not be involve in, a 23% consumption tax would be plenty high enough. I personally believe the only programs federal funding should be used for are our Armed Forces, homeland security, Medicare and S.S. If you eliminate all the other pork, we will have a stronger nation; a nation in which people will take more personal responsibility and won’t expect a free ride.
Dutchman3 // Sep 10, 2010 at 11:04 am
JohnSteinberger,
(1) You might want know that the $350 billion in compliance costs is no longer supported by the IRS and the Tax Foundation. Turns out that in 2006, a new and more realistic estimate was developed and is now in use. Just check page 98 of your 2009 1040 Instructions. Individual compliance costs amounted to only $26 billion.
(2) Your $10-15 trillion in US owned offshore assets is another Fairtax myth. According to the Tax Justice Network, an organization that tries to track offshore wealth, North Americans owned $1.6 trillion in offshore wealth in 2005. There are 23 sovereign nations in NA, and the best estimate for US owned wealth is around $700 billion. And, failing some sort of amnesty provision in HR25, that wealth isn’t about to come “rushing home”.
(3) Where on earth did you get the idea that if businesses can save on tax costs, they would hire new employees? Hiring new employees depends on increased demand, and I’m not convinced that adding a 30% sales tax to business costs would increase demand.
(4) I’ve been trying to get a copy of that Archer study for years with no luck. Do you have a source?
(5) I pray that SC does not implement a State Fairtax. Even John Linder is on record as saying that States should wait for a federal Fairtax reform before trying to set up a similar State system. You may think that putting all your eggs in one basket is a good idea, but the AFFT Director of Research does not agree that property taxes should be replaced with a sales tax. Stand by for lots of cross border buying by your fellow South Carolinians in the States adjacent to SC. Very bad idea!
wiseoldowl // Sep 14, 2010 at 7:45 am
Dutchman3
(1) Your $26 billion figure does not include corporate compliance costs which I am sure is much greater than individual compliance costs.
(2) I believe it is almost impossible to estimate the amount of US owned wealth that is invested offshore. One thing for sure the FairTax will attract foreign wealth. Again it is anyone’s guess as to how much; but one thing is for sure foreign investors will flock to the US.
(3) I agree demand dictates the hiring of employees; but how do you figure the FairTax will add a 30% sales tax to business costs when business cost are exempt?
(5) I believe including property taxes in a state FairTax is a good idea, if it were not for the ease of cross border buying.
Dutchman3 // Sep 15, 2010 at 9:35 am
Woo-woo,
(1) I never suggested that the $26 billion included corporate compliance costs, but if personal costs are so much lower than the amount estimated prior to 2006, can corporate costs be far behind? The old IRS method of calculating compliance costs was so error filled that it was dropped in 2006, yet AFFT continued to use the old methodology, and old cost estimates in order to help make their faulty case for the Fairtax.
(2) There are several studies and sources for the current estimate that there is $14 trillion in US investment around the world. And, it is interesting that the same studies estimate that there is $17 trillion in foreign investment in the USofA. What conclusions do you draw from those statistics, if accurate?
As for foreign corporations rushing to the US, have you read and understood HR25, Sec. 905? As I read it, there would be a 23% tax on earnings in the US by foreign owned businesses. Hardly an inducement to rush to our shores?
(3) Sorry if my comment was confusing, but the 30% is the sales tax, which added to the reduced production costs results in an estimated 18% increase in nominal retail prices. That kind of “sticker shock” isn’t likely to increase demand, is it? You do agree that retailers have to add 30% to their costs in order to arrive at a 23% tax inclusive price, don’t you?
(4) Sorry, but even AFFT doesn’t agree with that. Fundamentally, let property owners pay property taxes!!! Anything else would be grossly unfair! It’s probably a moot point as I don’t believe any State would be foolish enough to institute a Fairtax plan prior to a Federal version going into effect.
wiseoldowl // Sep 17, 2010 at 9:13 am
Dutchman
(1) The new estimates may be less than the old, but you have to admit, compliance costs under the FairTax would be considerably less.
(2) I really don’t have a whole lot of faith in estimates. I just believe the FairTax would benefit corporations much more than our current system resulting in increase investing whether it be new foreign investors or US investors currently investing offshore.
In most cases under sec. 905, 23 percent would not be withheld because of treaty agreements. These treaties would reduce the rate to 5 to 15 percent and in come cases to zero. A survey was done in Japan involving 500 different corporations. Many of them said they would move their headquarters to the US under the FairTax. I am sure this would be the case with many other countries. Moving their headquarters to the US would eliminate this withholding completely. This would be a huge incentive to do so.
(3) Demand will increase as a result of the economic growth the FairTax will bring. More investing, more jobs, more demand.
(4) I don’t agree with everything AFFT believes. I believe it is unfair for a 70 year old couple who owns their $200,000 home to pays property taxes and a 40 year old couple with two kids that rents an apartment pays nothing? But unless every state was to replace property taxes with a consumption tax, it would hurt too many businesses, especially those located close to state lines.