New ‘Answering the Critics’ Book: Reactions?
February 12, 2008 · Filed under: Education
Hayden knows how to get a new thread started around here:
I think we need a new thread to discuss the new book, Answering the Critics. I read it in the bookstore over lunch. You all know what I think, so I won’t bore you with my critique. But I am curious as to what the rest think of it.
I will say this, though, virtually everyone on this board — both pro and con — has presented a lot better arguments and analysis than you will find in the book. If the people who buy that book would simply link to this site instead, they would be much better educated.
...Just butter us up with compliments! 
70 Responses to “New ‘Answering the Critics’ Book: Reactions?”
I haven’t read the book but I’m going to make some comments on the 1 star Amazon review... I think we all know who wrote it.
First section - (a) the Joint Committee on Taxation (2000), (b) the Institute on Taxation and Economic Policy (2004); (d) the President’s Tax Reform Panel (2006); and (e) Bruce Bartlett (2007) did not analyze the FairTax, and (c) William Gale of the Brookings Institution (2005) did only in his last publication (where he did not conclude a 50-60% rate). (a) & (b) clearly studied a different bill with a different tax base (the Individual Tax Freedom Act or some other national sales tax plan, which can change the rate dramatically). You may be able to argue (d) but they won’t release their data. Where do you find that Bartlett actually did a study on the rate? He used (a), (b), and (d) as reference - not his own work. One the other side you actually have studies of the FairTax legislation. I think it is a reasonable objection of the book if it did not adequately argue these rate studies, but it was extremely inaccurate of the reviewing author to claim these were FairTax studies and the 50-60% rate they “concluded”.
I thought comments 2 & 3 were fair enough criticism. Of course I’d argue them... but they were not misleading (and sometimes just plain false in my view) like comment 1.
Actually, now that I look at it, I don’t think the Institute on Taxation and Economic Policy did a rate study at all. They reference Gale’s old stuff for their 50-60% rate analysis, which was not the legislation. So (b) & (e) don’t even look like studies, just references to (a), (c), & (d). When they reference (c), they reference Gale’s older works. (a) and (d) didn’t score H.R. 25., particularly (a). (d) could be argued but they may have used Gale’s old research as well - we’ll never know as they won’t release their methodology. Their are really only two detailed studies that analyze the FairTax. BHI/Kotlikoff (2006) and Gale (2005).
The section on the VAT is particularly weak. It’s obvious they don’t understand or refuse to acknowledge the advantages of a VAT.
The book states “It’s true that the tax on the increase in value is very small at each step along the supply chain. But all those taxes accumulate along the way. By the time the consumer buys the product for final consumption, the total cost of the tax burden is hidden in that final price, to be paid by the final consumer.” The VAT isn’t “hidden” in the final price. The full amount of all taxes would be added to the tax exclusive price of the good just like the FairTax and the full amount of all taxes paid through out the chain would clearly be stated for the consumer to see - just like the FairTax. In fact, all other things being equal, a FairTax and a VAT at the same rate would generate the same revenue.
The book later states “Since the VAT is levied at so many steps along the manufacturing chain, a very small increase raises a significant amount of revenue; the average consumer thinks this is just a matter of inflation.” This really shows they don’t understand the VAT. It appears they have the idea that the VAT cascades. This just isn’t true. A change in the VAT rate would generate the same amount of new revenue as the same change in a NRST rate.
It further states “Europe, whose member nations levy a VAT, taxes its citizens at about 40 to 45 percent of its entire economy.” What does one have to do with the other? The VAT certainly isn’t 40 to 45 percent of its economy. Is it the VAT that cause, or even allowed, these to tax their citizen at this level? The VAT is used by most countries on the planet. Do all these countries tax their citizens at this level?
Again from the book, “There’s one more very important danger associated with the VAT: many countries that use this system also have an income tax. Is that what we want in the United States?” How is a VAT any more or less likely to be implemented with an income tax than a NRST is? Most states that have a sales tax also have an income tax. Does that mean that if the U.S. goes with a NRST we’ll also get an income tax? Of course not. This is just really sloppy logic from the authors.
Finally it states “One more thing: can someone tell us how the VAT untaxes the poor?” It could do it the same way the FairTax would - by sending them a check every month!
Again, the authors don’t seem to have a very good grasp of the VAT which is too bad considering it is very similar to the FairTax (without the major compliance issues) and has been successful in over 100 countries.
I would really recommend that people who would like to get a good overview of all the different tax systems pick up a copy of “Taxing Ourselves” by Joel Slemrod and Jon Bakija. There is a new edition coming out (they come out with one every 4 years). It’s really excellent.
I agree with you here Fred. I haven’t read the book but all your points are true, minus maybe a fuzzy debate on exclusive. VAT’s are also inclusive as they already include the tax. So there is nothing to add except their value added.
Under a 20% VAT or a 20% NRST (both tax exclusive), a $100 item sold at retail would have $20 of tax added to it ($120 total) at the register and that $20 would represent all the taxes collected throughout the chain for that product. You can choose to state the rates as tax inclusive rates - as the AFFT does - but that really doesn’t change anything. To the customer, a VAT or a NRST at the same rate would appear exactly the same and collect the same amount of tax from them.
Fred,
Thanks for your insightful comments, here.
Can you explain more about how a VAT works?
Here’s my specific question: If the VAT is added at each step of the supply/production chain, how do they control the cumulative nature of the taxes, so that it adds up to (say) 20% for any product at the cash register, rather than 15% for products in some smaller industry (with a shorter supply chain) and 25% for those in some other industry (with a longer or more complex supply chain).
Joshua
Under a credit-invoice VAT (the most common), businesses charge the VAT on all their sales but they get a credit for the VAT they’ve paid on their inputs. They only remit the difference between what they paid and what they collected. By giving this credit, it avoids cascading and only taxes the value each business adds to the product.
One way to think of the retail price of a good is that it’s the sum of all the “values” each business in the chain added to product. A NRST taxes this total “value added” at the register. The VAT taxes each “value added” as it occurs though the chain.
A simple example of a 20% VAT for a product going through chain:
Raw Materials Stage: Has $0 cost of inputs. Adds $10 of value. Sells product for $10 and adds $2 VAT for a total of $12. He collected $2 in VAT and paid $0 so he remits $2.
1st Processor: Has $10 cost of inputs (the VAT he paid doesn’t count as a cost because he gets a credit for that, i.e., he’ll be reimbursed when he sells the product). Adds $4 of value. Sells product for $14.00 and adds $2.80 in VAT for a total of $16.80. He collected $2.80 in VAT and paid $2.00 so he remits $0.80. (Notice he only remitted the amount of VAT for the value he added: 20% x $4.00 = $0.80)
Distributor: Has $14.00 cost of inputs. Adds $2.00 worth of value. Sells product for $16.00 and adds $3.20 VAT for a total of $18.20. He collected $3.20 in VAT and paid $2.80 so he remits $0.40.
Retailer: Has $16.00 cost of inputs. Adds $4.00 worth of value. Sells product for $20.00 and adds $4.00 VAT for a total of $24.00. He collected $4.00 and paid $3.20 so he remits $0.80.
Notice that if you add up all the “values added” it equals the final retail sales price ($10 + $4 + $2 + $4 = $20) and that the VAT charged at the retail stage equals the total VAT remitted throughout the chain - completely visible to the customer.
Also notice what happens if one of these businesses tries to cheat and not remit the taxes they collected. Since they had to pay the VAT on their inputs they would only gain the amount of VAT on the value they added.
If you think about it, the FairTax acts like a VAT when a B2B transaction includes the FairTax. In that case, the purchasing company can deduct the FairTax paid from the tax they remit. This is how a VAT works. Under normal conditions in a sales tax, the B2B does not have the FairTax applied, but the option is there.
As far as exclusive inclusive, I believe all VAT countries treat the tax inclusively. You don’t add it on at retail - something for $5.00 cost $5.00. VAT is displayed on the receipt as a percentage of the $5.00. GST countries treat it exclusively.
There are arguments against a VAT that do not apply to a sales tax. One being that the compliance cost is higher but I’ve heard others... Also consider that the government could compel firms to report, via 1099-type forms, their sales to other firms, which would provide the same records that arise under a VAT.
Morph — You should have written the Answering the Critics book. You are clearly much more knowledgeable than the authors are of the pros and cons of the FairTax, as your hard work on (and battle-scars from) Wikipedia show, and would have engaged in a much-needed substantive discussion of the criticsim of the FairTax. Now all you need is your own radio show or to run for Congress!
This new book is actually a great improvement over the original, but I do not believe the authors really address the fundamental criticisms of the FairTax. For example, in the part where they respond to those who question the FairTax rate, they say that you can’t trust the think-tanks because they have a tendency to rewrite the FairTax to exempt medicine, housing, etc. That’s a favorite tactic of Boortz to discretic those studies, even though the Gale study and the Tax Reform Panel report, among others, clearly stated that they did NOT exempt those things from their analyses.
