Someone Tries To Defend the Fairtax. Bad Idea.
Jonathan Chait
The New Republic
A few weeks ago, in a column about Mike Huckabee, I took note of his crazy plan to replace the income tax with a federal sales tax:
Basically, the main problems of the Fairtax are:
1. It would be massively regressive (though some conservatives consider this a feature, not a bug)
2. Every customer and every merchant would have the incentive to evade the tax on every sale ever made. It could not be enforced unless you had tax collectors posted in every business in America, and possibly not even then, and would probably lead to an explosion of black-market sales and other evasion that would turn the American economy into something resembling a post-Soviet Republic.
(The live links are here. And a related story:)
Unspinning the FairTax
FactCheck.org, May 31, 2007
We look at the numbers behind the numbers.
Summary
In our recent article on the second GOP debate, we called out Gov. Mike Huckabee as well as Reps. Tom Tancredo and Duncan Hunter for their support of the FairTax. We wrote that the bipartisan Advisory Panel on Tax Reform had “calculated that a sales tax would have to be set at 34 percent of retail sales prices to bring in the same revenue as the taxes it would replace, meaning that an automobile with a retail price of $10,000 would cost $13,400 including the new sales tax.” A number of readers pointed out that H.R. 25, the specific bill mentioned by Gov. Huckabee, calls for a 23 percent retail sales tax and not the 34 percent used by the Advisory Panel on Tax Reform. That 23 percent number, however, is misleading and based on some extremely optimistic assumptions. We found that while there are several good economic arguments for the FairTax, unless you earn more than $200,000 per year, fairness is not one of them.
(Emphasis ours. The complete article is here.)
The New Republic
A few weeks ago, in a column about Mike Huckabee, I took note of his crazy plan to replace the income tax with a federal sales tax:
It is difficult for me to find the words to explain just how crazy this idea is. The national sales tax is crazier, by an order of magnitude, than any other crazy idea I've seen at the national level. It's so crazy that even really crazy right-wingers think it's pretty crazy.I probably understated the case, but sometimes that happens when you're working with space constraints. Basically, trying to explain why the Fairtax is a bad idea is like trying to explain why having trained elephants perform open-heart surgery on every first-grader in America is a bad idea. The whole idea is one bit of lunacy stacked upon another, so when you focus on any one element of it, you let the other side suck you into into arguments about details--Maybe there could be benefits to preemptively fixing the hearts of six year olds! Perhaps elephants do have the potential intelligence to one day perform this task!!--that inadvertently make the plan sound semi-credible.
Basically, the main problems of the Fairtax are:
1. It would be massively regressive (though some conservatives consider this a feature, not a bug)
2. Every customer and every merchant would have the incentive to evade the tax on every sale ever made. It could not be enforced unless you had tax collectors posted in every business in America, and possibly not even then, and would probably lead to an explosion of black-market sales and other evasion that would turn the American economy into something resembling a post-Soviet Republic.
(The live links are here. And a related story:)
Unspinning the FairTax
FactCheck.org, May 31, 2007
We look at the numbers behind the numbers.
Summary
In our recent article on the second GOP debate, we called out Gov. Mike Huckabee as well as Reps. Tom Tancredo and Duncan Hunter for their support of the FairTax. We wrote that the bipartisan Advisory Panel on Tax Reform had “calculated that a sales tax would have to be set at 34 percent of retail sales prices to bring in the same revenue as the taxes it would replace, meaning that an automobile with a retail price of $10,000 would cost $13,400 including the new sales tax.” A number of readers pointed out that H.R. 25, the specific bill mentioned by Gov. Huckabee, calls for a 23 percent retail sales tax and not the 34 percent used by the Advisory Panel on Tax Reform. That 23 percent number, however, is misleading and based on some extremely optimistic assumptions. We found that while there are several good economic arguments for the FairTax, unless you earn more than $200,000 per year, fairness is not one of them.
(Emphasis ours. The complete article is here.)
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2 Comments:
The Fair Tax would be a good tax collection process … if the existing system wasn’t so skewed already.
It’s DOA because of the home mortgage deduction. The affluent would build bigger and more valuable homes in order to get the tax deduction (ask any accountant how many people ask how large of a mortgage do they need to take out) … while the working class would borrow home equity for cars, and other living expenses. With the electoral clout of states with high real estate values (NY, CA, FL), Congress would never accept it. John Linder of Georgia has been pushing legislation, but it seems to be more campaign fodder than action … the current bill HR 25 Fair Tax Act of 2007 has 68 cosponsors but none are from Minnesota although Fair Tax website has Tim Walz and Collin Peterson being in favor of it while Betty McCollum and Jim Oberstar are against … the others have not weighed in.
Huckabee will get some mileage out of this, but also some flack. Funny thing is that Jim DeMint (R-SC) ran on the Fair Tax as a major campaign issue in his senate race … he is supporting Mitt Romney.
I disagree with the premise that it would cumbersome to collect and lead to black markets. Quite the contrary, people cheat on their income taxes and some find ways to avoid paying taxes (Wal*Mart has been most creative … like their Illinois – Italy connection or their North Carolina REIT worth $33Million ). But I would be concerned that basing all taxes on people spending money would be risky … just look at State sales tax collection fluctuations.
There are no deductions with the Fair Tax since it replaces the labor-based tax with a consumption-based tax. The Fair Tax is a point-of-sale tax - the concept of Fair Tax 'deductions' is a non-sequitir.
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