Bill Hirsch’s Criticism of the Fair Tax is Flawed
The following is Mr. Howard Johnson’s response to the Ocala Star-Banner op-ed by Bill Hirsch.
Dear Sir,
I would like to take a few minutes to respond to Bill Hirsch’s article in your paper on November 27, 2005 titled, “The FairTax: Magic or Illusion.” In his second paragraph he addresses the code as merely “overly complex” as if 66,000+ pages of regulations were a simple matter for the astute tax preparer to figure out.
First, the income tax code hides the real tax burden from us because corporate America passes their taxes and compliance costs down to us in the form of lower wages, higher prices and lower returns on our investment dollars. As Mr. Hirsch rightly points out, it penalizes working Americans, the poor, and middle class. But, much more than that, It taxes investments multiple times resulting in America having the lowest savings rate of any country in the industrialized world.
The FICA tax is regressive because it is only paid on the first $95,000 of “earned income” while those who earn above that level get the same or more return on their dollar investment into the system. Further, there are somewhere around 50 million Americans who are not paying into the system according to the IRS, thus, defrauding the government of $200 to $500 billion each year which those of us who do pay in must make up. Under the present income tax system Social Security will only survive long term by reducing benefits or increasing taxes on all Americans. The fact is the Social Security Administration, itself, has admitted that under present conditions Social Security will go broke within 12 years and go into bankruptcy within 30 years.
But, Mr. Hirsch, lacking any plan himself, comes out with all sorts of criticisms of a proposal by Americans for Fair Taxation (AFFT). First, he says the FairTax “tacks a 23% sales tax on everything we buy.” WRONG; it taxes 23% only on NEW goods sold at retail and services. Business-to-business and used goods are not taxed. Why tax services you ask? The fact is services are taxed today, we just don’t know it because those providing those services hide their income tax and compliance burden in the price they charge us for those services. But, he doesn’t even mention the fact that all working Americans will take home their entire pay check to pay that 23%. Further, with no corporate income tax or compliance costs, market forces will force a decrease in the cost of goods and services.
AFFT did not “enlist” Neal Boortz as a spokesman for the FairTax. He was asked by his publishers to write a book about “many” of the issues he raises on his radio talk show. He told them he wanted to write a book about one subject – the FairTax. AFFT knew nothing about the book until his publishers started advertising. They, in fact, believed a book about taxes wouldn’t sell. It did and the rest is history. AFFT, to this date, has derived no income from its sale. The only benefit AFFT received from “The FairTax Book” is the publicity for the FairTax Act, which is a bill in both Houses of Congress.
But, before “The FairTax Book” and the FairTax bills (H.R.25/S.25), came $22 million and ten years of research by some of the best economic minds in the country on tax issues. The researchers for AFFT came from Harvard University, Boston University, Stanford University, Rice University, MIT and the National Bureau of Economic Research, just to name a few. They did not include Congressional Tax Aides helped by Washington K Street lobbyists. And, unlike revenue bills that are put together in the back rooms by those Congressional Aides and their special interest lobbyists, the academic research results were constantly exposed to real life tax payers. Further, a diverse array of methodologies was used to thoroughly test the FairTax idea with the public and many rounds of testing were done before the bills were written and introduced to Congress.
As far as the FairTax being a “non-starter” with most Americans, a number of national public opinion polls were conducted, always combining Republican and Democratic polling groups to ensure strict bipartisanship. These polls have consistently shown a high acceptance rate for the general concept of a national sales tax (up to 85%) and an ever increasing level of specific support for the FairTax (recently surpassing Steve Forbes flat tax proposal). In addition to an estimated twenty five million Joe average Americans who are now familiar with the FairTax, it is endorsed by such prestigious organizations as the 6 million member American Farm Bureau Federation, the National Association of Physicians and Surgeons, the National Taxpayers Union, The Association of General Contractors, Citizens Against Government Waste, the National Retail Sales Tax Alliance and the United States Business and Industry Council, just to name a few.