And, with all due respect, I believe your comments in the first two posts in this thread are not accurate. The JCT study of 2000 is specifically referred to in the book, and the JCT study specifically refers to H.R. 2525, the “FairTax Act of 1999.” The ITEP study specifically discusses H.R. 25, and claims that it (i.e. ITEP) calculated “the required break-even sales tax rate would be 45 percent and 53 percent, depending on how certain tax-base issues are resolved.” Although it references other studies, it claims to have done its own analysis. And Bartlett claims in his recent TaxNote article that the 23% tax-rate is too low and would not cover increased government extenditures under the FairTax.
Now, you could certainly argue that none of those reports/studies showed how they calculated the required tax rates (although I would assume that Cong. Linder would have access to the JCT’s calculations, but I don’t know for sure), but neither The FairTax Book nor Answering the Critics contains any calculations either, nor do they cite any studies (even the Beacon Hill Study) supporting the 23% tax-rate. They simply say that the studies finding higher rates must be wrong. There’s no real effort made to refute those studies, and, presumably, neither Boortz nor Linder ever made an effort to contact the authors of those studies to determine why they concluded the rate would need to be so high. So, the “refutation” in the book essentially amounts to little more than the school yard logic of: “We’re right! They’re wrong!”
We spend a lot of time on this board arguing over which study is more accurate in predicting the required tax rate. And since (to my knowledge) none of us are economists, none of us know for sure whether any of the studies are even halfway accurate. One good thing about the recent interest in the FairTax due to the Huckabee campaign and the Boortz/Linder books is that more and more economists will presumably find it worthwhile to actually study the thing. It would certainly be nice to see two or three civil discussions on the FairTax between knowledgeable folks with differing points of view.
I’d even chip in for the popcorn (as long as Morph and Joshua didn’t steal it all).
Morph –
One more thing. The William Gale study did, in fact, conclude that the required tax rate would be 53% (on a tax-exclusive basis) if there was merely a 10% reduction in the expected tax base due to tax avoidance and the like. If there were a 20% reduction, Gale found that the required tax rate would be 65%.
I also note that at the very end of the book, at the end of the appendix discussing the Tax Reform Panel, Boortz/Linder claim that James Poterba found the required FairTax rate to be 23.1%. I’m not sure exactly what their point is, except to say that Poterba was on the Tax Reform Panel so his views must somehow have gotten suppressed by the other “bureaucrats” on the Panel.
I wonder if Boortz/Linder bothered to contact Poterba to get his thoughts on what the FairTax rate would need to be. Perhaps Hank can refresh my memory. I believe that Poterba gave up on the FairTax a long time ago. I know that he very pointedly did NOT sign the open letter from the economists to the President supporting the FairTax, but I thought he had also offered cricism of the FairTax.
Hank?
After my last post here I decided to run out and buy the book. Borders was sold out and Barnes and Noble only had 2 left; looks like it’s heading to #1.
Well I’ve finished and I’ll have to agree somewhat with Hayden; the arguments here are pretty good and have covered most if not all of the issues the book does. However, Neal Boortz does have a certain eloquence and rhetorical style that will help the widest audience to better understand the FairTax.
“FairTax: The Truth” will be most useful to those who have read the first book “The FairTax Book” and haven’t really participate in internet debates; it will quickly get them up to speed as though they have been participating here. But even seasoned proponents will find very useful concepts and phrases that will surely aid them in discussions about the FairTax.
For example, Neal Boortz addresses the concern of many on the Right that the FairTax does not reduce spending by correctly pointing out it has to have votes from both political parties to pass. He admonishes the Right by saying, “Where did the political right get the idea that tax bills should contain spending provisions?” to show them just how much the current code has warped their own thinking. I suspect his phrase, “that’s why it’s called the FairTax, not the FairSpend” will become commonplace in internet discussions on this issue in the near future.
“FairTax: The Truth” does indeed address what I’d guess are 90% - 95% of the criticisms most often seen on the internet. In my observations the remaining criticisms tend to be based more on a lack of belief of certain concepts and principles involving economics and the power of a free people participating in the free market. To argue criticisms of this type requires less in the way of number crunching or revealing logical fallacies than it does a more theoretical approach.
Neal gives us a hint he might not address these theoretical criticisms when, writing about the 10 principles of tax reform suggested by the AICPA, he says, “If criticisms pass muster with the principled lens, we’ll incorporate them to make the FairTax and all other reforms better. If they don’t, we’ll discard them as the tripe they are, the machinations of naysayers who would rather defend their turf than move the debate forward.” So consider those 5% - 10% not addressed as discarded. Neal does mention Milton Friedman several times as though pointing the way forward to greater understanding for those so inclined.
I highly recommend “FairTax The Truth” for anyone, with the possible exception of those that are already sold on the FairTax and have no plans to participate in discussions or debates about it and really need to save the money. Otherwise it will be quite useful to help shatter the misconceptions spread by the critics and help prepare those that wish to participate in the growing movement of the FairTax.
I think Neal is very clear on the VAT. A VAT violates at least four of the 10 principles or criteria set forth by the American Institute of Certified Public Accountants. The 10 points are simplicity, fairness, economic growth, efficiency, neutrality, transparency, minimizing non-compliance, impact of government revenues, certainty and payment convenience.
I believe that if a tax reform proposal is a little weak in any of these areas it should be so in favor of the citizens and not the government.
Simplicity: The FairTax is one rate collected once on any product or service. The VAT is collected or credited every step of the way all through the supply chain of every product or service. The value added must be determined some how. The VAT must require some kind of accounting and paper pushing.
Economic Growth: Econometric models showed consumption taxes create more economic growth then a VAT. The wastes involved are surely greater than the FairTax with all that extra accounting and paper pushing. Waste does not help economic growth.
Efficiency: The time and money involved that burden businesses are greater with a VAT than the FairTax. That’s time and money that could be spent actually producing the product or service. The VAT is less efficient than the FairTax.
Transparency: The VAT is one of the most hidden taxes; completely invisible to the consumer. This allows the government to raise taxes unnoticed by consumers. That’s why Europe has total taxes of typically 40 – 45 percent of their economy and we are at about 25% according to Boortz.
Milton Friedman said, “The VAT is the most efficient way to raise taxes and the most effective way to increase the size of government.” I’m sure there are some here who think this is exactly what we need.
I could probably argue the VAT violates one or two more of the points, but this is enough for me.
Econometric models showed consumption taxes create more economic growth then a VAT.
A VAT is a consumption tax.
The VAT is collected or credited every step of the way all through the supply chain of every product or service. The value added must be determined some how. The VAT must require some kind of accounting and paper pushing.
Subtract what you paid from what you collected. Not real difficult. That fact that the VAT is being used in over 100 countries testifies to the fact that the VAT is not overly burdensome.
The time and money involved that burden businesses are greater with a VAT than the FairTax. That’s time and money that could be spent actually producing the product or service. The VAT is less efficient than the FairTax.
The FairTax would be far more burdensome to virtually all businesses than FairTaxers would like to admit. Rep. Linder has stated that any business that buys from a business that also sells to consumer would have to pay the FairTax and then file for a refund (see here). That’s an awful lot of paper pushing right there.
The VAT is one of the most hidden taxes; completely invisible to the consumer.
Did you even read my post? The VAT would appear to the consumer just like the FairTax. Not hidden at all. Completely visible.
This allows the government to raise taxes unnoticed by consumers. That’s why Europe has total taxes of typically 40 – 45 percent of their economy and we are at about 25% according to Boortz.
Europe has high taxes because they like socialistic government programs, not because of their tax system. There are dozens of countries outside of Europe that have a VAT. Do they all have this high of a tax rate?
Milton Friedman said, “The VAT is the most efficient way to raise taxes and the most effective way to increase the size of government.”
Let me get this straight, we are suppose to reject the VAT because it’s too efficient? It’s entering the realm of the absurd to think we should have the FairTax over a VAT because the FairTax is less efficient.
I could probably argue the VAT violates one or two more of the points, but this is enough for me.
I think you should do a little more research before you try and make any more points. The book I suggested above, “Taxing Ourselves,” would be a good start. Anything not by a radio talk show host would be a good start.
Fred,
From your link, the only search hit about a VAT.
“Whether a flat tax, a retail sales tax, or a value‑added tax (VAT), I suggest that the Subcommittee and the Committee accept the offer of the IRS Commissioner to brief the Committee on problems his European and other international counterparts have shared with him about the serious noncompliance problems they face in administering their tax system.”
I didn’t feel like reading the whole thing since a search only got one hit for VAT. Not sure what you wanted me to see there.
You might want to read this.
Lot’s of problems with the VAT.
If that’s not enough then download this.
