Mises Institute Attacks FairTax ... Again
Reader Jason Coyne points me to a new article by Lawrence Vance at the Ludwig von Mises Institute called “The Fraudulent Tax” which provides a withering critique of the FairTax.
The article devotes more than a little space to criticizing Boortz — somewhat deservedly, in my opinion, despite the fact that I’m a FairTax supporter — for being “unclear” in the past about whether people would keep 100% of their paychecks. (That was definitely one of AFFT’s bigger mistakes in promoting the FairTax so far.)
Vance has criticized the FairTax before on behalf of the Mises Institute.
Overall, I continue to marvel at Vance’s capacity to sacrifice the good on the alter of the great. Given a choice between keeping the existing tax code and adopting incremental change, Vance seems to opt for stasis:
The income tax should be repealed, not replaced. The IRS should be gotten rid of, not renamed. Tax reform should reduce taxes, not be revenue neutral. Government theft of the wealth of its citizens should be abolished, not adjusted.
I find this kind of all-or-nothing idealism to be astonishingly myopic.
It appears his previous arguments have not really changed. Instead it seems that he is willing to shoot down the FairTax rather than provide something more constructive to the debate. But anyway, we’ll do the point-by-point:
1. The ‘bottom line’ should result in one of three scenarios:
If gross wages do not decrease, then prebates and less tax components in prices should result in at worst price increases on goods to the tune of 15%, with most eaners keep 20-25% more income.
— continuing on:
The second scenario is one where you only keep your current net wages. If that happens, we all get the prebate but prices should nearly completely wash. In that event, further price competition will likely drive prices down a small margin, say 5%.
The third scenario is in my opinion unlikely, the attempt to take some wage out of price but still give some raise to the employees. If we assume some sort of half-and-half setup, prices might go up 7-10% and wages might go up 12-15% depending on your bracket. That’s pretty close to a wash too.
I also dispute his arguments on prices not being dependent on producer costs. Producer costs are a FACTOR in pricing that directly affects pricing in every product or service. The argument posted by Mises that they aren’t absolutely correlated is correct, and with the FairTax we may see many permutations of pricing changes, but it is silly to think that if producers can save money on costs, that retailers won’t take advantage of their margins to compete on pricing. Wal-Mart has made billions doing precisely this. It is also poor argument to use Jorgensen as both a credible source and an incredible source in the same argument. Do you trust the man’s expertise or not?
Other arguments he makes have been covered elsewhere, specifically the recent Kotlikoff study showing the 23% inclusive rate should indeeed be revenue-neutral.
Additionally, I believe that Boortz mentions that Jorgensen isn’t a FairTax supporter in the book, but rather that he still supports his initial study.
Finally, with only tax rate to work with, we should at least be able to put tax raises and such directly in the public eye EVERY DAY. It should put federal taxation in the forefront of all our citizens’ minds so that changing that rate would be a difficult thing to do indeed. Raising the rate would hurt EVERY American rather than a few here or a few there. Raising the rate should be very dangerous politically as a result.
Ok, I am a little dense, I suppose. Where on earth is this idea that my employer would “adjust” my wages so that I would net the same each paycheck coming from? That sounds like my employer would abitrarily cut my pay, because that $19 each hour is MINE, not my employer’s. I feel like this goes along with the mentality that my tax dollars aren’t really mine.
Could someone please shed some light on this for me?
Kelly, just click on Neal Boortz (Fairtax Resources), select Archives and go to September 15th 2005. Read his explanation about your wages under the section “Clearing up confusion”. Hope this helps!
I have discussed this at length in many other places, but let’s be clear.
The FairTax legislation does not explicity define what would happen to your wages, so while there is no guarantee that wages would not fall, there is no requirement for wages to drop.
But I have spoken to friends and businesspeople I know, and they have basically said that only in the absolute worst cases would they consider lowering their employees’ wages. They said that trying to get an employee to take a pay cut is the most efficient way to make an employee quit. Even if it’s a pay ‘wash’, they believed they would not be able to keep their employees if they tried to lower their wages in said fashion. So they said that they if it came to that, they would lay people off before lowering wages in many cases. So IMHO I don’t think that wages would fall at all except in extreme cases.
So what happens to prices then? Jorgensen’s research would seem to indicate that prices would not be able to fall by the complete 23% inclusive margin since he accounted for federal taxes on wages for employees in the tax component of the iundustries he studied. Instead, it might fall by somewhere between 11-16%, leaving a price increase of 7-12% (exclusive rate ~8-14%) on most goods and services initially.
But if that happens, this still has the effect of lowering rates of taxation across the board using the much broader tax base of consumption, while it loses the salability of the ‘free lunch’ argument.
I personally expect something along these lines to occur and have no problem with a price increase on goods & services in trade for no income taxation. But we should be realistic about what what could happen. It’s still a win-win for nearly everyone!
Personally, I can’t envision a company’s argument of cutting wages to hold any credibility whatsoever. I do beleive that companies are no longer coughing up 35% of their profit on corporate taxation, so where would the claim of hardship come in under this new plan? If a company can sell me on the idea that a nearly 54% increease in spendable income would become a hardship the are doing a superb job of salesmanship.
(I get 54% by taking the 65% they currently keep in profit and adding the 35% to it. 35/65=53.8...)
Is the hardship due to the fact that they will now have to pay the federal tax on everythiing they buy? Don’t get me wrong, I am not anti-business, far from it. I am curious about how most businesses purchase new equipment. Isn’t it normally spent from profits? When the costs of doing business becomes pretty constant due to downward pressure from competition to reduce the price of goods to about the same price as pre-implimentation goods, where would a company get the figures to support wage reductions?
If I am really fundamentally wrong about this, where can I go to learn more? I would appreciate any constructive education on this issue.
