Bartlett criticizes FairTax
August 26, 2007 · Filed under: Criticisms
In an August 25 opinion in the Wall Street Journal Online, Bruce Bartlett is highly critical of the FairTax. Bartlett was deputy assistant secretary of the Treasury for economic policy from 1988 to 1993.
39 Responses to “Bartlett criticizes FairTax”
At last, the FairTax is getting criticized from conservative commentators, namely Bruce Bartlett.
I don’t agree with everything Bartlett says here, he doesn’t give any convincing citations to his numbers or calculations, and (in my opinion) he misses some more compelling criticism, but at least there’s someone else out there besides yours truly and William Gale pointing out that the emperor has no clothes.
And, since Bartlett’s a well-known conservative economist, he gives at least some credence that we fairtax critics aren’t all commie pinko followers of father Karl. Can’t wait to see what fairtaxgroups.com and Boortz have to say about this. I’m sure the responses on fairtaxblog.com will be far more insightful. : )
Bartlett’s criticism brings nothing new the table. Instead he drags out well worn arguments that have been debated exhaustively from each side. Unfortunately, in each case, he only presents one side. With almost laughable irony, he accuses FairTax supporters of using tricks and being dishonest.
Bartlett: ...the FairTax rate is not 23%...Linder and Chambliss get this figure by calculating the tax as if it were..incorporated into the price...
Yes, that’s why it is referred to as 23% inclusive. Bartlett implies that because sales tax is usually implemented as exclusive, then it is calculated wrong if it is expressed as inclusive. You can calculate it either way you want - neither is wrong.
Bartlett: ...the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax. The tank would then cost the federal government $300,000 more than it does today...
But having eliminated all of the other taxes previously embedded in the cost of goods not to mention the cost of compliance with the current code, the price of the tank would be substantially lower. Ideally, the cost out the door will be the same in both systems. The debate is how far over or under the ideal it would end up being. But to completely ignore this dynamic is pathetic on Bartlett’s part.
Bartlett: ...state and local governments would have to pay the FairTax on most of their purchases. This means that it is partly financed by higher state and local taxes. It’s also worth remembering that state sales taxes now average 6%, which means that the total tax rate will be 36% on retail sales...
He continues the same ruse, ignoring the reduced cost of goods.
Bartlett: Imagine paying 30% to the federal government on top of the purchase price of your next house.
Imagine having 100% of your paycheck to pay it with. Again, his omissions of the most elementary pieces of the other side of the equations are almost embarrassing.
Bartlett: ...professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%...A 2000 estimate by Congress’s Joint Committee on Taxation found the tax-inclusive rate would have to be 36%...
I have never understood this line of criticism other than to the extent that perhaps the execution plan needs to be altered. Revenue neutral is revenue neutral. Whatever the amount raised, the intent is to be the same as it is now. The rate on sales that it turns out to be is irrelevant. However, we do need to get it right - so, great, let’s go with 36%. Whatever it takes - the bottomline is the same.
Bartlett: I’ve emphasized problems with the FairTax rate because public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%.
Point 1: The size of the federal government expressed as a percentage of consumption is greater than 23% inclusive.
Point 2: The public does not find a tax on consumption greater than 23% inclusive acceptable.
Conclusion: The public wouldn’t find the size of the federal government acceptable if they saw the cost plainly as a single number.
Bartlett’s position: continue to hide the cost of government.
I am all for criticism, but this is not a serious presentation of the proposal. It is so blatantly empty of basic economic logic that I am assuming his motives are political - and that perspective will never be honest.
[...] Captain Ed has a few illuminating comments well worth reading, but the best response to the issue I’ve seen today are from the Fair Tax Blog and the Cato Institute. [...]
Some of this is just plain false information. He stated the rate did not include government spending on the FairTax or the prebate. This is false. The Beacon Hill rate study includes government spending and the rebate in the rate calculation, as does the William Gale study. These are the only real studies (recent, detailed, and published) of the plan and he mentions neither in his article. He brings up the old JCT study (unpublished) that is not of the FairTax plan and the tax panel (with their magical 100% tax on consumption methodology they will not publish). I don’t mind so much that he’s crticial of the FairTax. That’s his right and opinion. “Everyone is entitled to his own opinion, but not his own facts.” It really bothers me that he included false information - He’s an economist and should know better.
Other areas that bothered me.. - no incentive for the states. They get .25% of the collection.. this can ammount to quite a bit of money - over 500 million for California. So there is some incentive. Points he made that serve little meaning in federal tax reform but were just meant to demagogue the FairTax - Church of Scientology charges, State tax forms on April 15th, etc. Hitting below the belt in my view.
There are 4 groups that now don’t pay into the Fed Take,
Moonlighting, under the table, and Tips income.
Spending by Criminals - of their ill gotten gains.
Foreign Tourist -
2005 = 45.2 Million (USA Today)
Average Foreign Tourist spent $1.200 on trip
They spend = $54,240,000,000
A 10% FairTax would add $5.4 BILLION
in NEW Federal Taxes we don’t now get.
Total Advertising in 2006 = close to $600 BILLION (AdAge)
A 10% FairTax would add $60 BILLION
in NEW Federal Taxes we don’t now get.