That’s the original paper from the tax modeling symposium.
Chart on GDP is on page 223. The VAT is a clear loser.
Here’s some quotes:
“The range in factor responses is similar to the range in GDP responses, with a medium-run increase in labor effort due to a switch to a consumption tax that clusters between 0 and +1 percent, but includes values ranging from - 4.3 percent in the DRI VAT simulation to 6.8 percent in the J-W simulation. Similarly, medium-run changes in the capital stock range from - 0.7 percent for the DRI VAT to 47 percent in the Robbins consumption tax, with a loose cluster between approximately 1 and 4 percent.”
J-W is Jorgenson and Wilcoxen which is the original research used for the FairTax. DRI is DRI Inc./McGraw-Hill.
Factor responses are lower with a VAT. Capital stock actually decreases. The FairTax can have really high increases in capital stock. Capital is directly related to productivity which is directly related to wage increases and growth of GDP.
“Under a VAT, labor compensation is entirely nondeductible to businesses. Thus, assuming workers resist the lowering of their nominal wages, the VAT exerts markedly greater pressure on the general price level than a flat consumption tax.”
So prices will rise more with a VAT than the FairTax.
“This distinction between a VAT and a flat consumption tax supports the view that a VAT will require greater Federal Reserve accommodation to avert involuntary unemployment; while a flat tax may be consistent with greater initial price stability.”
Oh great, we would be dependent to a greater degree on the Fed knowing what to do. People make mistakes.
It appears some countries have made their VATs visible now where they weren’t originally. I have a hard time remembering to call a VAT a consumption tax because the difference between a NRST and a VAT is huge.
Business don’t pay the FairTax on their normal supplies. They do however when they buy something retail then they get credit that reduces their own taxes. See the 1st page here.
You have misunderstood Milton. He means the most efficient way to raise tax rates and thus the size of government. He did not mean a more efficient way to collect revenues.
There is more paper pushing and accounting and thus compliance costs under a VAT. Convince me why we should burden our businesses, the only place wealth is created, with anything other than creating wealth. The FairTax requires only a one page form sent in monthly, 2 weeks for large businesses.
The fact that other countries use a VAT is no reason for us to. The VAT was invented in the 1950s while the FairTax is a result of the computer revolution enabling economist to run complex simulations.
The VAT is European. The middle class in Europe live at about the same standard of living as most Americans considered living in poverty. Coincidence?
This is America. We lead the world, we don’t follow it.
Aside: a couple of my favorite quotes form the tax symposium.
“If we do not retrain the growth of entitlements then the ratio of debt to GDP starts rising exponentially and the model eventually explodes.”
If the model explodes what happens to us?
“A ten percent difference in GDP is considered a sizeable difference in the standard of living across countries. So, it is nothing to sit still about.”
So what exactly has congress been doing since this 1997 symposium?
Sitting still.
I agree with Fred on half and dculling on half. To Fred’s points, the VAT is a consumption tax and would have the same effects as the FairTax, so economic growth is not a factor. It would be just as transparent, displayed on the receipt in exactly the same way as the FairTax. Any change in the VAT rate would be reflected in the same way, so transparency is not a factor. To dculling’s points, the FairTax would be simpler and more efficient than a VAT (not saying the FairTax doesn’t have compliance burden.. to Fred’s point, just that it would be slightly less than the VAT). So while I agree that the FairTax is simpler and more efficient, I’m not sure that it is by any significant amount. The VAT might have some advantages in the areas of evasion and since it is largely quoted as an inclusive tax around the world, we’d have less 23%/30% debates. You’d also remove the “It’s never been done before” argument. There are some advantages to a sales tax over a VAT though. I remember debating it with someone and they had made some very good points. For me, I wouldn’t have many issues if the FairTax were turned from a sales tax to a VAT. They’re pretty much the same thing in my view.
Hmmm, dculling... interesting last post - perhaps I would mind such a change. I’m not that familiar with some of the underlining differences, which can of course make a big difference. I’ll have to read more and do some comparisons.
Here’s a nice chart on tax rates around the world.
http://www.worldwide-tax.com/index.asp#partthree
After looking at the chart, what do you think the possibility is we would end up with both a VAT and income taxes?
After looking at the chart, what do you think the possibility is we would end up with both a VAT and income taxes?
Exactly the same as us ending up with the FairTax and income taxes. There is nothing about a VAT that makes it any more or less likely than the FairTax to implemented in addition to an income tax.
I don’t see how this is any different than the possibility of ending up with both a NRST and income taxes.
Dculling — Thanks for the link to that chart. That’s very interesting.
For me, that pretty well confirms what I’ve been saying forever (consistent with what Dale Jorgenson and others have said), in that, even if there is merit to a VAT or a consumption tax, it cannot by itself replace all other sources of tax revenue.
Look at Ireland and New Zealand, for example. They are notable for having slashed their income tax rates over the last several years and prospered for it, yet they still require relatively high VATs as well as individual and corporate income taxes.
To say that the US could eliminate its income, payroll, corporate and estate taxes, and replace them all with a 30% consumption tax, while paying for the prepate as well, would seem to fly in the face the evidence from these other countries. (By the way, the rates for Canada on the chart seem quite low; I think its because the chart does not show the additional taxes the individual providences add, which are themselves quite high. Similarly, the US taxes are higher when you add state and local taxes.)
As I’ve said before, I personall, would like to see a simplified income tax system in this country, perhaps combined with a moderate consumption tax to replace the Social Security and/or Medicare taxes. I’d also like to see corporate income taxes eliminated or at least reduced. I’d keep the estate tax, at least at some rate.
Having a “three-legged stool”, in taxing income, wealth (via estate taxes) and consumption makes the most sense to me, and could keep the rates down in all three areas. That is basically what most states do. They have income taxes, property taxes and sales taxes. Nobody likes state taxes, of course, but at least that way they spread the tax burden over different groups, rather than loading it up on one.
I didn’t feel like reading the whole thing since a search only got one hit for VAT. Not sure what you wanted me to see there.
From the link:
“Chairman CAMP. All right. Thank you very much. Mr. Linder, your proposal obviously is a retail sales proposal, and property that is purchased for business purposes or services would not be subject to tax. If the taxability of an item depends on the nature of the transaction, would that be a simpler tax to administer? Because there still will have to be this evaluation: Was the item purchased for business purposes or was it purchased for consumption? If you could just talk about that a little bit, I would like to hear your thoughts on that.
Mr. LINDER. If a business went to Home Depot and bought some goods from Home Depot, they would pay the tax at Home Depot, which sells to both consumers and businesses, and they would keep their receipts, and they would use the value of those receipts as a credit against paying the tax in the future. So, they would not be taxed. We would not ask Home Depot to make the decision whether or not to raise the tax from them.”
The FairTax totally dismantles the IRS. Rep. Linder is planning on added in the next session of congress a provision where if the 16th amendment is not repealed within 5 years after the fairTax goes into effect then the FairTax becomes unlawful.
So me any VAT plan that at least dismantles the IRS.
Fred,
Rep. Linder did not say that the Home Depot purchase is or is not for a normal business expense. You are reading into it that it is. I’m sure if your primary business is, say, remodeling then you can set up Home Depot as a normal supplier for your business and thus not have to pay the FairTax on purchases. I’m assuming that’s what your interested in from previous posts.
Lot’s of problems with the VAT.
Lots of problems with any tax system that is trying to collect ~20% of the economy. The income tax has problems, the VAT has problems, and the FairTax would most definitely have problems.
Chart on GDP is on page 223. The VAT is a clear loser.
They didn’t model a NRST specifically but a VAT and a NRST are economically equivalent so you would expect a NRST to follow the VAT line. You might notice which consumption tax showed the most growth in this model - the “consumption flat tax.” Yes, it’s a consumption tax.
“Under a VAT, labor compensation is entirely nondeductible to businesses. Thus, assuming workers resist the lowering of their nominal wages, the VAT exerts markedly greater pressure on the general price level than a flat consumption tax.”
So prices will rise more with a VAT than the FairTax.
You are making a common mistake. You are assuming a “consumption tax” is a sales tax. This isn’t correct. A sales tax is a consumption tax but a consumption tax isn’t necessarily a sales tax. When the paper is talking about a “flat consumption tax” they are talking about the Hall-Rabushka flat tax. The flat tax they proposed and promoted by Steve Forbes is a consumption tax.
“This distinction between a VAT and a flat consumption tax supports the view that a VAT will require greater Federal Reserve accommodation to avert involuntary unemployment; while a flat tax may be consistent with greater initial price stability.”
Oh great, we would be dependent to a greater degree on the Fed knowing what to do. People make mistakes.
The Fed would have to make the exact same accomodation for the FairTax. If this is a criticism of the VAT, it’s a criticism of the FairTax.