In three Town Hall meetings organized by AFFT in 1999, attendance, enthusiasm, and media coverage exceeded all expectations. Over 2,000 people packed the halls in Houston, Atlanta, and Phoenix on each of three consecutive nights. FairTax web site hits soured to 30,000+ in a single day with the AFFT phone lines being jammed by many more thousands of callers after those meetings. This led to the establishment of the FairTax volunteer organization that numbered in excess of 600,000 members by 2005, and who began informing their friends, neighbors and relatives about the FairTax as well as writing letters to editors, their Congressional Representatives, speaking at public forums, etc. Since “The FairTax Book” came out that figure has nearly doubled with the book hitting the top of the New York Times top ten best seller list one week after its publication. The result has been that Congress is finally sitting up and taking notice. Hearings will be held in the House Ways and Means and Senate Finance Committees in 2006, and possibly come before the House and Senate for a floor vote before the elections of 2007.
Mr. Hirsch really hits bottom with his attempt to marginalize the benefits of the FairTax prebates. How can a family in the 20% lowest income bracket earn $8,201 and spend $18,492 a year without going into massive debt? I would suggest that you go to www.fairtax.org and check the FairTax research for the facts, not just what he alleges the U.S. Bureau of Labor Statistics say. But, for the record, if we assume that a family of four living at or below the poverty level consumes all of their income, saves nothing, and pays the FairTax on everything they buy including services, after prebate they would pay no taxes at all and might actually have a negative tax rate. Additionally, under the FairTax they do not have to find and hire a tax preparer to help them with their Earned Income Tax Credit forms. A family of four that spends $50,000 a year will have an effective tax rate of 11.5% after prebate, while a family of four spending $200,000 a year has an effective tax rate of 22.71% after prebate. That sounds pretty progressive to me!
But, most importantly, it must be remembered what the FairTax does for the American economy which the income tax and no other tax reform proposal put before Congress today does. First, according to the research done by Professor Dale Jorgenson of Harvard University’s School of Economics, revenues to Social Security and Medicare would double as the size of the economy doubles in the fifteen years after the FairTax goes into effect. How will that happen? The tax will be collected from all 300 million Americans and the more than 50 million visitors to our shores each year. With no tax on capital or labor the U.S. would become a tax haven for foreign investment and the $6 trillion offshore market would return bringing with it hundreds of thousands of jobs.
With no corporate income tax or compliance costs, exports would be unburdened by all tax components in the pricing system lowering export prices by as much as 30%, increasing exports by as much as much as 26% initially. They would remain, according to the studies, more than 13% above current levels under the income tax. At the same time, imports would carry the FairTax into the American market place leveling the playing field for our domestic products.
With the elimination of complicated depreciation schedules, AMTs, complicated credit and deduction schedules to confuse investors, along with complicated compliance costs, corporations would be able to take a whole new look at their accounting practices. Only three numbers would have any real meaning – earnings, expenditures and dividends.
According to studies done by the National Bureau of Economic Research, Gross Domestic Product (GDP) would increase almost 10% the first year after the FairTax went into effect. Real investment would increase almost 76% and the incentive to prosper would increase by about 20%. But perhaps the most significant benefit of the FairTax would be that it would simply cost far less to collect (about $225 billion or 90%), the same amount of revenue as the income tax. And compliance costs, according to recent studies, amount to 3% of GDP under the income tax, the equivalent of three Iraq wars.
The simplicity of the FairTax makes enforcement easier and tax evasion harder by allowing state sales taxing authorities to focus resources by lowering the total number of filers from the 145 million (who file income taxes) to about 16 million retail businesses. By eliminating loopholes, the FairTax also keeps the tax base broad and marginal rates low – dramatically lower than any other tax reform proposal or current law.
The only losers in the FairTax proposal are the tax lobbyists (more than half of all registered lobbyists in Washington) and incumbent members of Congress whose reelection campaigns are mostly funded by those lobbyists.
In conclusion, I would quote former presidential candidate, Alan Keyes, “Under the income tax, the government takes whatever percentage of the wage earner’s income it wants. The income tax, therefore, represents our national surrender to government of control over all of the money we earn. If we believe we deserve – and have the capacity – to be free, ending the income tax is a duty to ourselves and our posterity.”
Howard L. Johnson
Jacksonville, Florida
Mr. Johnson has wrote a very compelling letter, though I disagree with his conclusions.
