Taking on Woodall & Linbeck
December 11, 2012 · Filed under: Criticisms
Hank has asked that we provide some critical input on the attached study prior to taking on Rob Woodall and Leo Linbeck.
Forward:
The September 2006 Fairtax Rate study concluded that an inclusive sales tax rate of 23.82% would be revenue neutral. The study is fatally flawed for two reasons. (1) Including Government consumption in the base is inappropriate under our constitutional republic form of government, and (2) The failure to properly account for legal tax avoidance and illegal tax evasion. The following discussion explores both criticisms and addresses several related issues along the way that bear on my conclusion.
Give it a read and provide Hank some feedback. 
https://docs.google.com/open?id=0B6dQ-sYtwh6lMWdlazM5VWtBNWM
4 Responses to “Taking on Woodall & Linbeck”
Hank’s gotten deeply into the weeds. A few issues.
The appropriate comparison to make is not the FairTax v. perfection. No tax system ever will be perfect. It’s whether or not the FairTax is better than the income based system we have today. We have a tax code now that is such a complex mess even the IRS admits it can’t manage it correctly. The cost of compliance is astronomical and a big economic drag.
The current code’s complexity creates huge uncertainty. The current “fiscal cliff” debate is a prime demonstration of how uncertainty paralyzes business investment and constrains economic and job growth. In fact, any income tax based system discourages growth. The maze of credits, deductions & loopholes distorts sound financial decisions. Business investment decisions are frequently warped and prolonged by tax implications.
You can argue about what should be the appropriate “revenue neutral” rate all day long, but you could simply implement the Fair Tax and adjust the rate after real data becomes available. That would be pretty quick because govt inflows would be much more consistent from month to month than the current income tax based fluctuations. Think April 15. That introduces risk that we won’t forecast FairTax collections accurately, but risk is hardly absent from our current state of affairs as we run $1T+ yearly deficits.
The underground economy is large, but no one is suggesting that the FairTax will produce tax revenue from illegal transactions themselves. What will happen is that the drug dealer, the hooker, the illegal alien who either don’t report income at all or don’t even exist from a legal standpoint today, will start paying sales tax on the everyday things they buy (e.g. a new Escalade, fancy clothes, new work boots). That’s tax revenue from a totally new source.
Taxing services recognizes that we have an economy in which we produce more services than goods. Also, it makes the FairTax more progressive. Who consumes more services, rich people or poor people?
Regarding intergovernmental taxes, it’s irrelevant. Neither governments nor businesses ultimately pay taxes. They’re only collection agents for the people who use them. People pay all the taxes.
The FairTax may not be perfect, but it looks a lot better than what we have today. It encourages behavior that will positively impact our worldwide competitiveness and growth in the future. The way things are headed, we’ll need it. Let’s stop trying to reform the malignant beast we have today and do something genuinely different. Isn’t that REAL reform?
Hi Bill,
Thanks for your comments. I certainly agree that the income tax needs replacing. I just don’t agree that the Fairtax is a suitable replacement. And if you think I’m getting down into the weeds with this post, you might read my 15 point indictment of the Fairtax which I’d be glad to provide upon request.
As for the Fairtax rate, I am simply questioning the AFFT paid for rate study that concluded that a 23% inclusive rate works and is revenue neutral.
By taxing governments and failing to account for evasion, I can show that the exclusive rate would have to be 65%+ in order to be revenue neutral. Surely you wouldn’t want to implement the Fairtax and find out the rate the retail merchant has to add to his cost is 65%? Now is the time to get in the weeds and see what the legislation really says. The Pelosi approach is sheer insanity, imho.
Taxing services is the fundamental problem with the Fairtax scheme. Six other nations have tried to implement a broad based national sales tax like the Fairtax. They all failed and switched to a VAT, a consumption tax in use in over 130 countries worldwide. Isn’t there a message there?
Intergovernmental taxation is far from an irrelevant issue. It is one of the oldest and most difficult challenges our Courts have faced. Perhaps this extract written by then Justice O’Connor will explain what is at stake.
“Federal taxation of state activities is inherently a threat to state sovereignty. As Chief Justice Marshall observed long ago, “the power to tax involves the power to destroy.” McCulloch v. Maryland, 4 Wheat. 316, 431 (1819). Justice Holmes later qualified this principle, observing that “[t]he power to tax is not the power to destroy while this Court sits” If this Court is the States’ sole protector against the threat of crushing taxation, it must take seriously its responsibility to sit in judgment of federal tax initiatives. I do not think that the Court has lived up to its constitutional role in this case. The Court has failed to enforce the constitutional safeguards of state autonomy and self-sufficiency that may be found in the Tenth Amendment and the Guarantee Clause, as well as in the principles of federalism implicit in the Constitution.”
Bill, we need tax reform, but the Fairtax is not the solution.
Bill,
To reinforce Hank comment, “”Yes”, we all agree that the current tax is a disaster and must MUST GO. But many of you employ the faulty logic the erroneous rationale, that therefore we MUST adopt the FT. No, we can get rid of the IT and find something better than the IT – i.e., the FT is considerably worse than the IT, not in its complexity, but in it is outrageous expansion of Marxist wealth redistribution and in its disastrous impact on our 70%-retail-sales-sensitive economy.
Consider the disastrous impact on our economy of a 60% revenue neutral rate.
When the govts have to pay FT, yes they will/must [ass it on to theor citizens who would then pay not only much higher FT, but higher State & Local taxes
The economic Kool-aid you note in your last paragraph, does not hold up against the reality of the disastrous financial of the FT. It sounds good when you say it fast, but does not hold up under thoughtful analysis. Its a glib marketing line.
I haven’t had a chance to go through Hank’s paper, but I noticed that Senator Chambliss and Congressman Woodall (who replace retiring Rep. Linder) have asked the Joint Committee on Taxation to score the FairTax. As far as I know, this has been the first request made to do so since 2000 or so. I hope Morph keeps an eye on this. I would be very interested to see what the JCT comes out with this time.
http://www.gwinnettchamber.org/chambliss-woodall-call-for-fairtax-consideration-send-letter-to-joint-committee-on-taxation