Bartlett makes all the common mistakes. I spent some time today answering his criticisms as well other common ones. It’s called How FairTax Critics are Always Wrong.
But his biggest mistake? He says that “the FairTax does this by sending monthly checks to every household based on income.” Completely wrong, and shows that he simply doesn’t know the FairTax well enough to criticize it.
Ken, Americans visit foreign countries, too. Currently they spend already taxed money, with the FairTax that spending would not be taxed (by the U.S.). So you have to subtract out the loss of American tourists from the gains of foreign tourists.
I really have no idea what you are talking about with the advertising. That would be a business and would not be taxed, IMO.
Derek, although I have some issues with several of your points, the one where you are just flat out wrong is #5 (”Complaining about the effect on charities”). You state:
Second, people also assume that charities will have to pay the sales tax on products or services they purchase. This is not true. The FairTax bill provides for qualified non-profit organizations (basically, organizations that are not politically oriented) to receive the same exemptions that businesses do - meaning, they will not have to pay the sales tax.
This is wrong. Charities are not taxed on purchases if those items are then resold or exported (just like a business). All other purchases by charities are taxed. As Kotlikoff put it in “Taxing Sales Under the FairTax: What Rate Works?”:
“The FairTax taxes nonprofits’ sales of goods and services to individuals and their purchases of goods and services that are not sold on to individuals, including capital goods.” [emphasis added]
Kotlikoff’s rate calculations (the methodology is consistent with previous rate calculation by the AFFT) shows nonprofit organizations paying ~$36 billion in FairTax (2005 data).
This was discussed in further detail here.
This is from Boortz’s response to Bartlett:
It looks like Boortz hasn’t learned a thing. He’s still selling that prices will stay the same with the FairTax but doesn’t mention that this can only happen if our current take-home pay is our post-FairTax gross pay (everyone has a nominal wage reduction). Considering it would be a near impossiblity to reduce everyone’s nominal wages, what he’s selling is impossible. He’s been slapped in the face with this before and even had to edit the second edition of his book. But I guess a leopard can’t change his spots. As an economist, Boortz makes a great talk show host.
I don’t like a couple of things in this article. I agree with Morph that the Scientology jab was uncalled for(Although I must say I take alot of attacks like this, being called a marxist commie bastard and such on fairtaxgroups). Likewise the info about the rebate not being included is just plain wrong. About the government spending, I believe he is talking about “the error” here, but I don’t think it was intentional subterfuge as he suggests.
Now, I want to rant about “How FairTax Critics are Always Wrong”.
For #2, This should be removed from your list. I feel this is a legitimate gripe. It is true sales taxes are usually stated in exclusive terms. People are not thinking about “marginal tax rate” when they buy something.
For #3, Ugh. This is completely wrong. Prices will only fall by 22% if your net pay stays the same, not if gross pay becomes your new net pay. When the 22% figure was calculated, the calculation assumed employees would only be paid their net pay, not gross. Assuming people will get paid their gross, prices will fall by about 11%, not 22%.
For #4, there are many reasons people claim the rate will have to be much higher. One of them is exemptions. Ok, so exempting items means it’s not the fairtax. But not exempting items would make this extremely difficult to get passed through congress. Changing your perfect tax plan so that it exempts a few items may end up being a political reality you have to live with, even if it you feel it is a dumb idea.
Other reasons people claim the rate will go up include:
An error was made in the original calculations.
Evasion/Avoidance levels assumed in the fairtax are completely unrealistic.
etc.
For #7, I think this is a legitimate gripe. I am very paranoid we will end up with both a sales tax and income tax. You say you share this concern as well, why put this on a list of why people are wrong? I know fairtax eventually calls for repealing the income tax, But I say repeal it first, then implement the sales tax.
Kublikhan, I agree with you on #2. Nobody ever had to explain “inclusive” vs. “exclusive” before - even when talking about sales taxes. People assume naturally that when someone is discussing an income tax rate they are talking in inclusive terms (the base includes the tax) and when someone is talking sales taxes it exclusive terms (the base excludes the tax). The FairTax people are using this assumption to mislead. When they say the FairTax is a 23% sales tax, the vast majority of people will assume that is an exclusive rate and thus assume that the burden of the FairTax is less than it actually would be. I know it confused me when I first heard of the FairTax. Is there anyone reading this who wasn’t confused?
On #3, you are correct about the net/gross pay issue.
On #4, the rate will have to be higher. Period. Even Kotlikoff using every possible assumption in favor of the FairTax says the rate would have to be 23.82%. It seems FairTaxers like to round this down shorting the government ~$76 billion in revenue. But this also ignores the hundreds of billions in extra federal tax dollars we would be paying through our state and local taxes which will undoubtedly have to increase. If I pay a 30% NRST and my state/local sales taxes go up from 8% to, say, 11% to cover the increase - how can this not be consider as paying 33% in federal taxes. (If states were smart, they would list this increase separately as a “NRST surcharge” or something.)
