The Idiot’s Guide to the Fairtax
Hank Van Gieson reviews “The Idiot’s Guide to the Fairtax”
“The Idiot’s Guide to the Fairtax” was released in 2010, and for those of you that haven’t yet spent ten dollars on this pocket guide, here is my take on the content.
After reading it through for the first time, it wasn’t clear to me if the term “Idiot” was aimed at the intended readers or the author? Ken Clark is a well known financial advisor, but he made a huge error early on in his book. On a subject we are all familiar with, Ken wrote that everyone would get all their pay and retail prices would remain about the same. That is the long discredited “free lunch” myth. He did reference the “Dan Jorgenson” (?) study, but he might have been better off reading it himself. He wrote that the only way retail prices might increase would be if there was no competition, no availability of substitute items or no lack of collusion between sellers. He overlooked the single most likely cause of price increases which is that payroll costs won’t go down.
I realize that there is some disagreement on this blog about whether we will get our gross or net pay under the Fairtax, but there is no disagreement that if we get our gross, retail prices will rise.
After reading the book several times, Mr Clark does make many accurate points, but on balance, his book is badly flawed.
I would recommend that everyone keep their ten dollars and invest it in Ken Hoagland’s Fairtax Solution book which is due to be released this Thursday. I suspect that there will be a lively discussion of Hoagies book. Stay tuned!
Thanks Hank… I was wondering about this book myself but hadn’t had the time to read it yet. I recently criticized the press release from Rep. Steve King for similar nonsense.
My comment:
Argue the plan on its merits.. In my view, it’s positive tax reform – we don’t have to misrepresent it. All tax systems are an ugly beast – don’t falsely sell it as a magical unicorn shitting skittles.
Looking forward to reading Ken Hoagland’s book as well. I take it that you will be performing an equally comprehensive review? It would be great if you could quickly outline the accurate points within Ken Clark’s text, from your perspective. As you know, The Club For Growth supports both the Flat Tax and the Fair Tax as improvements over the current tax code.
I bought the book and it has helped me tremendiously with understaning everything I never understood! Great investment.
I too believe in curbing government spending, cutting the taxes middle class Americans pay, and turning the national deficit to surpluses. The truth is besides controlling health care costs (especially Medicare payments), there is little way to significantly cut spending without slashing things like Social security, the military, public education, VA spending etc.
So if you do the math, the only way to achieve the goals above is to increase taxes on the very wealthy, say the top 20%. They now hold 87% of the national wealth and by far profited most from the financial bailouts we all paid for. As shown in the next paragraph, they are not paying their fair share in taxes if you consider all the taxes we pay at the federal, state, and local levels.
In an analysis which includes all our taxes (income, social security, sales, excise, property taxes), a struggling middle class family can easily pay four times more in taxes than a millionaire couple living off their investments. Considering all these taxes, a middle class family’s tax rate on income from work is seven times higher than the millionaire’s tax rate on investment gains and income. Middle class families often pay more than half their entire wealth (>50% net worth) in total taxes each year, a 2500-fold higher rate than the third richest man in the world, Warren Buffett, who pays about 0.02% of his net worth in taxes each year. (For calculations: http://fairsharetaxes.org)
I know what you some will say: Taxing the welathy will hurt investment and so lead to job loss. That’s what what they said when Clinton raised taxes on the wealthy, but it lead to the best decade in job growth and federal surpluses. Bush cut taxes for the wealthy and it lead to the worst decade in job growth and the biggest federal deficits. Wealth concentration causes over-investment in which too much investment money chases to few worthy investments…investment bubble..investment bust….recession…job loss for the middle class. Wealth concentration in the very few also concentrates too much political power in the wealthy, which let’s them get more tax cuts and so on in a vicious cycle.
The proposed Fair Tax (or a VAT , or a national sales tax) would only place a bigger burden on the middle class. The rich only spend a small portion of their income and wealth, so their taxes would drop even further . Much of the middle class spends everything it earns to get by, so their taxes would increase. No serious economist disputes that the Fair tax is regressive.
My essay shows (http://fairsharetaxes.org) that the only way to make taxes commensurate to the ability to pay (and the extent to which the wealthy have profited from the services provided by all taxpayers) is to consider wealth, as well as income, in determining taxes. If we add a very small wealth tax on the wealthiest 20%, we could eliminate the regressive payroll, sales, and property taxes, reduce income taxes, cut the total tax payments of each middle class household by thousands, and eliminate the federal deficit. Even a tiny 1% tax on the portion of any family’s net worth over one million dollars would cut the 2011 federal deficit by 30%.
