Editore"s Note
Tilting at Windmills

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August 27, 2007
By: Kevin Drum

CRANKERY THAT REFUSES TO DIE....Bruce Bartlett shreds the idea of a national sales tax in the Wall Street Journal here. New things I learned: the idea orginally came from the Church of Scientology ("The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS") and public support for the idea is wobbly to say the least ("public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%").

The upshot of this is that sales tax advocates universally claim that their plan can eliminate all federal taxes at a rate of — surprise! — 23%. The real number, you'll be unsurprised to learn, is north of 60%. But public opinion polls say it has to be 23%, so 23% it is.

This, of course, is the Mayberry Machiavelli theory of the modern Republican Party: policy analysis doesn't matter. Only politics matters. If the peepul support a rate of 23%, then who cares what the eggheads say? We're looking for votes here, not tax policy that actually works.

Of course, what's really amazing is that Bruce can write a thousand words on this subject and maintain a calm and even demeanor throughout. After all, among serious tax analysts a national sales tax ranks right up there with eliminating the Fed and putting the United States back on the gold standard. It's crankery. And yet it keeps rearing its ugly head, like a vampire that just won't die. Anybody got a silver bullet handy?

Kevin Drum 1:00 PM Permalink | Trackbacks | Comments (62)

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Oh, come on. Haven't you ever watched Buffy? Silver bullets won't help with vampires. They're only useful for werewolves.

Posted by: Matt Austern on August 27, 2007 at 1:02 PM | PERMALINK

There's another problem that's often ignored by sales tax advocates, and surprisingly, Mr. Bartlett, is that tax evasion on sales tax goes up markedly when rates go above 15% or so. So the rate would have to be even higher than whatever the "revenue neutral" amount is to make up for the increase in black market activity. Risking getting arrested for sales tax evasion isn't worth it at low percentages, but saving 25% off a flat screen TV will make a lot of TVs "fall off of trucks".

Posted by: Mo on August 27, 2007 at 1:07 PM | PERMALINK

the republicans in the fla house proposed increasing the state's 6 percent sales tax in exchange for greatly reducing or eliminating property taxes. the idea had next to no popular support.

Posted by: mudwall jackson on August 27, 2007 at 1:12 PM | PERMALINK

That's great. The government taxed my income as I earned it. Now these assclowns want to let them tax it again when I spend it in my old age?

Great plan, guys.

Posted by: Quaker in a Basement on August 27, 2007 at 1:15 PM | PERMALINK

Why can't the feds compete for revenue in the great "marketplace of ideas" like everybody else? All taxes should be voluntary. Let a thousand TURDblossems bloom!

Posted by: LieberTURDian on August 27, 2007 at 1:18 PM | PERMALINK


A sales tax to replace the "income tax" (and not FICA, that I've ever heard) is of course a silly idea. The whole complexity of the income tax arises from defining "income", not the from the arithmetic of calculating the tax owed. In a sales tax scheme, defining a "sale" would be at least as complex. When you buy 100 shares of stock, do you pay sales tax? How about when you buy a house?

But I want to focus on the point about popular support for a "flat" tax dropping off if the "rate" goes over 23%. No "flat tax" proposal I ever heard of fails to include an exemption before the tax kicks in. Old Steve Forbes's formula was something like:

Tax = 17% of (income -$30K)

Well, here's a formula for a tax that is just as "flat", in form:

Tax = 47% of (income -$130K)

Same formula, just different parameters. Would such a proposal be "unpopular" because of the _rate_ parameter?

Posted by: Tony P. on August 27, 2007 at 1:19 PM | PERMALINK

Buffy would suggest exposing them to sunlight--a much better metaphor don't you think?

Posted by: none on August 27, 2007 at 1:23 PM | PERMALINK

Kevin, I'm not sure what you mean by saying that "serious tax analysts" consider a national sales tax "crankery." A federal-level value added tax, which is certainly a kind of sales tax, has plenty of advocates among reputable tax analysts. The idea of a national VAT is floated regularly although of course it has never had much political support in the U.S. But almost every other OECD country besides the U.S. has a national VAT to accompany its national income tax. Now, if you mean that a national sales tax of some kind to REPLACE all other federal taxes is crankery I agree with you - but that's not what you said, and what you did say was wrong.

Posted by: Richard Riley on August 27, 2007 at 1:23 PM | PERMALINK

Tony P.: No "flat tax" proposal I ever heard of fails to include an exemption before the tax kicks in.

In other words, the "flat tax" proposals are not for flat taxes. Similarly, snake oil was rarely labeled as such.

The whole complexity of the income tax arises from defining "income", not the from the arithmetic of calculating the tax owed.