I think the vast majority of people have no idea of exclusive and inclusive and are completely clueless unless it is discussed with them. All they know is a tax rate and they compare it with what they currently pay. With almost everyone that I have talked to about the FairTax, you have to discuss this because they just are not aware of the difference. After you discuss it, the point is not an issue and people understand. Critics want to use this as a stick like everyone understands this concept so it is deceptive to present it any other way. It just makes since to quote it based on the system you are replacing and then define other methods of calculation. It is easy to get from 23% to understanding 30% but not the other way around. They will dismiss it before understanding it. If the goal is understanding, then it is deceptive to present it as 30%. Also, while it seems different in regard to U.S. state sales taxes, European sales taxes are inclusive. All the national VAT taxes that I know of are inclusive. They could very well implement the FairTax as an inclusive tax. I don’t get why sales taxes are not inclusive already.. bugs me a bit that I have to pull out extra cash. If congress has the choice of implementation of 23% inclusive or 30% exclusive, I can guess how they may go... I think advocates have done a fairly good job about discussing the difference. FairTax.org has had the “23% tomato or a 30% tomato?” on their main page for a good while now and discussed it in their FAQ as far back as I can remember. It is not about deception but understanding. You can’t teach people if they’ve tuned you out. Well that’s my view anyway... everyone has their own.
Re: the 23%/30% semantic argument:
It’s easy enough to get past this issue, and on to more fruitful and meaningful ones, no matter how suspicious or mathematically dim your audience is.
All one needs to say (when explaining the topic to a FairTax newbie) is, “There are two ways to calculate a percentage. One makes it sound low, and naturally enough this is the one that the scum-sucking IRS tends to use. One makes it sound higher, and this is the one that your average retailer down the street tends to use, because he’s a more honest straight-shooter type than the IRS.
“That’s why, when your take-home pay is $40,000 and your taxes are $10,000, the IRS calls it a 20% tax rate. Which is true enough, in the sense that $10,000 is 20% of $50,000...even though you only ever see $40K, not $50K.
“Now, had you bought a $40,000 item from your hometown car dealer, if he charged you $10,000 in tax, for a total of $50K, it’d be because your town had a 25% tax rate, not a 20% rate. So even though the dollars are the same, the IRS claims that “40 + 10 = 50″ represents a 20% rate, whereas your retailer says “40 + 10 = 50″ represents a 25% rate.
“So how come your retailer is forthright about it and uses the 25% number? He’s an honest Joe. And how come the IRS uses fancy math to make it seem less? Well, easy. They’re the IRS, what do you expect?”
Now of course, everything I said above is nonsense. The IRS are, of course, scoundrels in lots of ways, but for rather different reasons.
No, the only reason I’d put it this way is, if you’re trying to help some suspicious or math-challenged person understand the reason why “23% is the same thing as 30%,” they’re going to think that **you’re** the dishonest trickster unless you give them another convenient villain to blame the confusing numbers on.
And ain’t nobody less popular than the IRS.
Call it a “teaching aide.”
Derek,
It seems possible to me that you are spending way too much time with the Fairtax cheerleaders at fairtaxgroups.com and not enough time here discussing both the pro’s and con’s of the Fairtax in a civil, rational manner.
Your paper refuting Fairtax critics has as many or more errors and misstatements as poor Mr. Bartlett’s disaster did. Many of my complaints have already been addressed, but I want to discuss your views on prices and taxing governments which are related issues.
Setting aside my major criticisms about the unconstitutionality of taxing governments, my firm belief is that the Houston tax lawyers that created the Fairtax badly needed government consumption to be included in the taxable base in order to arrive at the 23% rate. That rate was important because according to Jorgenson, the average embedded costs of the income tax system was 22%, and a 23% tax would be offset by the removal of the embedded costs and they could then claim that we would “keep all our paycheck and prices would remain about the same”. That claim has been thouroughly debunked in the last two years, and it’s clear that prices. at least initially will rise, although Boortz and company still don’t get it.
The problem is that there is no recognized study that quantifies just what the price increase might be. Although Kotlikoff and BHI claimed to address this subject in their report, in fact they took a pass by assuming price neutrality and mumbling about the impact of “monetary accomodation”. They also dismissed the impact of price increases on state and local governments by reporting that state and local governments could raise taxes to pay for any price increases, or just “tax the tax”, despite one of the goals listed in HR25 being to eliminate multiple or cascading taxation??
On this blog, Marvin has done a reasonable job of estimating a price increase of 15%-18%, based on a 10% savings to retailers from eliminating the income and payroll taxes. (It looks like this: 1.00 x .9 x 1.3 = 1.17.) Also on this blog, your contention, that there will be cumulative savings as a product moves through the production chain, has also been disproved. There are no cascading savings in the production cycle.
What amazes me is that, given the opportunity to instantly reduce the cost of government by over 10%, thus balancing the budget and paying for the inventory tax credit in year one, the Fairtax gurus chose to adopt a plan to tax governments and raise the overall costs. The reason given is that we need to tax governments to head off government competition with the private sector. That’s nonsense–there are any number of legislative fixes for that problem which don’t require taxing governments. How on earth the Libertarian faction supporting the Fairtax could go along with this strange plan is beyond me.
Derek, prices are going up, and taxing governments is a bad idea. And by the way, if exemptions from sales taxes are a dumb idea, then there must be a bunch of dumb state treasurers! Maybe someone ought to poll state and local officials to see where they stand as far as supporting the Fairtax???