Before we can have a rational debate on this issue, however, I would ask him to elaborate on his assertions contained in his sixth paragraph.
Specifically —
How was the $22 million in research spent? Did AFFT produce any reports as a result of this research? If so, where are they? (And, specifically, I am looking for a report that substantiates their claim that a 23% tax rate would, in fact, be revenue neutral. Other reports have said the the rate would need to be much higher.)
Exactly who at Harvard, MIT, Stanford, Rice and the other institutions you name support the FairTax? I believe if you dig a little deeper, you will find that despite the claims of Boortz, AFFT, et al., you will find that the specific individuals at Harvard and MIT that AFFT claims provided some of the intellectual basis for the FairTax do NOT support the FairTax. If you look at their published articles (available on their faculty websites), you will find that they have not listed any articles in support of the FairTax. Further, I think you will find that at least one of these individuals has complained that his research has been actively distorted by Boortz in the FairTax Book and on his radio show. (Boortz has since issued a correction on his website.)
I am aware of one professor that is either with (or was at one time associated with) Boston University that does actively supports the FairTax, but I am not aware of anyone at the other institutions Mr. Johnson mentions. (By the way, if you contact the professors who signed the Open Letter to the President that is copied on the FairTax website, I think you will find that a number of them had never heard of the FairTax and certainly are not aware of any academic basis to support the claim that a 23% rate would be revenue neutral. If you study the actual letter, you will see that a 23% rate is not referenced in the letter.)
Believe me, I am looking forward to seeing any studies or reports from the institutions Mr. Johnson referenced in support of the FairTax. Perhaps such reports might form the basis for a more informed discussion on this topic.
Dear Mr. Kepner,
All one has to do to find out how the research was produced and who produced it is to click on “Research” of the various aspects of what the FairTax will do in certain situations - www.fairtax.org. Then, read the cliff notes. There, you will find the researchers and the institutions from which they came.
For instance, if you want to know how the FairTax will effect ranching and agriculture, look at the bottom of the last page and you will find Ross Korves who is a trade and policy analyst with Truth About Trade and Technology.
Most of the early research was done by such distinguished researchers as Larry Kotlikoff, Boston University, Dale Jorgenson, formerly of Harvard University, Jim Poterba, the National Bureau of Economic Research, George Zodrow - Baker Institute for Public Policy, Rice University, Joseph Kahn (formerly of Stanford University) MIT, David Burton and Dan Mastromarco, the Argus Group, just to name a few.
The Researchers mentioned above and others were not hired to “support” the FairTax. They were, in fact, given free rein to come up with their own conclusions based on their research in support of or in opposition to the concept of a national retail sales tax. I go back to my statement about the market research. “A diverse array of methodologies and many rounds of testing were used to thoroughly test the concept before the FairTax idea was ever written and before it went public.” In short, it was developed like any successful product with both market acceptability and analysis for its capacity to produce the desired result.
There are many who are opposed to the FairTax for various reasons. None have come up with a single alternative that hasn’t been successfully rebutted by AFFT’s team of researchers.
If you will look at the rebuttal section on AFFT’s web site
under “Rebuttal to William Gale” by David Burton and Dan Mastromarco, you will find a complete summation about the 23% sales tax and its revenue nutrality, backed by Dale Jorgenson, in “The Economic Impact of a National Retail Sales Tax” among others in that rebuttal.
Now Mr. Kepner, you may debate all you want with the researchers. In every discussion there will be those researchers who will oppose the FairTax and those who will defend it. Virtually everyone of knowledge about the FairTax who is opposed to it have used skewed and/or flawed research to prove their points. We have heard it all and it has been thoroughly rebutted!
We, the FairTax citizen lobbyists, are not about debating the issue. That time has long passed for us. We are about trying to educate the public about the FairTax and its benefits to America; when thoroughly educated, to get them to enlist the support of members of Congress to become co-signers on the bill so that its benefits and shortcomings, if any, can be debated there.
Once the bill is on the floor of both Houses of Congress is when the real debate will begin. And, with the positive research we have at our fingertips, we believe we will win that debate.
But, I believe there is one thing we can all agree on and that is our present federal income tax system is a total disaster. It can’t be fixed as was recently shown by President Bush’s Tax Reform Panel’s pathetic recommendations.