Oh, come on. You actually have to look the number up in a table. Above a certain income, you will need to calculate a percentage. Fourth grade arithmetic is tough.

Posted by: alex on August 27, 2007 at 1:25 PM | PERMALINK

An alternative to sales tax as a universal tax is a wealth tax. The interesting thing about a wealth tax is that a flat tax on wealth is about as progressive as the current income tax. That's because wealth distribution is so skewed in the United States: The top 1% have 33% of the wealth (and so should pay 33% of the taxes). The top 20% have 51% of the wealth (and so should pay 51% of the taxes).

Posted by: Daryl McCullough on August 27, 2007 at 1:39 PM | PERMALINK

Agree with Richard Riley.

Since Japan and Australia introduced national Value Added taxes, US is the standout amongst industrialised countries without one.

*however* the US also doesn't have universal healthcare.

And in each case (Canada!) the political party which introduced the tax, was subsequently exterminated by the electorate at the polls.

VAT to finance universal healthcare would be a great idea. Snowballs and hell come to mind, though.

Alex

No. No. He means the definition of 'income'. They have whole international conferences about it.

Do stock options count as 'income'? How about capital gains? interest? Dividends? What losses are allowable against income? What expenses? Are company cars income? How about employer provided health insurance?

Posted by: Valuethinker on August 27, 2007 at 1:40 PM | PERMALINK

Matt, while hollywood vampires may not die from silver bullets, that is hollywood. In actual folk lore, silver bullets were a very common method of killing vampires.

Posted by: soullite on August 27, 2007 at 1:41 PM | PERMALINK

Even what they claim is 23% isn't really 23%. It's really more like 28%, because they're factoring the tax into the price of the good, not adding it on.

In other words, if you bought something for $100 with a 23% tax rate, most people would agree that the final cost is $123. But under this tax proposal, tax is taken out of that amount at 23% (i.e., 23% of $123 is roughly $28, and that's what the vendor would have to remit). So something that costs $123 is actually made up of $94.70 for the good, and $28.30 tax. Calculated the way all Americans already calculate tax, this is really about 30% for tax (28.3/94.7).

So it's not that they're picking out a number that's sellable to the public, they're also lying about it.

Posted by: Seitz on August 27, 2007 at 1:43 PM | PERMALINK

Of course, if I'd actually read the article, I would have seen that very same argument put forth.

Posted by: Seitz on August 27, 2007 at 1:43 PM | PERMALINK

I haven't read the WSJ article, but I have heard that the advocates of a national sales tax say that before their plan goes into effect, the 18th Amendment (the one that says there can be a federal income tax) will have to be repealed. These people actually think that eventually 67 Senators and 38 state legislatures will support this!

(BTW, around half of the Republican candidates for president support this idea. If a Democrat is elected next year, I predict that in 2012 the Republican nominee and a majority of Republican members in the House will support a national sales tax.)

Posted by: Anonymous on August 27, 2007 at 1:44 PM | PERMALINK

A slaes tax rather than a progressive income tax leaves the economy vulnerable to unlimited growth in government and eventually an economic depression.

Posted by: Matt on August 27, 2007 at 1:45 PM | PERMALINK

This is only slightly worse than the inaptly-named "flat tax," the previous sleight-of-hand pseudo-conservative tax scheme. No major pol (including Steve Forbes) has ever proposed a flat tax, if by that we mean a tax where everyone pays the same percentge of income. (Large deductions make the "flat tax" "progressive," as Dick Armey explained in his unintentionally comical book on the subject.) But for some reason, gonzo tax schemes of this type have driven pseudo-conservative culture for years.

This nonsense persists because big-time liberal pundits--for some reason, I always blame EJ Dionne first--refuse to tell the public that they are being played for fools by this pseudo-political movement, by everyone from Limbaugh on down. It's long been OK to toy with the rubes. Our biggest liberal spokesmen won't tattle. (Luckily, Bruce Bartlett does.)

Posted by: bob somerby on August 27, 2007 at 1:49 PM | PERMALINK

The problem as I remember it from schooldays is that a national sales tax is particularly unsuited to the US. It's a tax on consumption, which is what drives our economy. In nations with greater rates of saving and therefore investment, imposing consumption taxes wouldn't have such a disruptive effect. But this is only a rough statement of how the situtation stood in the early 90s.

Posted by: djangone on August 27, 2007 at 1:50 PM | PERMALINK

Off topic:

Don't look now Kevin, but you've been elevated to "pundit" status! You were quoted as a pundit for WM on NPR's Wait Wait Don't Tell Me!