Thanks for reading.
Another FairTax debate?
Another FairTax debate might be in the making. An Emory University political science professor named Alan Abramowitz apparently had the audacity to criticize the FairTax in a blog post in The Hill, which (as I understand it) is a website devoted to news in the nation’s Capitol.
Specifically, he something to the effect that every legitimate study of the FairTax concluded that the required tax rate would be much higher than the 23% tax-inclusive rate (which, of course, is true).
Boortz took offense to these comments on his show, on his website and in a newspaper column, claiming that the “so-called legitimate studies” all distorted the FairTax and promptly challenged Abramowitz to a debate (though, not surprisingly, never bothered to contact Abramowitz directly).
Abramowitz read about Boortz’s challenge in the newspaper and accepted it (via a letter-to-the-editor). They will apparently try to hold the debate somewhere on the Emory campus, which is located in Atlata, where Boortz broadcasts from. Boortz says he will broadcast the debate.
I’ll try to keep you posted if anything develops.
http://boortz.com/nealz_nuze/2010/04/at-last-invited-to-emory.html
Hayden,
I also read that Boortz is using his (disastrous) 2006 debate with my friend Michael Graetz from Yale as proof he can handle Abramowitz. My recollection is that Boortz got beat up in that debate, particularly when he didn’t seem to understand that all Government employees salaries would be taxed under the Fairtax.
Please keep us informed on the date/time. Should be interesting.
So the study by Laurence Kotlikoff is not legitimate? Bold words. He’s a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, and a former Senior Economist for the President’s Council of Economic Advisers. I may disagree with William Gale’s conclusions, but I don’t call his study illegitimate.
To counter, most would probably consider only studies of the Fair Tax Act with a published methodology as legitimate for proper rate analysis, which would exclude all but a few studies (Gale, Kotlikoff & Tuerck, Diamond & Zodrow).
Ah, Morph. Good to hear from you. I should have known you’d call me out on that.
Actually, I mispoke. The word Abramowitz used was “objective” rather than “legitimate.” I believe his precise words were:
“Every objective study of this has shown that the actual tax rate would have to be much higher than advertised to make up for the revenue that would be lost ……”
Now, I’m sure we could debate (and, in fact have often debated) what constitutes an “objective” study, but your point is well taken.
Incidentally, I have not seen Kotlikoff weigh in on the FairTax for a couple of years or so. I suppose he’s moved on to other things. (He’s probably the most prolific economic writer I’ve ever followed, and I agree with him on just about everything other than the FairTax.) I also wonder, however, if following the AEI debate he concluded that maybe the numbers in the BHI study don’t add up after all.
Just sayin’.
I might have spoke too soon. The latest info I have is that the debate will not take place, if at all, until Emory starts school again in the fall.
On another note: has anyone read Hoagland’s book? I flipped through it in the bookstore and, to put it charitably, I don’t think it exactly moves the ball in either direction. Frankly, I’m not even sure what the point of the book was. I’m wondering if anyone else got the same (or different) impression.
I put the book down after the first few chapters. The style is feeline, by which I mean it meows about every FairTax subject but never gets into the weeds. For example:
“FairTax advocates claim there will be embedded tax cost savings, but there is
no assurance these savings will be passed on to consumers.”
My four-year-old grandson could have written that.
The book is a waste of time and not worthy of the further attention I am giving it right now.
~Jim Bennett
Jim,
Well, that book was written for idiots by an idiot and you certainly don’t fall into that category! Who (idiot) did you give it to?
On a more serious note, what did you think of Hoagie’s book?
And, how is our $10.00 bet looking? I agreed to extend it through the 112th Congress just to give you a chance. Do you really think Woodall or whoever wins Linders seat will be able to sign up more co sponsors than the 110th Congress record of 72?
Cheers!
Hank,
I think the $10 bet looks pretty good for me. We have two candidates running in New Jersey – of all places – on the FairTax, and I just briefed a Democratic candidate who fell inches short of signing on. There’s electricity out there this time around.
~Jim
PS: I liked Hoagie’s book. Did you see whose name appeared towards the end?
~Jim
Jim –
I understand that you advocate the FairTax, but I looked up your intereview on Oct. 28, 2008 on YouTube. Without trying to get personal, here, you seemed to make several misrepresentations about the FairTax.
1. You said the FairTax would “fully fund the government at current spending levels.” But even the FairTax supporters say that’s not true. At best, it would raise as much money as our current tax system does, which would leave us with the same huge deficit. What did you mean by saying it would “fully fund the government?” (I’ve heard Boortz make the same claim, which also irritated me, so you’re not alons.)