If you want to debate tax reform, please come up with a proposal and present the research that will back your alternative to the FairTax.
Howard Johnson
Dear Mr. Johnson –
Thank you for your civil and rational reply to my post.
I agree with you that the present income tax system is a mess and should be reformed. I also agree that the Tax Reform’s Panel’s recommendations were misplaced, but, like most Americans, I believe in at least a mildly, progressive form of taxation. I have seen a few interesting proposals in that area. One that looks fairly interesting is currently being discussed at TPMCafe.
Regardless of one’s view on the merits of the FairTax, however, I think your reliance on the AFFT website regarding the research in support of the FairTax is misplaced. For the last several months, I have made a good faith and concerted effort to find ANY research that supports the FairTax, particularly the notion that the 23% rate would be revenue neutral. I have invited others to do so as well (including the host of this bolg.) So far, I have found none. What I have found, however, is a lot of apparent misinformation and half-truths being propogated by the primary proponents of the FairTax. Much of this misinformation is picked up and repeated by well-intentioned people such as yourself who would probably be dubious of unsupported statements printed in the New York Times but, for some reason, are less skeptical of unsupported statements contained in Neal Boortz’s book or the AFFT website.
Here are a few things that I believe would at least make a fair-minded person take pause:
1. Boortz and Linder’s book do not contain a single footnote, calculation, chart or appendix showing how the 23% rate was derived.
2. Boortz has never put such a calculation, chart or study on his website despite being publicly challenged to produce any evidence in support of his claims.
3. AFFT references certain (alleged) studies in footnotes, but does not post the studies themselves or link to those “studies” on its website.
4. If you look at the websites of the purported authors of those studies, such as Dale Jorgenson and Jim Poterba, you will not find those “studies” listed in their list of articles and publications.
5. Dale Jorgenson does not support the FairTax. Moreover, he has claimed that he believes the 23% rate is wholly inadequate, and that the true rate would be more along the lines of what William Gale calculate it to be.
6. The AFFT “rebuttals” are, at best, way out of date. For example, they supposedly rebut studies done by William Gale several years ago, but in fact Gale has done a very detailed recent study that was published in the May edition of TaxNotes.
7. The President’s Tax Reform Commission devotes an entire chapter of their report on the FairTax, and concluded that in a best-case scenario (i.e., no tax evasion) the minimum tax-rate would need to be 34% just to replace the income tax. It would need to be much higher to accomplish its stated goal of replacing the social security, medicare and estate taxes as well.
8. Jim Poterba is a member of the Tax Reform Commission. If he could demonstrate that a 23% tax rate would be refenue neutral, why couldn’t he convince the other members?
9. In short, just because Boortz and AFFT claim that the FairTax critics have been “throroughly rebutted” does not mean that they have in fact been rebutted at all. Moreover, since Boortz et al claim that the FairTax critics use “flawed research,” why won’t the produce any of their own research?
My point of all this is that if there in fact is a legitimate study or report showing that the revenue neutral rate is 23%, why don’t the FairTax proponents produce it so it can be examined by the public? If they are not willing to do even that, I think you might want to reconsider spending too much of your time being a “citizen lobbyist.”
I sincerely hope you believe me when I say I am not trying to sound sarcastic or cricize your beliefs. I am aware of certain economic benefits that could probably be derived from a consumption-based tax system. A number of respected economists (including Dr. Jorgenson, for example) have argued that a consumption-based tax system could produce economic benefits. But there is a great distiction between those who argue on the theoretically merits of a particular tax system, and those who make specific claims (e.g., the 23% rate is revenue neutral; prices won’t rise because the “imbedded taxes” will disappear; we’ll have explosive economic growth, etc.) without providing any evidence to support their claims and refusing to fairly address criticism of their proposals.
As always, if you can point me to any actual research to enlighten me on this, I would greatly appreciate it.
Best regards,
Hayden Kepner
These deserve a good reading:
http://fairtaxblog.blogspot.com/2005/08/tax-base-under-current-system.html
&
http://fairtaxblog.blogspot.com/2005/08/tax-base-under-fairtax.html
&
http://fairtaxblog.blogspot.com/ the posts from there around the same day.