You have misunderstood Milton. He means the most efficient way to raise tax rates and thus the size of government. He did not mean a more efficient way to collect revenues.
Actually, you misquoted Boortz quoting Friedman. The quote is “The VAT is the most efficient way to raise revenue for the government. It is also the most effective way to increase the size of government.” [emphasis added] You really need to be a lot more careful if you are quoting people. I also can’t find that quote by Milton Friedman from any other source but Boortz.
So you have the states collect the VAT - just like the FairTax - and pass a constitutional amendment to have the letters “i”, “r”, and “s” removed from all words in the English language. Would that make you happy?
Rep. Linder did not say that the Home Depot purchase is or is not for a normal business expense. You are reading into it that it is. I’m sure if your primary business is, say, remodeling then you can set up Home Depot as a normal supplier for your business and thus not have to pay the FairTax on purchases. I’m assuming that’s what your interested in from previous posts.
I think it’s pretty clear what Linder was saying.
“If a business went to Home Depot and bought some goods from Home Depot, they would pay the tax at Home Depot”
In #10, Hayden wrote:
“I also note that at the very end of the book, at the end of the appendix discussing the Tax Reform Panel, Boortz/Linder claim that James Poterba found the required FairTax rate to be 23.1%. I’m not sure exactly what their point is, except to say that Poterba was on the Tax Reform Panel so his views must somehow have gotten suppressed by the other “bureaucrats” on the Panel.
I wonder if Boortz/Linder bothered to contact Poterba to get his thoughts on what the FairTax rate would need to be. Perhaps Hank can refresh my memory. I believe that Poterba gave up on the FairTax a long time ago. I know that he very pointedly did NOT sign the open letter from the economists to the President supporting the FairTax, but I thought he had also offered cricism of the FairTax.”
Jim Poterba is a fellow MIT alumnus, and here is a direct quote from an email exchange we had last summer:
“My one page in 1997 has been widely described as an endorsement of the Fairtax, but in fact it was only an arithmetic calculation requested by the Fairtax group. I agreed that IF the base was as broad as they say it could be, THEN a rate along the level they suggest would be feasible.
But I never endorsed the feasibility of such a broad base, not the absence of evasion, nor the plan in general.”
Everyone now needs to turn to page 240 in the “Fairtax: the Truth” book, and read the last few lines. For those of you who wisely didn’t invest in the book, here is a quote:
“The good folks at AFFT had to hire some of the top economic minds in the country to tell us the proper rate. The AFFT received three calculations of the rate from three leading national economists, and we’re rather comforted by the fact that one of those three economists was none other than (Presidents Tax Reform Commission) tax panel member Dr. James Poterba.”
Draw your own conclusions, but as a minimum, I think you may agree that AFFT is guilty of over eager marketing, and Boortz/Linder certainly did not contact Dr. Poterba. Boortz has often said to believe nothing you see or hear, but do your own homework and draw your own conclusions. Physician, heal thyself!
With the VAT the problems are on the people. With the FairTax the problems are on the government. The government is supposed to server us not the other way around.
Look again at the chart, I know it’s hard to read. The VAT and unified flat tax are the dotted lines on the bottom. The consumption flat tax and consumption flat tax with relief are the solid lines on the top. Therefore the consumption flat tax is the Jorgenson-Wilcoxen NRST.
If you don’t like the graph then look at table 1 on page 21.
Jorgenson-Wilcoxen is base research for the FairTax and it shows 3.6 growth of GDP for 2005
The DRI Inc./McGraw-Hill-(”VAT”) shows -4.2
Then see table 2 on page 24 97 98 99 00 05
Jorgenson-Wilcoxen 3.4 3.6 3.6 3.7 3.6
DRI Inc./McGraw-Hill-(”VAT”) -2.3 -7.7 -11.2 -12.5 -4.2
In the symposium papers it’s pretty clear which consumption tax is a VAT since it says (”VAT”).
A VAT is not equivalent to a NRST.
I quoted Milton Friedman from “FairTax: The Truth” page 175.
The Fed would have make “greater Federal Reserve accommodation” for a VAT. The greater the change the greater the risk for mistakes.
You haven’t shown me a VAT plan that dismantles the IRS. I’m not going to invent one either since there is already a great tax reform proposal that economic models shows improves GDP growth better than a VAT; the FairTax.
Maybe someone else will chime in here about what Linder meant in your quote.
You have yet to give me any good reason to burden our businesses with anything other than creating wealth.
I don’t understand this obsession with Europe. For every measurable indicator for the quality of life America is superior. We don’t need to copy their proven failure of a 1950’s tax plan.
Joel Slemrod, one of the authors of the book you recommended is a supply-side denier. A brief search revealed he believes tax rates have no impact on economic growth. Oh really? What if the rate was 100%?
The FairTax is better and has the most public support and momentum and thus the most likely chance of actually getting passed any time soon. We need economic growth as soon as possible because of the ever escalating debt that will “explode” in the not to distant future.
That makes no sense.
I’m sorry to be blunt, but you are just wrong. A “consumption flat tax” is a Hall-Rabushka flat tax, not a national retail sales tax. No where in this paper do they say or even hint they are modeling a national retail sales tax.
You need to read a little closer. Straight from the Jorgenson-Wilcoxen paper:
“In this paper we analyze the impact of fundamental tax reform on U.S. economic growth over the next quarter century. We consider two alternative approaches to tax reform. The first is a flat rate consumption tax, similar to the one proposed by Hall and Rabushka (1985) and introduced in the 104th Congress by Majority Leader Dick Armey and Senator Richard Shelby.”
As I said, the “consumption flat tax” discussed in these papers is a Hall-Rabushka flat tax.
Then Boortz misquoted. So much for “the truth.”
What are you basing this on? If it’s the JCT paper, you need to realize you are misunderstanding what a “flat consumption tax” is. That is the flat tax, not a NRST.
What in the world makes you think the VAT is a proven failure. Is it the fact that most countries on the planet use it? How many use a NRST?
For those of you who like to read, let me recommend you check out a new book entitled “100 Million Unnecessary Returns” by Prof. Michael J Graetz. You may remember him as the bearded guy who made Boortz look rather foolish in their public debate about the Fairtax some time ago.
Here’s a quick summary of his “Competitive Tax Plan”. Professor Graetz is proposing a 10%-14% broad based VAT which exempts education, religion, most health care, rents, and the purchase of existing housing. Businesses with less than $100K in gross annual receipts would be exempt, which includes 65% of the 25 million US businesses. Graetz notes that the VAT is used by 141 countries on six continents, and is well understood.
His plan would eliminate income taxes for most Americans and set the rate for higher income families at between 15%-20%. This tends to retain the progressivity of the income tax while exempting 100 million low to moderate income families. (thus the title). He also would lower the Corporate tax for the larger businesses to 15%-20%. He retains the estate/gift taxes which impact mostly the wealthy.
To protect the lower income families from the regressive nature of a consumption tax, he proposes a Payroll Adjustment or Smart Card which would replace the EITC and Chld Care refundable tax credits.
And finally, he would provide incentives for the States to adopt a similar model.
The book gets excellent reviews from people such as Paul Volcker, Norman Ornstein, David Ignatius (Washington Post), Alan Blinder and former Senator Jack Danforth. You might find it interesting, particularly those sections on the VAT.
With a VAT every businesses has to do accounting and paperwork for every step along the supply chain. With the FairTax only retail outlets fill out a one page form, but it may be a bit harder for government to enforce compared to a VAT. Therefore there is more burden on the people with a VAT and more on the government with the FairTax. The government is supposed to server us, not the other way around, right?
I’ve read other papers by Dr. Jorgenson written about the same time that showed a NRST before I read the symposium paper. It could be that was another consumption tax; I’ve been wondering why the GDP growth was so low.
Here is a article Dr. Jorgenson wrote comparing a NRST to a flat consumption tax.
That must be the flat consumption tax he wrote about for the symposium. The NRST blows it out of the water and it blew the VAT out of the water at the symposium. Thanks for pointing that out.
Here is good reason to want as much economic growth as we can get.
I like the looks of that 13.4% rate that still brings in revenues to pay for the entitlements.
You can not convince me we should copy Europe in any way I can think of.
You would have to have good study comparing GDP growth of a VAT and NRST for me to even consider it. I’ve already shown you studies that show a NRST creates far more economic growth.
Everything I’ve seen shows VATs to be failures, you need a lot more evidence to convince me otherwise.
The book also repeats a couple more ridiculous claims.
1. You’ll have less cheating under the FairTax because it only takes one to cheat under the income tax but it would take two to cheat under the FairTax.
Huh? Who came up with that idea? Under our current system, the vast majority of income is reported from two sources — both the payer and the payee. Your employer gives you W-2s. If you’re an independent contractor you get 1099s. You bank and brokerage firm send you (and the IRS) earnings statements. That’s why there is very little cheating in these types of transactions, precisely because it would take a conspiracy of more than one person to cheat.