Hank, Just to clarify.. there is cascading savings dollar wise (just not percentage wise). I think part of the issue with needing to tax government for revenue neutrality is due to the current system. We could easily untax government (implement HJR 23 to prevent competition if we choose) but we have to determine how much the government taxes itself today through paying employee / contractor income and payroll taxation. We need to decrease the revenue neutral figure to account for the government paying itself under the current system. This adds a new bag of worms. The idea is that we’re continuing to tax government (it’s not like they’re untaxed today).
Morrphh, what do you mean when you say “there is cascading savings dollar wise (just not percentage wise)”? I’ve never heard of “cascading savings.”
Morphh,
Us old guys are a little slow on the uptake. I read you as saying that the government somehow is paying itself when they pay employee/contractor income and payroll taxes? Then you say we need to reduce the revenue neutral amount to account for these payments. I don’t get it. Can you provide a few examples to make understanding easier? My point remains that if we are taxing governments today, why not stop? What is the point of increasing the cost of government? If you are correct, what’s wrong with untaxing governments and lowering the Fairtax sales tax rate?
What am I missing?
Fred,
Go to the July thread entitled “Cascading embedded taxes” and if you can wade through the posts to the bitter end, you will see what Morphh is talking about. I have to admit it isn’t obvious why savings don’t accumulate at each step in the production process, but they don’t, and Morphh explains it well.
Morphh,
After sleeping on your post, (so court martial me?), is this an example of what your concerns are all about?
Using the Kotlikoff/BHI study data, federal consumption is $916 billion, of which 32% is payroll. The government share of payroll tax would then be $22.4 billion ((916 x .32 x .0765% = 22.4). Returning to Kotlikoff’s rate calculation, removing the $22.4B from his $2228B revenue neutral amount comes to $2205.4B, and when divided by his consumption total of $9355B, the new FT rate would be 23.58% instead of his 23.82%. This is a difference of 1/4 of 1%, so the reduction in non social security federal spending in order to get to exactly 23% would be 2.04% instead of his 2.73%. Is this what you are describing as a “new bag of worms”?
Thanks for the feedback about my article. I appreciate all of your criticisms, but perhaps I wasn’t clear enough in my original. Or maybe I was, and you just disagree with me...
The problem with #2 (23% vs 30%) is that it is purely semantics. For critics to focus on this issue shows that they just want to portray those who support the FairTax in a negative light. Do you quote 30% to compare to current sales taxes, or 23% to compare to all of the other taxes that the FairTax would replace? I guess it’s a personal preference, but I think it largely has to do with whether you want to portray it positively or negatively. But to claim that a $100 item would cost $130 under the FairTax, without discussing #3, is simply deceptive. Denise Majette tried to use this tactic against Johnny Isakson in 2004 and failed.
Let me reiterate - people who harp on this point are only doing so to try to make FairTax supports look bad. They are not arguing about anything meaningful.
About #3 (falling prices vs. rising wages), I’m aware of Boortz’ problems with this and I wish he would say it as I did: “There is some debate about which of these two scenarios will be most prominent. But between these two factors, the elimination of personal income taxes and the elimination of repetitive taxation throughout the creation of a product - people will largely purchase items for the same net personal cost as they did before the FairTax.” You have to factor in both the elimination of income tax and the elimination of corporate taxes. The untaxed price of products and services will fall, competition will see to that. The final price may rise, but the degree to which it does rise is the degree to which employees keep their withholdings. So either prices fall or real wages rise. Take your pick. But in the end, the net personal cost will be about the same.
Personally, I believe competition will lower the price, and push wages down as well. But it will vary from market to market depending on the amount of competition.
About #5 (responsibilities of non-profits), I know, and appreciate, that there is debate about this. But as long as the AFFT position is that charities won’t pay the sales tax, then I’ll take that position. The way I read it, is that section 706e gives qualified charities access to all section 102 exemptions, including 102b3 - “furtherance of other bona fide business purposes.” In this case, I believe this would include charitable services. Otherwise, 706e is completely pointless.
Even if you disagree with me on this, charities are currently paying embedded taxes in every product or service they purchase. So the negative impact on charities would only be related to how high prices would rise. But if that happens, wages will rise as well, and people will have more money to give to charities. So even if I’m wrong about 706e, I fail to see how this is a problem for charities.
About #7 (sales tax and income tax) - I don’t think the solution to this problem is to just say let’s just stick with an income tax. If this is a major sticky point for you, then emphasize the need to tie the execution of the FairTax to the repeal of the income tax. Most FairTax supporters feel that it will be easier to pass the FairTax and then repeal the income tax.
Derek,
For #2:
I appreciate that you want to paint the fairtax in the most positive light you can, but just because I think stating the exclusive rate up front is easier for Joe six pack to understand, doesn’t mean I want to paint fairtax in the most negative light. I actually believe the average American will have an easier time understanding exclusive sales tax rate, because that is what they pay now. And they might be in for a nasty surprise when someone in the know educates them on the difference between the two rates.
For #3:
Your belief that lower prices will push wages down to net pay doesn’t sound like a scenario I would be happy with, nor the average American for that matter.
A. You no longer pay income tax. But now everything that you did pay in income tax goes to your employer instead. Why? So he can sell his product cheaper of course.
B. You must now pay a 30% tax on everything you buy. Prices will be cheaper because the person who made them got a pay cut, but you still have to pay a 30% tax rate on your new purchases.