2. You talk about the “Boston brain trust,” including Jim Poterba of MIT and Dale Jorgenson of Harvard as providing research that formed the basis for the FairTax. I know that Jorgenson has come out against the FairTax several times, claiming that it won’t work and the rate would neet to be too high. Hank has indicated several times that Poterba has also made it clear that he does not endorse the FairTax. And, as you probably know, Poterba was a member of President Bush’s tax reform commission that trashed the FairTax. Wouldn’t those facts be important for the viewers to know?
3. You claim that Kotlikoff and the BHI guy produced a study supporting the FairTax, but even theat studyconcluded that the 23% “tax-inclusive” rate would be too low, and that’s even before factoring in tax avoidance.
I don’t mean to be overly critical because I know how daunting it can be to speak intelligently on TV or the radio when you only have a few minutes and don’t know what the interviewer is going to ask. But when someone like you, who presumably is familiar with all of the above, goes on the air and makes a series of apparent mistatements like those referenced above, it gives the impression that you are intentionally deceiving people in order to advance your pet cause. Doesn’t that just make a meaningful discussion of the FairTax more difficult?
Sorry for the rant, but one of the difficulties I’ve found in trying to have an intelligent discussion about the FairTax is that there is so much misinformation repeated over and over by FairTax proponents that it’s almost impossible to cut through the misinformation to discus the actual facts.
Jim,
The only reason I can find for your love of Hoagie’s book is the fact that your name appears in the index?! As for the book, it breaks no new ground and contains many misstatements about the Fairtax scheme. I doubt it ever makes the top 1000 list?
I consider you a person of good character and integrity and have enjoyed our discussions over the years. As a former lobbyist, I learned early on that telling both sides of a story is very important when lobbying politicians. Misstatements come back to bite everyone and credibility is easily lost. In that regard, do your efforts to sell the Fairtax to potential Congressmen include mentioning that the Fairtax isn’t perfect, and that there are some down side issues? For instance:
(1) Do you discuss the fact that federal taxation of State/Local consumption as proposed in HR25 is unconstitutional? Do candidates understand that all fifty Governors are opposed to any kind of national consumption tax? Do they really want to support a new tax collection plan that pits our two sovereign powers against each other?
(2) Do your candidates really want to throw seniors under the bus? Double taxation of after tax savings is clearly unfair. And, forcing retirees to resume paying for their pension and health care benefits with their sales tax dollars is a major break of faith in the federal government.
(3) Do your candidates understand that the Fairtax prebate is really a $600 billion cash grant entitlement? And that the prebate will create a group of 30 million working families that would pay no net federal tax annually, yet would still receive full SS benefits when eligible. What kind of socialist plan is that?
(4) Do your candidates understand that the most likely outcome for the Fairtax would be a 9% reduction in business costs and an 18% increase in average retail prices. For many families, that retail price increase will be offset by their receiving 100% of their gross pay plus the monthly prebate. But for many retirees, there will be no increase in their pay check and the prebate alone won’t offset the taxes paid on pensions and savings. Is that fair?
(5) Do they understand that no other nation in the world has ever funded their national government with a sales tax? Doesn’t the overnight, “cold turkey” transition proposal put our whole economy at significant risk?
Jim, I appreciate your willingness to spend time and energy promoting the Fairtax scheme. That is certainly your right, but telling only half of the story will not benefit you in the long run, imho.
Best regards,
Hayden and Hank,
I am sensitive to representing the FairTax properly, but your point – that 10 minutes on TV don’t lend themselves to going into as much detail as I would like – puts its finger on the problem. TV appearances don’t provide much luxury. Anyway, I don’t think I said anything inconsistent with the defici under the FairTaxt when I qualified funding “at current spending levels” (I think I said “real” spending levels to take government taxation on its own consumption into account, but I didn’t see the clip lately). Under the FairTax, if there is a deficit today, there is a deficit under the FairTax. My statements consistent with that fact and not misleading.
If you look at what Jorgenson wrote in 1995, he will have a hard time backtracking today – even though he has. It was not necessary for me to point the backtracking out. Even if the rate is too low, that says nothing more than we’re paying it already through taxes on income and indirect taxes on consumption. The .82% over the 23% that Kotlikoff and Tuerck calculated in 2006 de minimus. Remember also that the Kotlikoff BHI study assumed away any positive dynamic effect from the FairTax, even if it did overlook evasion. The former more than offsets the latter.