On the other hand, most cheating currently goes on where people are paid under the table, or where independent contractors do not get 1099s, or small businesses do not report all of their income, or where certain people might have assets offshore that they don’t report to the IRS. In other words, the cheating occurs where there is no automatic reporting to the government. And, in those cases, it would only take one person to cheat.
But it would only take one person to cheat on the FairTax, and it would be far easier to do because there is no dual reporting expenditures. If if hire Joshua to prepare a personal website for me, I pay him for the website and he’s supposed to collect the FairTax. I would have no idea whether he actually remits the FairTax to the government. Similarly, if he hires me to prepare his will, I charge him my fee and the FairTax. He isn’t going to know whether I remit the FairTax to the government. So, this notion that “it takes two to cheat under the FairTax” is just ridiculous. In fact, since there is no dual reporting requirement under the FairTax (at least that I know of), cheating will be easier under the FairTax.
Yes, I’m aware of the argument that most retail transactions occur with the large chains which are unlikely to cheat, but we’ve still got an awful lot of activity with small mom-and-pop businesses, particularly in the service sector. But even if cheating does not go up under the FairTax, there is certainly no reason to think it will go down.
2. The book claims we’ll be getting so much revenue from illegal aliens and the underground economy that tax rates could be kept low on everyone else. This has been debunked on a different threat, and even the economists that support the FairTax do not believe this. But Boortz and Linder still like to repeat it because it sounds good and keeps people from actually focusing on their inconsistent arguments. For example, if illegal aliens and the drug dealers are already paying a 22% “embedded tax,”, how are we going to increase revenue from them by charging them a 23% embedded FariTax?
I haven’t finished the book yet but I just finished the VAT rebuttal, and I have to say... weak, very weak, and inaccurate. I think Fred has some valid points. I don’t agree with all of Hayden’s sub-points above, but I agree with the general statements. Hayden, in regard to number 2, the argument holds when illicit income is earned through illicit consumption - not sure such would apply to illegal aliens since their income (in most cases) is not earn by selling illegal goods/services. I think Hayden’s point is valid with regard to drug dealers. Oddly, it is more of a perception statement, since it has no effect on the rate - illicit consumption is not part of the base (just as illicit income is not part of the income tax base).
Overall, I think the book has been pretty good so far (I have about 60 pages left). I think they did a good job in outlining the economic reasons for a consumption tax and the aspects of transparency.
On a side question... I see some of you are able to add bold, italics, and hyperlink words. How do you do this?
Hayden,
You forgot to mention what the cheating rate is now. I’ve seen several sources that say it’s somewhere between 15% and 40%. The lower estimates come from the government of course. Have you seen any data on what kind of people are cheating? I would suspect it is mostly small businesses and to a large part because they are getting screwed and they know it. Tax lobbyists exist to get benefits for the large corporations, not the little guy.
What makes you think any one checks these employer/employee or seller/buyer records? The IRS doesn’t even bother if you don’t send in a return lol. Here are the things that flag an audit from here:
It’s simple then, just don’t file. One has to wonder how many small businesses find out they owe far more than they have any chance of paying soon so they just give up and don’t file and wait for the IRS that never shows up. After a couple of years go by, what the heck, why bother.
I’m sure many people have figured this out. Probably even many employees know to claim all the deductions they can by lying and then never file. Nothing spreads faster by word of month than a good scam.
I think there’s a good possibility these kinds of evasion will go down with the FairTax. With the FairTax anyone that doesn’t get a receipt will suspect something’s up. If evasion becomes a problem, worry about it then. There are lot’s creative people that can come up with a good deterrent.
Here is a pdf that shows that in Britain there are smuggled cigarettes that save the buyer 1/3 to ½ off the legal price. That equate to 25% to 50% inclusive or 33% to 100% exclusive tax. You would expect pretty high evasion rates especially for something people are addicted to and represents a significant part of their consumption spending. Well, the evasion rate was determined to be 22%. While they don’t give the prices for America they do determine we have around 15% evasion rate on cigarettes. I seriously doubt the FairTax will have higher evasion rates then cigarettes. Keep in mind too the current evasion rate of the income tax was already built-in to the NIPA data used to determine the FairTax rate and revenue.
Didn’t we already discuss the underground economy? Oh well. Consider there’s a drug dealer that pays no income tax and a masseuse that does. Only the masseuse pays income tax now. After the FairTax the drug dealer pays taxes when he gets a massage and the masseuse pays taxes when she spends her profit. I really don’t know why this is so confusing.
dculling, there are about 140 countries with a VAT. How many countries do you think there are in Europe? This whole “If it’s European it’s crap!” line is really ridiculous.
The reasons why many of us don’t want to import Europe’s economic structure is because we have visited there, or know folks there, and have noticed that Europe simply doesn’t offer the kind of economic opportunities that exist here in America. Part of the reason why is the VAT, although it is the onerous level of taxation and central economic planning that is more to blame.
Engram’s Back Talk is a blog with a lot of solid analysis on comparing Europe’s economy to that of the USA in varying degrees of detail.
Some examples: 1, 2, 3, 4.
James, I don’t see anything at those links about the VAT. All that talk about the difference between our economies and no mention of the VAT? I’ve not seen any evidence there or anywhere else that the VAT is the reason Europe’s economies don’t perform as well as the US. Do you have any evidence of economies suffering when they adopt a VAT?
Discounting a VAT simply because it’s what they use in Europe seems a little irrational to me.
BTW. the Fourth Edition of Taxing Ourselves, the book I mentioned earlier, is now available on Amazon. If anyone is interested in a good, honest assessment of our current system and the possible fundamental tax reforms, this is most definitely the book. Although FairTax supporters may not like what it has to say, they will get a better understanding of the other options for reform. I think it should be required reading for all citizens.
Hayden - As for the example in your first argument.... if you or Joshua were to collect that FairTax money for those services but not submit it to government - then you wouldn’t be able to claim it as income. And if you can’t claim it as income, then you would risk not receiving as much social security and medicare benefits after you retire. It’d look suspicious to your state collection service if you’re reporting more income for you and/or your employees than your business had in sales.
Fred - The largest problem with VAT that I can see is that it continues to leave the doors wide-open for special interest lobbyist and congressmen. Unless each step of VAT taxation can be taxed an equal and flat rate for all businesses and industries - it would continue to be inferior to FairTax in simplicity, fairness, execution, and understandability.
I’m not sure I would say anything by Joel Slemrod is an honest assessment but thanks for the link.
Ahh, you know what.. I was thinking of someone else when I made that last comment... disregard the slam.. but still, thanks for the link.
My Simple Explanation of the FairTax
The FairTax replaces the 22% average tax burden corporations and businesses now pay and makes THEM PAY the government 23 cents out of every dollar they collect from WE consumers.
This would collect enough money for THEM to cover our withholding tax. So, WE could take home our full paycheck.
This would collect enough money for THEM to pay for everyone’s Social Security. So, when WE retire the money will be there for us.
This would also collect enough money from THEM for the government to give every one of WE consumers a 188-dollar a month rebate check.
I don’t discount the VAT because it’s what they use in Europe. I discount attempting to follow Europe’s example (whether it be VAT, overall tax levels or central economic planning) because their economy simply doesn’t perform as well as ours does.
VAT taxes are very efficient and (in and of themselves) are less onerous overall on an economy per dollar (or whatever unit of currency) of taxation than most other forms of taxes.
However, virtually every country with a VAT has found that it is a great enabler of larger government, because it allows greater generation of revenue than most forms of taxation. This has made government intervention in markets greater and has enabled larger levels of overall taxation on their populations. We shouldn’t be interested in those kinds of things.
VATs are popular because GOVERNMENTS like them, not citizens. And governments tend to get addicted to taxation, particularly when their favored tax mechanism is easy to inflate without much fuss from the public.
So don’t misunderstand. My objection to the VAT comes from an inherent distrust of government-enabling systems, not a dislike of Europe. I love Europe!!
But just because 130+ GOVERNMENTS in the world have found VATs so addicting isn’t a case for our government to become just as addicted. I find that train of thought to be irrational.
James, how is a VAT different from a sales tax regarding government enabling? What makes a VAT an enabler and not a sales tax, since in my view, they are essentially the same thing with different filing mechanisms for business. To Fred’s points, a VAT can be just as transparent as a sales tax. They are displayed on the receipt exactly the same way and the rates would be exactly the same. The rate does not cascade. It is my understanding, and I could be completely wrong, that the business pays the tax in B2B transactions, and the tax paid is rebated when the item is sold to the next business or retail. This is very similar to how the FairTax works if a business were to pay the FairTax on a retail purchase, and then sell their good / service. The company would be able to rebate the FairTax. In most cases with the FairTax, the B2B will not be tax and no rebate necessary but it seems to me that the underlining systems are the same.