Even though the net personal cost might be similar to the old system, I personally have a problem with living in this scenario. I doubt I am alone. And as for your home purchase scenario, only a fraction of a home’s value is determined by the labor and material that went into it. A larger burden of the cost is the land/location value. So even thought costs may fall 10%, the final value of the house is not going to fall 10%.
Also, I do not believe 100% of a business’s cost savings will be passed onto the customer. I believe the cost savings will be divided between consumer price savings, payments to stockholders, employee compensation, capital investment, etc.
So Bartlett thinks the Scientologists started the idea of a national sales tax. Wrong! The Constitution allows for a national sales tax, but without the 16th amendment, the income tax would be illegal.
Thought on #2... are there any federal taxes today that are quoted exclusively? It comes down to the method of presentation. Are you comparing it with the current tax burden or are you trying to determine how much you’ll pay at the store (based on your understanding of U.S. state sales taxes). Again, the FairTax may very well be implemented as an inclusive tax like European taxes and all current U.S. Federal taxes. I don’t want to rehash a debate on who is right or wrong. I don’t see it as a matter of deception but just concepts with which one chooses to compare it against. I think quoting 23% fosters more understanding because you gain more debate though.
Hank, I think you got most of it correct there. My thought was if you are going to untax the Goverment under the FairTax (taking in less revenue). Then you have to remove the taxes government pays to itself today. Example: Revenue Netural figure is $100 under the current system. FairTax collects $100 taxing government and is revenue neutral. Untax the government (or removing taxes the government pays to itself as some studies call it) and the FairTax collects $85. ... now this is where some twist the idea and they say the FairTax needs to collect $100 to be revenue neutral, so we have to raise the rate. but anyway.. back to the example. We then have to reduce the $100 figure to account for all the taxes that the Government pays to itself today. So for simplicity, lets say the new revenue neutral figure is $86. Recaclulate percentage. Point is that if you do it to one side, you have to do it to the other. I’m not saying that they are even.. the gov is probably paying more under the FairTax.. I don’t know. The can of worms is that we already have enough debates about the rate, without trying to figure out what the new revenue neutral for the current system is... and opponents not making this calculation, etc. Personally I don’t see what the big deal is with taxing the government.. makes things simpler in my view and prevents tax advantages to the gov. But anyway...
Derek,
Sorry, but I don’t agree that the 23/30% discussion is only semantics. What’s at stake here is Fairtax integrity and truth in advertising. Already, you have congressmen and presidential aspirents describing the Fairtax as “a 23% sales tax”. This is just not accurate, and a lot of folks are going to have egg on their face when the facts are known. I support saying that the sales tax is 23% of every dollar spent, but it’s not a 23% sales tax. Period!!
20 million retailers have absolutely no use for the 23% inclusive rate. They only need to know what percentage to tack on to their costs plus profit in order to arrive at the sticker sales price. And that percent is 29.87012? Wouldn’t it have been easier to say 30% and simplify the higher math?
But, you say, we need to use inclusive rates in order to fairly compare with payroll and income taxes. O.K., I’ll give you your 23% Fairtax inclusive rate, now just what income tax number do I compare that to? Are you hoping I’ll compare it to my 25% marginal tax rate? No, the fact is that neither the 23% nor the marginal income tax rate are of any direct use.
So, what do we compare? How about effective tax rates? I know by looking at my income tax return exactly what my effective income tax rate was last year. By making some assumptions about my spending habits, I can come up with an effective Fairtax rate after factoring in the prebate. But be careful. As a retiree with $80,000 gross income, my effective income tax rate is just over 10% or $8,000. Assuming I will spend 75% of my income on taxable goods and services, my Fairtax will be $13,800 less $4400 prebate for a net of $9400. Which is better for me? I’ll stick with the devil I know–it’s cheaper.
Now, you say that either prices will fall or income will rise, but no matter, it’s a wash. Well, my income will rise by $8,000, but prices will initially increase by 18% or $10800, so once again I’ll stick with the income tax. Unless of course, I choose to change my life style and buy my underwear at Goodwill in order to reduce my Fairtax burden. Ain’t going to happen!!!
There is no need to try to reeducate 300 million Americans that 23% equals 30%. No longer is anyone with any sense claiming that the 23% sales tax will be offset by the elimination of the 22% in embedded costs of the income tax system, and prices will remain about the same. That bit of nonsense was shot down long ago. Any plan that has to redefine sales tax terminology, has to claim that the prebate is a tax refund in advance when in fact it is a cash grant entitlement, and claims that everyone will be better off under the Fairtax is doomed to failure. My ten years working on Capitol Hill taught me that honesty counts for everything, and the truth always surfaces.
I’ll tell you why the tax exclusive/tax inclusive rate is important. Let’s assume, hypothetically, that the FairTaxers are right and the 30/23% rate would be the actual FairTax rate.
FairTaxers claim that this is a 23% tax-inclusive rate, that is, if the purchase prices is $130, the FairTax will be $30 of that amount. They say the receipt will clearly say: Purchase price = $130. Tax = $30. $30/$130 = 23%.
The consumer will quickly conclude that if he can buy that same item on a tax free basis, he’ll only need to pay $100. In other words, the after-tax price of the good will be 30% higher than the pre-tax price of the good. It’s this 30% difference he will focus on.