Thanks,
Oh, and please dont forget that the employers are also getting a 7.65% break due to the fact they are no longer adding directly to the social security roles. Unless I am mistaken, a good business would add that right to the profit and it is entirely possible for some businesses that amount would be equal to or even greater than the current reported profits. Of course, profit reporting may skyrocket once businesses understand that the reported profit is what they currently pay taxes on.
Dan R. Mastromarco responds with Honk if You Oppose a Fairer Tax
How would you explain the guiding principles of tax reform? Laurence Vance responded by condemning the FairTax. This paper does more than debunk the myths Dr. Vance put forth. It encourages the American taxpayers, referred to as geese, to get “hissed” and work to change the system.
Reply to Bren # 6 and #7.
FIRST: The misleading label FAIR TAX couldn’t be further from the truth, this is a National Sales Tax, and it is most certainly NOT FAIR.
SECOND: If there is a small business making 65% profit, let alone keeping 65% profit, please let me know I’d like to own a chunk of it.
THIRD: There should not be a problem for a company with an astute owner/manager to show it’s employees how a reduction in gross pay of 5% (arbitrary value) would result in an increase in spendable income if the employees marginal tax rate was reduced by greater than the 5%. Most employees are not dumb, they know that their gross pay is not “theirs”.
FORTH: As I said above, although a company COULD show that an employees take home pay would increase, since a company wouldn’t gain or loose by a shift in the WORKERS taxation method, there would be NO justification for a company to cut the gross pay unless the company exemption on goods for resale were eliminated.
FIFTH: The unfair part of the National Sales Tax (please call it what it is) proposal would apply to retired individuals, regardless of their income level. Until an individual retires, that individual helps support the Government(s) by the present income tax system. The person has saved all of his or her life and now starts to draw on their savings. By shifting to a National Sales Tax that individual must now pay all over again. Of course that is still partially the case under the present Income Tax system, but that IS only partly true. And, yes there are some reductions under the proposed National Sales Tax, but not sufficient to protect a retiree’s life’s savings.
SIXTH: I believe most business understand very well that the pay taxes on their REPORTED profit, which is why they do whatever they can to reduce their REPORTED profits.
Since most people are criticized for criticizing without proposing a solution,I submit the following simplified proposal.
1. Eliminate all Personal Income Taxes (Federal, State and Local)
2. Eliminate all Business Income Taxes
3. Eliminate all Sales Taxes EXCEPT certain Luxury Taxes
4. Retain Capital Gains Taxes and place a Flat Tax on Interest (both withheld by the paying institution)
4. Establish only a Payroll tax on all for profit businesses (according to one expert this should be under 30%).
5. All employee’s pay would have a one time reduced based on a formula that would limit the allowed reduction.
After all, it is the businesses of this country that effectively pay all those taxes under the present system.
I would only chime in on this to say that while it is true that some retirees might have some double taxation under the new system, not all of them would.
Any retiree using a tax-deferred retirement account would skate free on taxes on investment principal and earnings (example 401K, traditional IRA).
Any retiree on fixed income from SS or something similar would see more money due to the prebate.
Any retiree relying solely on traditional investments (via brokerage firms) will see the tax burden on their investments disappear.
The people who get double-taxed are the folks who used straight savings and folks who used Roth IRAs. The straight savings method is increasingly uncommmon due to low return on investment. Roth IRA’s I am beginning to think need some form of companion legislation or a ‘patch’ to give them a one-time disbursement out of their Roth IRA into a tax-free spending account (probably using a debit card) and phase them out, since the Roth IRA style investment wouldn’t make much sense under the FairTax.
While the Fair Tax proposal eliminates the Federal Income Tax on earned income, retirement income (pension, IRA, 401-k, and Social Security), it imposes a 30% tax on the purchase of all new products (including homes) and services (including medical and legal).
I assume the Fair Tax 30% tax will also be included on insurance, including home, medical, dental, and life since the Fair Tax website does not appear to exclude these expenses.
What it does not address is that while non-retired people pay payroll taxes (Social Security and Medicare) and Federal income taxes, retirees only pay Federal income taxes.
In addition, the vast majority of retirees are only in the 10% and 15% tax brackets, many of them have a Federal income tax payment of less than 10% of their total income from all sources after deductons.
The imposition of a 30% sales tax in lieu of paying less than 10% appears to be a way for retirees to continue funding Social Security and Medicare long after they completed 40-45 years in the labor force and then retired.
I have grave reservations that the savings achieved by corporations from not paying the Corporate half of the payroll taxes and Corporate Income Taxes will result in wage increases or reduced prices for the products and services they sell.
It appears that the savings achieved by moving jobs off shore, reducing employee wages and benefits, and importing manufactured products went straight into executive bonuses and perks, and outrageous executive retirement programs.
Alan,
It doesn’t just “appear” that retirees will be forced to resume paying into the SS trust funds with their sales tax dollars. It’s a fact! And that is a major break in faith with all current and future retirees who paid FICA taxes for all their working lives.
I’ve written AFFT a number of times, taking them to task for providing businesses a break with the inventory tax credit, but ignoring promises made to retirees. At the least, they could have created some sort of sliding scale sales tax exemption or rebate to account for FICA taxes previously paid. As you can imagine, that’s a non starter for AFFT.
This is not the way to enlist AARP support, imho.
Totally agree with you there Hank and Alan! I have tried to argue this point on fairtaxgroups, but I got back responses like “economists feel fairtax is the only tax plan that can handle the retiring baby boomers”. Well yeah, it handles it by taxing the crap out of them!
Or “the prebate covers the tax on poverty level spending. I have no empathy for rich retirees who have to pay more in taxes above the poverty line.” Ick, we are suppose to live in poverty now when we retire?