The issue with VAT is that because it is incremental, the visible amount of TAX from the previous levels is generally hidden in the cost of the item. Each previous stage of production paid the VAT, and it progressively gets to be a larger amount of revenue per stage until the consumer buys the item in the end. The consumer is generally only cognizant of the amount of tax that they pay on the final stage, and is not concerned with any taxes that came before that contributed to the final cost.
If you are a UK customer, it works like this: government proposes a small VAT increase of 0.5% or something. It doesn’t seem like a big deal, and no one protests. But then, when you buy something at the store, not only has the tax increased, the cost of the item has increased as well (due to previous stages of VAT), and your final cost tends to be a tad more than 0.5% more than the original cost of the item, but not by much. The School of Hard Knocks makes citizens wary of this after one or two bounces, but it still masks a significant amount of taxation.
The distributed effect of a VAT also means that a small VAT increase can result in a significant increase in revenue collected over all the various stages of production, without appearing to the consumer to be a large relative increase in the level of tax; this is what enables larger government.
Now, rebating VAT via B2B varies a great deal from country to country. There are 137 or so countries (I think that’s right) using VATs and they all vary in the details on who gets rebated, who does not, what kind of rates there are, etc. Some VATs are very transparent, some use different methods of calculating added value, and some are just super sneaky.
What tends not to vary is that it helps government get insight into production chains and start to use differing VAT rates to control production of this, that & the other thing, or perhaps attempt to limit trade between member states (VATs in the EU were originally built to replace tariffs which were harming the EU trade situation... kind of like when individual US states were trying to tax each other at the state line). Governments using VATS nearly all have greater central economic interventionist policies than we have in the USA.
Now Sales Taxes tend to go ahead and smack the consumer directly for the entire bill of the tax, with no rebate. The FairTax tries to rebate taxes to create progressiveness in the code. If the FairTax succeeds in illuminating tax burdens for citizens in our country (as opposed to masking their impact as VATs tend to do in many implementations), then it shouldn’t become a big revenue sucking machine. However, my worry is that the FT will cause enough illumination for folks to simply vote in denial for the continuation of income taxation.
The FT and the VAT both have the potential to end the bizarre income tax structure here and fix many problems we have with international trade and tax differentials. However, the VAT has a historical record of being associated with governments that are highly interventionist and utilizing many more socialist programs with their newfound efficient revenues than most pro-market types would be comfy with.
I should clarify that I (think) in the UK, they simply include the entire VAT in prices most of the time, and put it in your receipt at 17.5%. Or something. They also don’t charge VAT on lots of things like food, for instance. I am not sure if this includes previous stages of VAT in production or if those stages are largely rebated in the UK. Also, they have a special 5% VAT rate on some things. As you can see, you can make a VAT just as ugly as any other tax.
So what I get is that VAT taxes very greatly in implementation as does the tax base depending on country. My confusion was around the first paragraph in number 43, that appeared to be incorrect (or it was my understanding that was incorrect). In my understanding, the cost would cascade, but the percentage would not. It is sort of like the embedded tax cascading argument that we’ve shown increases cost but not percentage. A 10% VAT at each level reaches the final consumer with a 10% tax, shown on the receipt. The additional tax added at each level is 10% of the Value Added. I believe Fred gave a good example above in #7. A 0.5% increase in the tax rate results in the same amount of revenue as a 0.5% sales tax, as it is 0.5% of the final retail price (inclusive), since B2B taxes are rebated. However, if many VATs implement this differently, then it would certainly be difficult to draw a correlation between the FairTax. In theory, you could implement a VAT just like the FairTax (which may reduce evasion) - but this would give more opportunities for exemptions and manipulation.
Well, tht’s not exactly correct, but close. If there are no B2B rebates, then a VAT will cascade, but it will generally not amount to a whole heck of a lot of difference. Cascading fractional taxes will APPROACH the limit of the total tax. So instead of 10% total, it’s like 10.11111111111 or something.
How did this thread turn into a discussion on VAT?
Didn’t anyone read the book and want to comment on it? Maybe people are just worn out on the FairTax.
Hayden, it started in #3 which was a comment by me regarding the section from the book on the VAT.
‘Answering the Critics’ Book:
Excellent read. I ordered 3 and had one sent to Congressman John Lewis. Now let’s hope the “critics” read it.
The trouble with trying to explain the FairTax is very few fully understand how complex and economically damaging the current system is.
Ashford Schwall
Like that?
There are a limited amount of html type commands that can be used here and on most blogs. I’m lazy and am using ScribeFire for Firefox so I can type these WYSIWYG then, because I don’t have an account here, just copy and paste the source. Hope this helps.
Thanks dculling, I wasn’t sure if it would take standard html commands and didn’t want to test it with some code looking post.
One thing regarding the book that I think was done very well (and this goes toward another post on the blog, which may be a better place to discuss it) was that they did a great job discussing the need for economic growth. We are currently around 18.5% of GDP for government size, which is an average tax rate of about 40% of income (since the income base is so much smaller then GDP). See Your real tax rate: 40% It is estimated that the size of government was maintained, no new social programs / expansions (cough), and economic growth continued as is, our government would have to grow to 40% of GDP. When my 4 year old daughter reaches adulthood, she’ll be a slave to taxation (paying over 80% of income). I loved Boortz’ analogies to how much 60 trillion really is.
We have to supercharge the economy. We need a larger tax base. You have to untax savings and investment, you have to drop the corporate tax rate, we have to adjust our border taxation and remove embedded taxes. We need to avoid self-destruction and the half fixes or status-quo implied by opponents won’t do it. The FairTax has its faults, but it’s an economic machine, something which economists almost universally agreed on. We wear out the debate on rates, transparency, government, evasion, taxing savings, and distribution but in the end we’re left with a big picture and bigger realities. We have to do something and we need to do it soon. I’m tired of being on the defensive, when the alternatives are non-existent, no better, or in most cases worse. If we keep progressing the way we are, the U.S. is going to implode under fiscal irresponsibility, something this America loving purple heart vet is desperately fearful of.
Note: I intentionally made this post a little extreme to generate some additional discussion.
Alas, Morph — We agree on the problem, just not on the cure.
There are solutions to almost every problem the FairTax purports to address without completely replacing our tax code. For example, we could reduce or eliminate the corporate tax today. We could replace Social Security and Medicare taxes with a consumption tax. We could greatly simplify the income tax and remove all credits, exemptions and deductions. Some or all of that would reduce the tax burden on our corporations, expand the tax base, and encourage growth, without the problems of the FairTax.
But (most) FairTaxers want “all or nothing.” So, we’ll probably end up with nothing.
FairTax — RIP?
Now that Huckabee has finally dropped out of the race, the new FairTax book has been published without anywhere near the success of the first book, and AFFT is claiming to be broke and laying off staff, does anyone think the FairTax is ever going to be taken seriously again?
Or will it just die the same sort of lingering death that the FlatTax did when Steve Forbes didn’t get anywhere in his Presidential bid?
Personally, I think that it will kick around for the foreseeable future with Texas and Georgia Republican Congressional candidates, but otherwise I think it is pretty much dead as a political issue.
Huckabee probably did it more harm than good by staying in the race as long as he did, so it now probably has a “loser” lable associated with it. If he had dropped out earlier, it might have had an “up and coming issue” lable.
Just curious what others might think.
I think that Huckabee did more harm than good by staying in the race so long, and his VP chances went to zero in the process. But, before we shovel any dirt on the Fairtax coffin, it might be interesting to see just how many of the 70+ co-sponsors of HR25 make the Fairtax a part of their reelection platform this year. There are many reasons to co-sponsor a bill, not all of which indicate actual support for the details of the bill. Stay tuned!
Hayden, in regard to 54, I agree and would support alternative options that have similar effects. Problem is those options don’t really exist and there is little to no movement behind them. Those that do exist don’t come close to providing the change needed to avoid disaster. The FairTax with its issues seems to be gaining some traction. While still a far stretch, there seems to be hope in this proposal and the movement.
With regard to Mark’s post (#41) it may be appropriate to consider the taxes on “M”. If the family in question earned $28,000 legitimately (let’s assume they did), at minimum they would pay 6.2% to Social Security and 1.45% to Medicare which comes to $2,142. Is it appropriate to assume zero $ federal withholdings at poverty level? I just went to turbotax online (free for under $30k/year filers) and entered the absolute basics with $28k for a family of four & came up with $1,100 in federal tax. With this, the actual disposable income for the family would be $24,758 under the tax system whereas under the FairTax the disposable income would be the full $28,000.
Now, here’s a kicker… if the family of four did not earn its $28,000 legitimately… they pay less than their fair share under the current system which means the rest of us pick up their share. The FairTax corrects this inequity.