He’ll then realize that if he buys the same item for his business, he’ll get it tax-free and it will only cost him $100. If he buys the item across the border in Mexico, it will only cost him $100. If he buys the item for “investment” or “educational” purposes, it will only cost him $100. If he buys the item under the table, it will only cost him $100.
The whole “tax inclusive” idea won’t’ make a dime’s worth of difference to the consumer. The consumer is not going to say to himself, “Gee. Since the FairTax replaced the Income Tax, I’m really only paying a 23% tax-inclusive rate. You know, that’s not so bad.” He’s going to focus on the 30% additional amount it will cost him if he follows the rules and buys the item as a consumer and pays the tax.
He’s going to be mad as hell everytime he has to pay the FairTax, and he — and everyone else — is going to do everything he can to by-pass paying the tax in order to save the 30%. Believe me, nobody — I mean nobody — is going to give a damn what the “tax-inclusive” rate is; they will only focus on the “tax-exclusive” rate and how to avoid it.
This seems so obvious to me I can hardly believe I even need to keep having this discussion with such intelligent opponents.
Something must be in one of our’s drinking water.
Hayden wrote: He’s going to be mad as hell everytime he has to pay the FairTax, and he — and everyone else — is going to do everything he can to by-pass paying the tax in order to save the 30%.
I certainly hope you’re right about the being mad part, Hayden. In fact, this effect is my primary interest in the FairTax. You mention various evasion techniques as reactions to get out of the tax. But what about being more vocal about being taxed in the first place?
If people get that mad, which I hope they do, I believe there will be considerably more pressure to reduce spending. And if spending goes down, would we all agree that prices will go down then?
...this effect is my primary interest in the FairTax.
I also suspect that, at some level, this is the primary fear of many critics. I am not referring to anyone in particular but, in general, it is hard to imagine that if your interest in government leans towards the collectivist side and / or you recieve your paycheck from the government, that you would rationally support pricing for the government that is so transparent and concentrated in one place.
OK, Mark. I agree with you that it would be a very good thing if people new exactly how much our government was actually costing them. I suppose putting it on receipts each time someone makes a purchase is as good a way as any. (The Flat Tax folks used to advocate something similar — requiring people to pay taxes each month to remind them of how much our government spends.) I also think it’s a good idea to make everyone pay taxes, so we’ll all have a strong incentive to control government spending. So, two points for the FairTax.
And, yes, reduced government spending would keep the FairTax rate lower, just as reduced government spending could get the income tax rate lower.
But I’ll tell you the first thing that would be eliminated under the FairTax — the prebate. Think about it. Imagine that you’re a middle class stiff paying out the ying-yang under the FairTax. You can’t afford health insurance because of the FairTax. You can’t afford a new car because of the FairTax. You can’t afford a new house, etc. So you DEMAND that the government reduce spending to bring the rate down. So, is the government going to cut defense? Social Security? Medicare? I don’t think so. The first thing the government will do to reduce spending is reduce the size of the prebate, or make the prebate available only to low-income families.
Now, eliminating the prebate might be a good thing or a bad thing, but it would definately happen. When it does, the whole sham of the FairTax being progressive will fall by the wayside, the middle-class will revolt, class warfare will result, and then — boom — we’ll be right back to where we are today with an income tax. So, why go through all the trouble?
Morphh, the employer portion of SS/Medicare is actually an exclusive rate (it’s paid on a base that excludes the tax). The gift tax is also exclusive. These are both taxes that would be replaced by the FairTax. It kinda puts a few holes in the logic that the FairTax needs to be inclusive because the taxes it replace are exclusive (I never understood that anyway).
It’s also interesting to note that the exclusive rate is the simplest way to determine the tax due on a price excluding tax (btw, the bill requires the seller to “charge the tax imposed by section 101 separately from the purchase” - so no inclusive prices - and inclusive prices would cause issues with state sales taxes). Using a tax inclusive rate, there are two ways to determine the tax due on a tax exclusive price. One is to convert the inclusive rate to the exclusive rate (by far the simplest). The second is to do a recursive calculation where you apply the rate to the price, and then to the tax (interestingly, the taxed is taxed with an inclusive sales tax rate), and then to that tax, etc. until the amount of tax generated is insignificant.
Example: $100 * 23% = $23 * 23% = $5.29 * 23% = $1.22 * 23% = $0.28 * 23% = $0.06 * 23% = $0.01
$23 + $5.29 + $1.22 + $0.28 + $0.06 + $0.01 = $29.86
Which, with a small rounding error, is the same as $100 * 29.87%
So why are they using the inclusive rate, again?
Hank said: “What’s at stake here is Fairtax integrity and truth in advertising.” I would propose that instead of saying a 23% or 30% sales tax, we should just call it a 23% consumption tax. Because it’s not a tax on ALL sales (used goods are NOT taxed), it’s a tax on items upon their initial consumption.