Congrats, and where are you spending the prize money? Oh wait....you don't even get Carl Kasell's voice on your home answering machine, did you?

Posted by: Adam on August 27, 2007 at 2:08 PM | PERMALINK

What Seitz pointed out needs to be shouted long & loud. The 23% number is a fraud to conceal the real cost. Calculated in the same manner as a sales tax, the real bite is 30%. Let's see how popular that would be.

Posted by: Jim H on August 27, 2007 at 2:10 PM | PERMALINK

soullite: In actual folk lore, silver bullets were a very common method of killing vampires.

Could be, but I'd put a stake through its heart, too. Just to be on the safe side, y'know?

Posted by: thersites on August 27, 2007 at 2:16 PM | PERMALINK

What Matt Austern said.

Posted by: Scott Herbst on August 27, 2007 at 2:20 PM | PERMALINK

I used to think that returning to the gold standard was a crank idea, too.

Until I read about the Breton-Woods agreement:

http://en.wikipedia.org/wiki/Bretton_Woods_system

Now it seems like common sense.

Posted by: Horatio Parker on August 27, 2007 at 2:25 PM | PERMALINK

I've always felt that this national sales tax idea was one of those you like it until you get it propositions. Republicans can like it while it is not going to happen and use it to their political advantage when there is no evidence to prove their claims, but when it did the law of unintended consequences may likely prove a harsh teacher.

Posted by: ET on August 27, 2007 at 2:25 PM | PERMALINK

Ah, Kevin.

"If the [bold]peepul[/bold] support a rate... "

Ever hear of spell check, Drum? LOL!

Must be that public sector education. LOL!

Posted by: egbert on August 27, 2007 at 2:38 PM | PERMALINK

Alex:The complication is in determining deductions to find the income level.

You could make a simple tax by eliminating most, if not all deductions. As if THAT'S going to fly.

Posted by: Karmakin on August 27, 2007 at 2:42 PM | PERMALINK


Soullite: I think you missed the sarcasm in Alex's comment to me.

In any case, all the tax schemes ever proposed boil down to this: how can we "best" apportion the tax "burden" among ourselves and our 300 million closest friends? No matter how small a fraction of GDP we make the federal budget, the question of who do we hit up for the money remains.

We could tax people per head, or per pound. We could tax per dollar earned, per dollar owned, or per dollar spent. We could use a progressive rate, or not. We could jigger the brackets, including the baseline exemption bracket. And we're still arguing about nothing more than who should contribute how much.

People argue about how any of these approaches would change ("distort" if you prefer) "the economy". I say that's a second-order question. The first-order question is always _who_ ends up paying the taxes, not _how_ the taxes are assessed.

Posted by: Tony P. on August 27, 2007 at 2:53 PM | PERMALINK

An alternative to sales tax as a universal tax is a wealth tax

Ahh, great idea. It's a good thing our problem is our exorbitantly high savings rate. The best way to fix that is to charge (I mean tax) people to save. This will reduce our savings rate even more.

The problem as I remember it from schooldays is that a national sales tax is particularly unsuited to the US. It's a tax on consumption, which is what drives our economy. In nations with greater rates of saving and therefore investment, imposing consumption taxes wouldn't have such a disruptive effect.

I think you have the causality wrong. While we've always had a consumption based economy, taxing consumption decreases it. It's micro 101, make people pay more to do something and they will do less of it. If a VAT or a FairTax is implemented, our savings rate will improve and consumption will plummet.

I don't see why there's so much hate on the flat tax here. The flat tax, with a high deduction, is reasonably progressive* and prevents some of the most regressive parts of our tax code, deductions. Deductions are used by a) special interest groups and b) the wealthy with good accountant. Simplifying the tax code would save a ton of dead weight costs and reduce the effects of special interest groups in Washington. Just because the marginal rate is flat, doesn't mean the total rate is. See below.

* Say the deduction is $30K and the rate is 20%. A household that makes $50K only pays $4K in taxes or 8%. A household that makes $100K pays $14K in taxes or 14%. The household that makes $1M pays $194K in taxes and pays a rate of 19.4%. Plus, this reduces all sorts of funny business with deductions and such.

Posted by: Mo on August 27, 2007 at 3:15 PM | PERMALINK

Well, we know the silver bullet isn't facts - conservalooney crankery is impervious to facts.

Derision and laughter, I feel, are much better weapons against these boneheads. They have no answer for it.

Posted by: craigie on August 27, 2007 at 3:27 PM | PERMALINK

Does anyone have any idea how complicated a national sales tax is?

Has anyone ever looked at state laws concerning sales tax?

Has anyone every looked at state case law concerning sales tax?