Finally, it is worth mentioning that there are current thresholds for the wealthy with regard to contributions to Social Security. Under the FairTax, consumers contribute to the general fund which funds Social Security whether they consume less than $50k per year or more than $500k per year.
There are so many amazing reasons to go to the FairTax. I truly hope people don’t buy the scare-tactics from FairTax opponents who want to continue to game the system.
Cheers,
YK
Hello to all,
I just read the new book and found it fascinating, especially the tidbit about getting rid of foreign debt from China. However, I think I need to voice some fair criticisms of the book, especially since this site seems to be very much pro-FairTax.
My comments on the new book:
1. Anything who knows a significant amount about either foreign affairs, economics or just about Ireland in general knows that the Ireland example repeated in the book isn’t painted entirely correctly.
There are a host of reasons why the Irish Tiger was successful in the 1990’s. Yes, the very low corporate tax rates were a significant reason, but in the book the authors walk a fine line between assuming causality – not just a strong correlation. That, as most all economists would agree, is not accurate. For example, a simple regression – even one with many omitted variables or endogeneity – would show that the Irish success can also be attributed to, for instance, its membership in the European Union and all of the inherent benefits of having a single market for goods and services. At the same time that the Irish economy was enjoying so much success, the European Union underwent significant reforms. I could go on and on about other omitted variables ( the fact that Ireland is an English-speaking country; the relatively high human capital rates in Ireland etc.) or just about incentives to invest in European Union Member States, but I think the point is clear. It’s not economically correct to assume causality, not just correlations. This makes me question the economics of the authors.
Furthermore, this Irish example reminds of me of a presentation that I saw at the Heritage Foundation in the fall of 2006. And anything that reminds any left-leaning voter (I would consider myself more towards the center, in any case) of something presented at the Heritage Foundation or the American Enterprise Institute definitely won’t get support from the left — it’s a fact of life.
2. Page 140 is misleading.
On page 140 the authors write: “[i]f you begin with the common, entirely rational assumption (as we do) that no government can provide goods and services to anyone as efficiently private business, why not encourage government to get out of the marketplace for services not uniquely in the province of government?”
The long and short of it is that there is more than one way to conceptualize public policy. The rational and welfare economics perspectives – the ones closest to the perspectives advocated by this book – also have their faults. There is no mention of government and market failures, or even altruism — this makes the book slanted far to the right, Furthermore, the authors don’t define the services that fall within “the province of government.” How does the reader know whether or not the authors are advocating, for instance, that the military should be run by private companies, too?
4. The authors didn’t portray all of the advantages of the VAT. It could have strengthened your argument.
What about its effectiveness on inflation? The authors could have in fact strengthened their argument by saying that VAT has the same potential for flexibility as the FairTax, since it can be adjusted so easily, whereas the specific tax rates arbitrarily imposed by Congress do not have such innate flexibilities.
5. Page 176 is misleading.
The authors mention that Europe has seen “virtually no increase in jobs for 25 years.” I’m not entirely sure about this claim, since they don’t put a source for the figure. Also, the authors don’t even mention which European countries they are referring to in such a statement. In short, that statement is oversimplified and therefore not accurate.
Conclusion: I really think the idea of the FairTax is quite interesting. I just think the authors should really have someone with a more liberal perspective write the book, because they are the people who are generally most skeptical of an idea like the FairTax. If you really don’t know anything about it, the FairTax could just be mistaken for some angry conservatives wanting a different version of a flat tax.
In my opinion, the authors could have: (1) easily chosen other examples; (2) not been so biased with their views on public policy; (3) not overlooked omitted variables in the examples; and (4) definitely could have sourced more of their arguments.
These little details matter. I think it’s a shame that the authors couldn’t have been more careful, because it really seems like the FairTax could be a great solution.
I’ll continue to read up on the FairTax before I make a final decision.
Mike — Those were very good catches. You are beginning to realize that certain proponents of the FairTax (not the ones on this board) are quite fast and loose with the facts. Below are a few comments on your points.
1. Boortz and Hermann Cain (another FairTax supporter on the radio, just looove to talk about Ireland, and how it’s economy has soared since it “lowered its corporate tax rate.”
What they fail to mention, is that Ireland has a TON of other taxes, including personal income taxes (at a maximum 41% rate); social security taxes (10% on businesses; 4% on individuals); and a VAT (21%). Here’s a link to all of the Irish taxes. http://www.finfacts.ie/taxfacts.htm. So, the next time they start talking about why we should follow Ireland’s example, give them a call and ask them why they want to raise our taxes.
Also, they claim that Ireland is such a wonderful example, and then bash the rest of Europe. Except they forget to mention that every country in Europe has lower corporate income tax rates than does the United States. They aren’t consistent at all.
2. Their argument that private business is always more efficient that the government is wrong. In this country, Medicare is far more efficient in the delivery of health care than is private insurance. For that matter, virtually every country that has universal health insurance paid through taxes has more efficient health care than the wonderful, private medical system we have in the U.S.
4. Of course the authors don’t explain all the benefits of a VAT. That would undermine their argument what we need the FairTax.
5. See my response to no. 2 above.
Yes, these little details matter, as do their larger arguments. You say its a shame that the authors weren’t more careful or “sourced” more of their arguments. But that was by design. They need to be sloppy in order to gloss over the many problems with the FairTax. They didn’t source many of their arguments because in many cases, no sources exist. A lot of their arguments are stuff they just made up.
Alternatively, in cases where their arguments do have some limited support (by studies paid for by AFFT), there are ususally independent studies that refute those arguments that the authors intentionally ignore or downplay. For example, if you go back and read the book, you won’t find a single citation as to how the 23% tax rate was derived. Nor will you find a cite to the reports and studies that concluded that the 23% rate was woefully low.
The bottom line is, they didn’t answer their (legitimate) critics at all. If they really wanted to refute their critics, they’d have public debates on the FairTax with knowledgable oppontents. But in the 12 years or so that the FairTax proposal has been around, there hasn’t been one real public debate focused solely on the merits (or lack thereof) of the FairTax. Boortz and Linder routinely refuse offers to debate it in public. That, by itself, should tell you something.
Hayden —
I’m glad to see that you are sharp enough to catch these guys, too. I like how you extended my criticisms.
I really don’t think the FairTax will ever become a reality unless Boortz and the rest of the FairTax people really make an effort to reach out to the left in general. For now, I think the FairTax movement is still a right of center movement — yes, I realize it has attracted some democratic support, too, but it’s not significant enough yet.
For instance, I think it would make a lot of sense if FairTax commissioned a great economist like Joseph Stiglitz or Paul Krugman to analyze it — or even the guys who wrote Freakeconomics would suffice. If the FairTax is really as great they are saying, they shouldn’t be scared to do so. But, as you say, if Boortz isn’t willing to debate publicly on the matter, I’m just wondering why I’m still even curious about the FairTax. Now I’m scared that they are hiding something from us.
Mike,
I agree that our Fair Tax image suffers from right-of-center stereotyping, and unfairly so. You and the others may be interested to know, however, that just last month the Cherry Hill NJ Branch of the National Association of Letter Cariers, a strong Democratic constituency, unanimously endorsed the Fair Tax. Doug Dash from that union is taking it to the national convention.
This development is not surprising. Labor Union rank and file usually support the Fair Tax once they learn about it. One of our Virginia Fair Tax DD’s, I understand, is a labor-union leader and a proud Democrat.
The guy with the microphone, Neal Boortz, actually is more of a libertarian that a stereotypical Republicn or conservative, even though people lump him together with the likes of Rush, Sean and Levin. Neal parts company with religious conservatives on most of the social issues. He also favors de-criminalizing drugs and ending professional licensing - hardly the voicings of a conservative.
The most prominent theoretician of the Fair Tax, Larry Kotlikoff, himself is no right-of-center guy either.
When the Fair Tax was first introduced, it had several Democratic co-sponsors such as Colin Peterson (D-MN). He and David Scott (D-GA) were told by Nancy Pelosi, who opposes the Fair Tax, not to support it or they would miss assignments to key congressional committees.
The challenge Fair Taxers have with economic liberals is to get them to listen further after they hear the words “sales tax” - a tough assignment. Once liberals do listen further, they not uncommonly become interested in the Fair Tax.
~Jim
Jim is correct that LK is a self-described liberal. He’s also a prolific writer on a number of topics, most significantly the rising future costs of Medicare and its effect on future generations. In fact, I agree with just about everything LK writes, other than his views on the FairTax. Now, since LK is or has been paid by AFFT, it might be easy to dismiss his opinions as being paid propaganda, but something tells me that LK is successful enough in his own right that he doesn’t need AFFT’s money, particularly if it meant supporting a cause that could affect his credibility among his peers. So I’m pretty sure that LK really believes what he says about the FairTax.