I didn’t mean to misstate anything about the FairTax on TV or to be misleading – and I don’t think I really did as to any material points. I don’t mind presenting the FairTax in its most favorable light. That’s my job. The problem, as you graciously said – is trying to cram everything into soundbites.
~Jim
Hank,
I’m about to moot-court one of our FairTax candidates, and I have most of your points woven into my rapid-fire stress questions.
~Jim
Jim,
I don’t have a clue as to how you “moot-court” some aspiring politician. However, when you are finished, I wonder if you could provide a summary of the rebuttals to my five criticisms? I’d like nothing better than to retire some of those old, worn issues if you have come up with valid points. Let me add that trying to use the false “embedded tax” arguments won’t work for the double taxation and government consumption issues.
Good luck!
Jim — I certainly empathize with the inability to articulate all you want during a brief interview. And I’m glad to learn that you are fielding candidates who appear to be willing to discuss/debate the FairTax.
We definately need more discusions/debates on alternative tax systems. Lord knows that our current system cannot last much longer.
Very politely, I asked my Congressman Jim Jordan (R) of the Ohio 4th district specifically why he opposed the FairTax.
Without ant attempt to answer my question, he stated to me that, “H.R. 25, the Fair Tax Act of 2009… would allow for some exceptions to this tax, including reductions for low-income families.”
Implying also that the Fair Tax would increase taxes, he further stated, “As a fiscal conservative, I am committed to the principle that families and taxpayers know best how to spend their own money. That is why I support efforts to cut taxes and leave more money in the hands of citizens. To do so, I believe we must reform our current tax system in a way that results in lower taxes.”
A follow up was, of course, ignored.
Should I sent him a big campaign contribution?
I haven’t read the book but my comments are more about the statements on this blog anyway. First let me say that I am not an economist, although I have lost a lot of money investing according to their predictions about the economy and how the markets would perform.I am a recently retired middle class homeowner. I have spent most of my working life in the wholsale/retail trade.You could say I’m an average American.
To begin I agree with morph that ‘all tax systems are an ugly beast”,but we have no way out, at least for now. The FairTax is a step in the right direction because it offers simplicity,transparency and cost savings by eliminating the IRS.
Pete thinks that a 1% tax on net worth over 1 million is a good idea.Pete,net worth is NOT the same as disposable income an to implement such a tax would hurt millions of average americans an small business people.So the middle class gets screwed again in the name of taking more from the rich.Class warfare always has colateral damage.
Mr. Van Gieson argues that “the most likely outcome of the FairTax would be a 9% reduction of business costs and an 18% increase in average retail prices”. I’m afraid sir, that the real impact of the FairTax is far more complicated than your fanciful numbers. You fail to mention that the FairTax would only increase the retail price of imported goods and that domestic goods and services would become less expensive due to the power of competition.This is easily supported by the dramatic reduction in the prices of generic drugs after Wal-Mart cut their prices to $4.00.Everybody else in the industry was forced to follow or lose market share.The sale of used goods would likely experience dramatic growth because they are exempt from the FairTax.Competition would drive this trend as well, but you knew that,right? You also completely ignored the revenue generated from taxing purchases made with money earned illegally and isn’t taxed at all under the present tax system
Mr. VanGieson’s next statement is a real puzzler.He states “federal taxation of state/local consumption as proposed in HR25 is unconstitutional”.
Honestly,as a “former lobbyist” how many pieces of legislation have ever been passed exactly as written.It is doubtful that such an obvious gaff would go uncorrected in the process of being voted into law.Again for clarification,you did mean state/local “government” consumption, correct?
I do need some help on this next point if it’s not too much trouble. In economics class we were taught that business doesn’t pay taxes, it collects them on behalf of the government. I have found this to be true in the retail industry where “loaded costs” (including taxes ) are used in the calculation of retail prices.So, if retail prices are already tax inclusive as far as federal income & witholding are concerned aren’t seniors already being taxes twice?
If the FairTax doesn’t provide relief,doesn’t it give seniors the option to help themselves by changing their buying habits to include more used goods?
” A 600 billion entitlement & 30 million working families that would pay no federal taxes but would receive full SS benefits when eligible” sounds pretty scary if we lived in a static soceity,but we don’t. Competition and politics will see to it. First no self-respecting classist politician will be able to resist pointing out that SS and Medicare funded from a pool of retail sales taxes can
be changed to a needs based system for younger workers much more easily
than our present set up.Cutting out the wealthy now (they won’t protest because they will save big on tax advisors under The FairTax the argument will likely go)could cut payouts immediately with even bigger savings in the future. Second, a percentage of the 30 million will be able to move up in a more vibrant growing economy and become too wealthy to collect.The same logic will likely be applied to medi-care. Will the economy grow? The question should be; how could the economy not grow? The elimination of federal taxes and progress in leveling of the playing field with imports under the FT would make a compelling case for a resurgence of manufacturing in the US. even if American companies were slow to react, foreign companies would be forced to manufacture here or cede their business to more nimble competitors. Correct me if I’m wrong but aren’t these the same market forces that drove so much US manufacturing overseas in the first place?