Hank also said: “As a retiree with $80,000 gross income, my effective income tax rate is just over 10% or $8,000.” You’re neglecting the embedded tax cost of everything you buy in your argument. Finally, as a retiree, you’re willing to fight against a system that could help the US economy grow much faster. Personally, I’d rather fight for a system that will benefit future generations by eliminating an impossibly complex and burdensome tax code and replacing it will something simpler that makes sense, and doesn’t burden the poor.
kublikhan said: “I personally have a problem with living in this scenario.” I’d rather be taxed on what I spend rather than on what I earn. It puts me in control, and rewards me for being frugal. But again, that’s an argument of a consumption tax vs. income tax. It seems like what you really have a problem with in your comments is the change. You haven’t argued against the basic idea of a consumption tax.
I’ll put it this way - turn the tables. Assume that we currently only had a consumption tax, and someone came along and argued that an income tax would be better. Can you make that argument? Even if you could, a lot of people would disagree just because they wouldn’t like the change.
Currently we tax production, at every possible stage. Taxing consumption at the final stage just makes more sense.
kublikhan also said: “Also, I do not believe 100% of a business’s cost savings will be passed onto the customer. I believe the cost savings will be divided between consumer price savings, payments to stockholders, employee compensation, capital investment, etc.”
Thanks for reiterating my point, though you certainly added additional outcomes, and rightly so. The money saved by businesses will flow back into the economy. Payments to stockholders? That’s great for everyone as well - retirement plans would increase in value. Employee compensation is great. Capital investment creates jobs. Are you trying to argue for the FairTax or against it?
Hayden said: “But I’ll tell you the first thing that would be eliminated under the FairTax — the prebate.” Hah, hardly. Can you imagine how a politician would be demonized for proposing such a thing? The poor would be the most affected (going from paying negative/no taxes to paying taxes). No, once we start the prebate, the more likely scenario is that politicians will want to increase the prebate - and increase the number of people who get a free ride - and also increase the rate to make the rich pay more. The great thing about the FairTax is that they can only do this to a certain extent. Like Mark, transparency is one of the biggest reasons I want the FairTax - that level of transparency is the only way we will ever get a hold on runaway government spending. But getting rid of the class warfare used in politics is a very close #2 for me. No longer would politicians be able to call a tax cut “for the rich.” An increase or decrease in the rate would affect everyone equally.
I’ve seen a lot of critics get irritated with specifics about the FairTax, and get hung up on minor details. But I’ve seen very few - almost nobody - argue that an income tax is better than a consumption tax. Are there any critics that are up to that task? If you spend as much time finding faults in our current system as you do finding faults in the FairTax, you’d become a supporter of ANY alternative.
Whoa up, Hayden,
Do you really believe that getting a sales receipt that never shows that the real sales tax rate is 30% is going to help us understand and be concerned about the cost of government? If you want to scare everyone, why not put the 30% exclusive rate on the receipt. The legislation never allows the exclusive rate to surface. Very strange.
And if you really believe everyone should pay taxes, then I would have expected a bigger reaction to my claim that an estimated 30 million workers might never pay any net federal tax, yet will qualify for full SS pensions and health care benefits. How in god’s name can all these Libertarians support a huge government welfare plan like the Fairtax?
Couple this socialistic issue with the fact that, after paying into the SS trust funds for 45 years, retirees will now be expected to resume paying for our pensions and benefits with our sales tax dollars. If anyone thinks AARP is going to support the Fairtax, think again!!!
Just read through (most) of the income vs. consumption blog post. Interesting thoughts there, though not much that would make me seriously consider income vs. consumption. I guess I fall on the side that progressiveness should be based on consumption rather than income, because those who make more but spend less will do something smarter with their money than the government would, anyway.
Also, I would actually support removing SS from the FairTax entirely, and keeping that portion income-based, IF it were moved into a partially privatized system at the same time. But part of the point of the FairTax bill is that it doesn’t touch any other aspect of government, from overall spending, to entitlement programs, etc.
And sorry Hank, SS is NOT a pension and it is NOT a trust fund. No such thing exists. It is a tax that funds an entitlement... when I pay the tax I am paying for someone’s retirement right now, not my own. That’s the basic problem with the system. And it will never improve until the AARP crowd gets over it and allows it to improve... which might only happen when the system completely collapses.
So since it’s really a tax that funds an entitlement, I don’t care if we just quit acting like it’s a pension payment to a trust fund and treat it like all the other taxes and entitlements, and include it in the FairTax. Heck, we could just do that and add a government-sponsored, minimal private retirement package that would eventually phase out traditional SS as the 40+ crowd move through the system over the next 45 years. Sometimes it seems like ANYTHING would be better than the mess of a system we have now.
Derek,
I think you misunderstood me there. When I said “I personally have a problem with living in this scenario.”, I was referring to your proposal of lowering everyone’s gross pay to their net, letting corporations pocket the difference, then on top of this corporate theft, charge everyone 30% tax when they buy something. I don’t like that. But I was not arguing against a consumption tax itself here.
Also, when I was talking about cost savings, what I was getting at was that your 22% price drop for embedded cost is thrown right out the window. The maximum is more like 10-12%. But when you divide up that 10-12% savings between lower consumer prices, capital investment, employee compensation, stock holders, etc, your 10-12% savings just dropped to a 2-3% embedded cost reduction. The rest was divided among the above items. Still good for the economy? Sure. But its still an almost 30% price gain that consumers will have to pay.
Hank, I agree with you completely regarding the problem of the social security benefits received by those that never have a net federal tax under the FairTax.
