Flat Tax vs. FairTax in the WSJ, by Pete Du Pont
Pete Du Pont penned the editorial “Flatter-y Will Get You Everywhere” in today’s edition of the Opinion Journal, reminding readers of the urgent need for tax reform and explaining why he believes the flat tax is the best option.
Unfortunately, his characterizations of the FairTax are muddle-headed and sometimes just plain factually wrong.
The article begins with good information about why tax reform is so urgently needed, per Steve Forbes’s new book Flat Tax Revolution:
* The tax code has been amended 14,000 times and is 60% longer since Ronald Reagan’s presidency.
* The cost of compliance in terms of taxpayer time has risen 67% in the past decade and a half.
* Americans spend more than six billion man-hours each year filling out tax forms at a cost to the economy of $200 billion.
Du Pont then characterizes the FairTax plan as follows:
One option is to replace personal and corporate income taxes, Social Security and Medicare payroll taxes, capital gains and estate and gift taxes with a 30% national sales tax. We would pay taxes when we buy things instead of when we earn income, and get a refund from the government to offset the purchases of essentials like food and clothing.
Here, of course, he is citing the FairTax’s exclusive tax rate (going up from the original amount, rather than down from the final price) — without bothering to point out that he’s comparing apples to oranges.
Like all income taxes, the flat tax is typically calculated on an inclusive basis (going down from the original amount, rather up from your take-home pay), making it appear smaller. At Forbes’s suggested rate of 17%, this translates to a 20.5% exclusive tax on your paycheck, including any money you plan to invest (which, unlike the FairTax, the flat tax still taxes).
Add to that your social security, medicare, and other payroll taxes (which the flat tax keeps in place), so-called “corporate” taxes (which the flat tax keeps in place), and any other cumulative embedded taxes in every item you buy at the cash register (which the flat tax keeps in place) ... and calculate all these taxes on an exclusive, rather than inclusive basis ... and you will quickly see that their plan has you paying a lot more taxes than the FairTax plan does.
Du Pont continues:
But as Mr. Forbes points out, raising by 30% the cost of housing and college education, along with government purchases such as military and medical supplies, would be economically devastating.
Stop right there. For all of the expenditures listed above, the FairTax’s rate (23% as a fraction of total expense) will be almost completely offset by the complete elimination of all the embedded taxes (an average of 22% as a fraction of total expense) reflected in today’s prices.
See how much more sense it makes when you leave out the statistical games and instead calculate all the percentages using the same methodology?
Also, the FairTax does not tax tuition. Where Forbes got that from is anybody’s guess. It’s not in the FairTax plan.
Du Pont then continues his mischaracterization of the FairTax:
And managing such a system — let alone integrating it with the many different state and local sales tax systems across the country — would be costly and challenging.
This is only true insofar as virtually anything the federal government does is “costly and challenging.” Managing the FairTax would be far, far simpler and less expensive than managing either the current system or the flat tax.
In particular, keeping around the Internal Revenue Service, the income tax, taxes on the money you save or invest, “corporate” taxes, medicare taxes, social security taxes, and other payroll taxes — all of which the flat tax preserves and the FairTax eliminates — would be much more “costly and challenging” to the American people than implementing and maintaining the FairTax plan.
Again, the important thing is to compare apples to apples. When you do, it becomes clear that the flat tax, though an improvement over what we have today, would be far less valuable to the American people than the FairTax plan would be.
Du Pont goes on:
Most important, before the national sales tax is enacted we would have to repeal the 16th Amendment, which authorized the personal income tax. Otherwise we would quickly have the current income tax burden and a national sales tax.
The FairTax’s call to repeal the 16th Amendment isn’t a bug, Mr. Du Pont — it’s a feature.
From the FairTax FAQ: “Why is it necessary to have a constitutional amendment? It is not the intention of this plan, or the desire of the American people, to end up with both a federal income tax and a federal sales tax. The objective is to ensure that one is replaced by the other, not added on top of the other. By repealing the 16th Amendment, we close the door on an income tax for generations to come.”
In sum, Du Pont provides an unsophisticated (and often uninformed) comparison of the flat tax and FairTax. Perhaps we shouldn’t be surprised, since Du Pont has spent over 10 years adocating the flat tax; until now, he’s never had cause to take the FairTax seriously.
As more and more people read The FairTax Book, such wrong-headed comparisons will occur less frequently. I wouldn’t be surprised if even Steve Forbes comes to hope, in the privacy of his own mind, that the FairTax becomes law.
PS. I’ve endeavored to portray the flat tax as accurately as I could, based on the various sources I linked above. If you spot an inaccuracy, please point it out in the comments below.
Does the FairTax tax corporations who purchase transportation?
If they don’t, then workers should not pay a tax on their transportation too.
If some are taxed when they purchase a corporate jet and others are not, then I need an explana
Yes, corporations would pay the FairTax on airfare, limo service, new company vehicles, etc. If they wanted to buy a jet, the plane (if it is new) would be taxes. If it was used, it would not (because it has already been taxed, either under the old system with embedded taxes, or under the new system, when it was new). Either way, new or used plan, the fuel and runway hangar costs and landing fees, etc. would all be taxed. The individual would pay the same taxes if they did the same thing. The government agency would also pay the same. It’s fair because everyone plays by one set of rules.
Actually, corporations would not pay tax on any of those items under the Fair Tax because they are used for business. The Fair Tax taxes only end retail sales.
~Jim
I have just read a bunch of items on both tax plans and frankly how can anyone see the flat tax as better? With the fair tax everyone has more money and things cost the same. With the flat tax people still have less money and everything costs the same. The fair tax would greatly improve our economy.
And yes everything would cost the same. Ex. Say you buy a PC for 500$. Everything inside that machine is taxed. With the fair tax all those taxes are removed but the sales tax is vamped up. This makes it cost 500$(or very close to it). Flat tax you have less income and it costs the same.