He claims that liberals should support the FairTax because it is progressive. The gist of his argument is that all wealth is (eventually) spent. Thus, under a consumption tax system, all wealth will (eventually) be taxed. Ergo, since the FairTax is a tax on consumption,LK claims it is an implicit tax on wealth.
I find that argument less than compelling for a number of reasons, not the least being that to base the fundalmental fairness of a tax system on the spending habits of unborn future generations is just silly. In addition, as has been pointed out repeatedly, there would be a myriad of ways for wealthy heirs to spend their tax-free inheritances on whatever indulgences they wanted without paying much, if anything, under the FairTax.
Besides, every other economist I’ve read who’s commented on the FairTax states just the opposite — that the FairTax is regressive. For example, Dale Jorgenson of Harvard — whom Boortz and AFFT used to tout as one of the brains behind the FairTax, at least until he began vocally denouncing it — has said several times that one of the main problems with the FairTax is its inherent regressivity. William Gale, of course, says the same thing. As does Bruce Bartlett, although Barlett has commented that it doesn’t really bother him that it’s regressive, he just wishes the FairTax proponents wouldn’t try to pretend its otherwise.
In addition to LK, the FairTax is supported by that notable liberal Mike Gravel, though I’m not sure AFFT really wants to adopt him as a champion.
It doesn’t particularly surprise me that certain labor unions would be in favor of the FairTax. After all, Reagan got a lot of votes from union members by promising to lower income taxes, which he did, except he didn’t tell them that he’d also raise their Social Security and Medicare taxes so that the average working family ended up paying more in Social Security taxes than in income taxes. Something tells me that those members of labor who support the FairTax would find themselves equally screwed (actually, much worse) if it ever became law.
Actually it is not surprising that left leaning ideologues don’t support the fairtax. They believe that the current system of taxation (incorrectly in my opinion) is able to tax the rich and spend on the poor. Even if they consider the fairtax progressive, it is definitely not progressive enough for their tastes.
However, if fairtax proponents wanted to pick a group on the left to have support, union members would definitely be the biggest beneficiaries. For their current NET pay, union members could export their products at a 22% discount under today’s prices. Plus, the competing imports would cost 30% more. I know America probably has the highest wages in the world, but that doesn’t change the fact that our products do compete against foreign products. And to reduce our costs by 22% in foreign markets and increase foreign costs by 30% in our own market has to at least increase the desire for our products. Of course, that increased demand for the product will also increase the demand for the labor needed to produce the product which will RAISE their current NET pay.
Of course, when their able to buy more with this new real income we can actually lower the fairtax rate and get the same revenue (but I won’t hold my breath).
Andrew and Jim –
Thanks for your comments, although I must admit that I see them as non sequiturs. I realize that Boortz isn’t a liberal or conservative, and that he’s a libertarian. I also realize that Kotlikoff is a Democrat. But none of this makes up for my first comments in post 60.
The authors were sloppy when they wrote the new book. And sloppiness matters. You guys argue, in essence, that you don’t understand why Democrats aren’t supporting the FairTax. But, as I described in earlier posts (and Hayden reinforces), the FairTax doesn’t tackle substantive critics — they are laughing at the economics of Boortz.
In the new book, Boortz even admits that, as evidenced by a chart, the lower middle class — that is, the people who barely don’t qualify for the Prebate — isn’t going to benefit from the FairTax. I would like to point out that this is a very large demographic group.
The truth of the matter is that FairTax supporters can come up with arguments like the ones Andrew and Jim made, but those types of arguments are non sequiturs: they didn’t even tackle my concerns, for instance. In other words, you need to learn make your arguments for the FairTax with no FairTax jargon and out of the realm entirely. Debating publicly with top economists who are against the FairTax could be one solution. But if you continue to argue like Boortz, you risk losing the interest of people like myself who are on the fence about the FairTax.
Mike, I’m really confused by your third paragraph in post 65. What chart are you speaking about? “the people who barely don’t qualify for the Prebate”? I’m not sure what you’re talking about. The prebate is based on family size issued to all households of citizens and legal resident aliens. It untaxes poverty level spending for everyone, not just the poor. The more you spend the less the prebate is worth as a percentage, creating a progressive effective rate on consumption. If you’re speaking of the income tax charts, keep in mind that they are just the income tax, which is very progressive; however, Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes. The corporate income tax is also more regressive then the income tax. You have to compare the entire tax burden and changes in purchasing power. I just created a new post on this topic titled “Purchasing Power - The Forgotten Factor“. It lays out an example that may clarify some points. I’d also offer this Kotlikoff study if you’re looking at comparisons “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation” and the ALME study “A Macroeconomic Analysis of the FairTax Proposal“. There are several others as well. These analyze the actual FairTax plan, unlike the Tax Reform Panel hybrid system that kept the payroll tax burden in place.
Morphh, You are right. My last post wasn’t clear. I was thinking of the chart on page 188, which shows the change in economic welfare under the FairTax. What I was getting at is that the middle class born in the 40s, 50s, 60s etc. aren’t going to, on average, benefit from the FairTax — yes, I realize that this is conditional to spending habits.
Judging from your most of your comments so far, I think most of you want to get right down to the dirty details of the FairTax. But that’s not the point of any of my comments. The point of my comments is that the public diplomacy of the FairTax movement is problematic. I just don’t think Boortz should be the Ambassador of this movement — that is, if he argues the way he does (see posts 59 and 60). This is getting at the final criticism tackled by the new book, that the FairTax isn’t possible to implement, because it won’t get the approval of some legitimate critics or liberals who don’t know enough about the FairTax to make an honest decision about it.
Also, can someone please answer the question why the FairTax guys refuse to organize a public debate on it — as Hayden suggested in post 60? As I said in post 61, having a public debate on the FairTax with the some of the best economists in the United States (Krugman, Stiglitz, Sachs, Levitt etc.) would do a lot for people like myself who are on the fence about the FairTax. Why can’t this happen? I just want to be sure about my decision. I want to see all of the dissenting opinions argue it out — just like Chomsky and Foucault use to do.
Mike,
There actually was a significant but perhaps little-known debate among experts on the Fair Tax hosted by the American Enterprise Institute on February 28, 2007. The participants were William Gale and Jane Gravelle (critics) and Laurence Kotlikoff and David Tuerck (proponents). The specific Fair Tax subject was “The Fair Tax, What Rate Works?”
Gale, before the debate, had written a paper statingthat the Fair Tax rate would have to be 28.2% tax-inclusive. Kotlikoff, using Gale’s methodology, demonstrated that the rate would be lower - 23.82% tax-inclusive. Although Gale had Kotlikoff’s paper months before the debate, he was unable to account for Kotlikoff’s difference. Kotlikoff was able to account in detail for the difference between his rate and Gale’s. Gale still has not responded to Kotlikoff to this day.
To view the debate go to: http://www.aei.org/events/eventID.1466,filter.all/event_detail.asp and click on “video.” We owe a debt to Hayden Kepner for finding this site.
~Jim
Mike, I understand your thoughts regarding public diplomacy. I’m not sure I have any comments for it though.. is what it is I guess. Boortz has done a lot for the movement. As Hayden will often say, there are a lot of tax proposals out there, but most don’t have a talk show host pushing them, so they’re non-existent to the public. AFFT is the organization behind the FairTax, and they try to be as non-partisan as possible (they have too - tax reasons.. haha). Getting the volunteers to leave their politics at the door is a little more difficult though.
Boortz has done a public debate with Michael Graetz. Kotlikoff and BHI have debated William Gale. Economists debate back and forth in Tax Notes (Bartlett and Tuerck). Eighty economists, including Nobel Laureate Vernon Smith, wrote an open letter supporting the FairTax. It’s been debated in the 2008 election, and discussed in a national republican debate. Hayden himself has even debated it on air (with Phil Hinson), in publication (AJC), and has even gotten a reply from Boortz at least twice that I know of in the Nealz Nuze. And of course we debate it here, often getting into the details. As for a big national debate with lead economists, perhaps we’ll get there some day, but I don’t think the FairTax has yet reached that level of public interest.
Jim and Morph, Thanks so much for your sending me all of the information that you have. It’s really great to know that you are so passionate about your support of the FairTax and are able to argue so coherently.
I guess my conclusion remains the same, though: The FairTax needs some better public diplomacy. Mentions at the Republican debates, support from Huckabee and a forum at the American Enterprise Institute might be a good start — but all three aren’t very popular with liberals (I’m not trying to infer anything about my personal views here, either).
I’m going to try read all of the material that you have been so generous to send and then I’ll make my final decision about the FairTax. When I was reading the Boortz book, I just felt like I was reading something from the far right, due to, for instance, its praise of the Bush tax cuts and my arguments in post 59. I’m just going to try to approach the FairTax in a different way and see how it goes, because the non-politicized substance seems, as I’ve said before, quite interesting.
my best to you all,
Mike