The problem there is that those particular programs are dependent on a model where paying them out fairly requires knowledge of how much each person is paying in. So they work well for an income tax model because the collector has to have knowledge of who is making what and who is paying what. Once you have that knowledge, programs that have payouts based on it are easy.
But with the FairTax, the government doesn’t know anything other than how many children are in your household - so programs like social security just don’t fit well. To build into the system the ability for the government to know what people are paying in would A) reduce or eliminate the savings in compliance cost and B) open the system back up to political manipulation based on class.
So, personally, while I recognize the problem, it is nowhere near worth fixing given the consequences. On top of that, I have little personal sympathy for those programs because I don’t even think they should exist in the first place - and this is an excellent example of why. Debating the merits of social security is a topic for a different blog, to be sure - but for the sake of illustrating support for the problem you propose, I think you will find alot of people with my same perspective.
Derek,
Well, bless your soul, we are in total agreement that it would be better to remove SS from the Fairtax. It’s interesting that Bartlett’s piece caused Linder/Boortz and company to publically try to distance themselves and AFFT from CATS and those darned Scientologists? It turns out that AFFT might have been better advised to coordinate with CATS, whose national sales tax proposal addressed just the income tax and left SS alone. I’d much rather pay a 15% national sales tax and ensure that all workers continued to contribute to their retirement pensions and medical benefits through payroll taxes.
I’m sorry you take such a dim view of SS in general. The check I receive every month certainly is a pension, and there definitely is a trust fund. Sure, the trust fund contains only Treasury IOU’s, but the system isn’t broke as you seem to believe. According to Bill Bradley in his latest book, the trust funds can remain solvent for the next 100 years by simply gradually raising the retirement age to 70, removing part of the current cap on taxable earnings, bringing all state and local workers into the system, and using a more accurate system for calculating inflation adjustments. Rest easy my friend, you too will get your pension!
Finally, I don’t think anyone here would disagree with you that a consumption tax would be better for the country than the income tax. The problem is that you can’t get there from here. Congress will never approve such a revolutionary plan as the Fairtax with all the unknowns that could wreck the economy. They are basically conservative and prefer evolution to revolution, so says Jim Sexton, former chair of the Joint Committee on Taxation. AFFT badly overreached when they created HR25. A phased introduction of a plan that just eliminates the income tax would have had a far better chance, particularly if it didn’t include the prebate, inventory tax credits, taxing governments, implicit taxation of investment and debt instruments, and exemptions for education. I call it “Fairtax-Lite”. Try it, you’ll like it!!!
Whoa folks;
I don’t know who resurrected this insanity of trying to reduce everyone’s income to their current net pay but someone isn’t thinking.
Will anyone please respond if, when being offered a position, the company offer was for the net pay. In my 40 years of working in the corporate world it has never happened to me. Can anyone spell “Breach of Contract”? Let’s go one step further, what about the labor unions? How many do you think are going to say thank you when you make that proposal?
I think this blog is a great exercise but that idea goes beyond reality. Besides, none of us can say what the legislation will look like if/when it hits the President’s desk. Let’s keep the exercise going but, please, stay in the real world.
Bartlett posted a follow up to his earlier piece. Among other things, he explains the scientology-Fairtax link.
Bartlett’s follow-up to his original schlock piece is hardly an explanation of a Scientology-Fairtax “link”. So let’s get this straight...some lawyer, who was contacted by a CATS Scientologist the lawyer previously did not know, has a few fruitless meetings with said CATS guy, then decides he likes the basic idea of a consumption tax and later gets involved in creating what is now AFFT and a completely different version of the concept. That’s a damning “link” to Scientology? Wow. Guess I’ll just renounce my membership in AFFT and support for the plan now. Hardly. Combine this with Bartlett’s numerous other blatant lies and misrepresentations, and one begins to smell a rat. Just what is thereal axe that Bartlett’s attempting to grind? Is he, perhaps, moonlighting as a K-Street lobbyist and therefore has a vested interest in maintaining the status quo, which benefits virtually NO ONE...except maybe...K-Street lobbyists? Hmm. Or is there something more sinister at work? I mean after all...Bartlett IS a former Deputy Assistant Secretary of the Treasury for Economic Policy...an impressive title for someone so critical of the plan. Would it be unfeasible for any group to recruit (read: pay) such a seemingly reputable man to be their spokesman? I can hear the uneducated/uninformed now...”But surely THIS guys knows what he’s talking about, doesn’t he”? Clearly, to anyone with the most meager knowledge of how the true AFFT proposal works, he does not. Either that or he is lying, plain and simple. Which is it and why?
>>But surely THIS guys knows what he’s talking about, doesn’t he?>>
Actually, his experience and former positions are what made the whole thing so unplausable to me. I would understand, and even expect, something this hollow from a CNN pundit, for instance. But this guy advised Reagan.
Given his penchant in the last few years for writing books critical of those on his side of the politcal fence, I was thinking maybe he enjoys the attention his opponents lavish on him for doing so. I figured something like a well placed article criticizing the FairTax might be points towards his next book deal.
But whether it is lobbying or a boost for a waning career, it is politics either way. Which, as I said up top, is particularly ironic given his accusation that the authors of the proposal were dishonest.
I want a simple tax system. It pains me.