Most of what I read on these blogs is politically motivated.A system such as we have now which allows tax breaks to be traded for votes on legislation (Obamacare anyone) or to buy campaign contributions & support for party candidates ,will be very difficult to supplant.Those who gain power (politicians) or become wealthy (lobbyists) from our Income Tax system will fight tooth and nail to protect what they have, the country be damned.This is why we see only two catagories of comments,pro & con. The FairTax may not be perfect,nothing ever is, but I have yet to find a discussion where supposedly educated people offer suggestions to improve it.
Bob L,
I’m not sure why you think my most likely scenario is “fanciful”? My 9% cost savings and 18% retail price increase is based on 2007 actual revenue numbers which you can find in the BHI/Kotlikoff rate study they did for AFFT. And that 18% retail price increase applies to domestic goods and all services.
Don’t count on any increase in the sale of used goods. After a short transition period, the supply and demand you write about will increase the price of used goods until the current new/used retail price relationship is reestablished. In other words, while no federal tax revenue will be generated, there will be no windfall cash savings from buying used stuff. If you don’t buy used stuff now, there will be no reason to do so under the Fairtax. Just for fun, take a look at your 2009 budget and see if you purchased any used goods. I could find none!
Sorry you are puzzled about my claim that federal taxation of State and Local government consumption is unconstitutional. And yes, I did leave out the word “government”. There are two sovereign powers under our federal form of government, Federal and State. The Supreme Court has long held to a doctrine of intergovernmental tax immunity, but who knows what the nine black robes will do on this one. The rule of law–the Constitution- is clear, but the rule of man- 9 black robes –is never clear. Congress could well pass HR25 as written because until the Court has ruled, anything goes.
As for what market forces might result in moving manufacturing corporations overseas, I would suggest that federal taxation isn’t very high on the list. Other reasons to move offshore include our very high labor rate, proximity to raw materials and markets, contractual offsets, infrastructure, etc. etc. In 2007, Corporations paid $291 billion in income taxes against retail sales of $9.5 trillion. That is 3% of sales and probably wouldn’t be a prime reason to move back. Stay tuned.
Here is how I would improve the Fairtax scheme. I call it Fairtax-Lite. Fairtax-Lite is a revenue neutral 10% national consumption tax that replaces just the income tax, has no inventory tax credits, does not tax government consumption, adopts a targeted prebate at 1/10th the cost of the Fairtax prebate, retains the payroll tax and the gift/estate taxes, and phases in over five years or so. If you really want to get rid of the hated income tax and the IRS, Fartax-Lite might have a much better chance of Congressional consideration. After 12 years of absolute inaction on HR25, isn’t it time to try something different?
Maybe the Birchers are right. I won’t say someone is lying, but there is a big difference the truth, and the truth, the whole truth and nothing but the truth.
As I remember the tax of 23% paid by, well, us when we make a purchase has to be matched by another 23% by the business from whom we made the purchase.
I am absolutely certain this is what I heard when its sponsor (or the sponsor of a similar proposal) was interviewed on some news program. I am certain.
Here is something else never discussed. Isn’t this tax configured to be revenue neutral? I believe it is. So no tax cuts eh? And, more importantly, no release from the strangle hold aggregate taxes are causing to our economy.
Micro managed economic confabulated projections notwithstanding.
One of the things that is holding up the FairTax is the idea that people will be taxed twice, and that people with 401k’s will get kicked in the derriere.
The way I understand it is that in the year the FT is passed, income taxes are paid for the previous year and the bill get’s rid of the income tax that year.
@ Lawrence:
I don’t recall ever seeing this –
As I remember the tax of 23% paid by, well, us when we make a purchase has to be matched by another 23% by the business from whom we made the purchase.
I just remember the 23% inclusive or 30% exclusive, but nothing from the business at all.
And another thing — I do believe the FairTax will take in more revenue than the creators of the FairTax thought. With between 11mm illegal aliens, an unknown number of crooks who don’t want to be caught, and international travelers, they will have to pay more due to the fact that they cannot receive the prebate. On top of that, there may be a number of other people who won’t request the prebate.