The state laws are absurdly complicated when the tax is in the single digits. Imagine how much harder people will work to avoid a double digit sales tax!!!

We all have had an experience where someone says they will do the job for $500 or, if you pay in cash, then it will be $450 or some lower number.

How about this absurd example?

I want my sink fixed. You as the plumber say $500. I say OK. You then charge me 23% sales tax or $115.

I say that instead of paying you $500 I will pay you $100 plus $23 in sales tax.

but, and this is the KEY BUT

I agree to borrow $973,333.33 at 15% interest for a single day. You say that I am not a very good credit for that much money so you need collateral. I agree to let you hold the money until I need it. Well, it turns out that I never needed the $973,000 so I just pay you interest of $400.

Well, you have your $500 and I just paid $23 in sales tax instead of $115 in sales tax. we didn't break any laws. we just entered into some creative financing.

Now, if i can explain in a few paragraphs how to get around 80% of the sales tax then how long to you think it will be before the smart people at GE end up paying no tax at all????

Posted by: neil wilson on August 27, 2007 at 3:43 PM | PERMALINK

So, this must be one of Bartlett's "lying is not OK" days.

Posted by: david on August 27, 2007 at 3:44 PM | PERMALINK


Two silver bullets, Kevin:

1) Ask people (or peepul, in your rendering) whether they are really willing to pay more in taxes so that wealthy people can pay less? Unless they are insane, I suspect the answer will be a resounding “NO”! For a “flat tax”, income or sales, to be revenue-neutral means that the vast majority of ordinary people would have to pay more in taxes, so that the very wealthiest can pay less. This is why old liver-lips, Steve Forbes, is so keen on the idea of a flat tax. He is all about reaming your butt more, so his gets reamed less.
2) Ask a conservative why they never talk about making the Social Security tax a “flat tax”? The reason is that if they did, the wealthy would pay more, all other things being equal.

So you see, the “flat tax” concept is just a Trojan Horse to screw the common man and make sure Joe Rich Guy pays less. Don’t fall for it! Besides, do you want to buy a bottle of Diet Coke that you pay a buck for today, and instead, pay $1.26? What a crock of shit.

Posted by: The Conservative Deflator on August 27, 2007 at 3:57 PM | PERMALINK

Mo writes: It's a good thing our problem is our exorbitantly high savings rate. The best way to fix that is to charge (I mean tax) people to save. This will reduce our savings rate even more.

Well, in this same thread, it was said that we don't want to discourage spending, because spending drives the economy. So we want a tax policy that encourages both spending and saving? And contributing to charity, too. And buying houses. And paying for college. We want to encourage every possible thing one might do with his money, except spending it on cigarettes.

Posted by: Daryl McCullough on August 27, 2007 at 4:01 PM | PERMALINK

You should really read more about the Fair Tax before commenting. The WSJ article was full of errors.

Our current tax system is a disaster, with billions of dollars going to pay for compliance. No matter what the final percent ends up being, it's better than our current system.

The two things to remember are:

1 - You get to keep your whole paycheck. No payroll taxes, no income taxes...and with the prebate, the poor pay NO TAX AT ALL! No other tax plan accomplishes that. All savings are tax free, which is the way it should be.

2 - Everything we currently buy has a lot of taxes imbedded in the price of the product. Payroll taxes, corporate income taxes, etc. With the fair tax, all that disappears, and the tax is collected at one point. No more hidden taxes!

Read the Fair Tax book. It really does make sense.

Posted by: Ed on August 27, 2007 at 4:05 PM | PERMALINK

Silver Bullet to kill FairTax lies = something even simpler and even fairer

CRS Report for Congress: "Transaction Tax: General Overview", December 2, 2004

"In order to replace all federal receipts with transaction tax revenues, the rate would have to be set at about 4.3% per transaction, possibly more."

Posted by: Emma Zahn on August 27, 2007 at 4:20 PM | PERMALINK

TCD,
I agree that payroll taxes are hugely regressive. But for a tax to be revenue neutral, it won't have to hurt the average joe more you need to take into account a few things:

a) Reduction in costs for IRS processing. Reduced IRS costs means less revenue that need to be made up. Also, flat taxes have lower cheating going on, so the old cheaters that become payors make up some of the difference.

b) Including payroll, cap gains and corporate taxes and as part of the deal. Presumably, this rate would be higher than those current rates and it would remove the regressiveness from payroll taxes. Easier sell based on flatness of tax on all persons.

c) Reduction in accountant costs for the wealthy. If the rich no longer have to pay accountants to do their taxes, that's the equivalent of a tax cut.

The people that get hurt by this the most are those industries/people that have tons of tax deductions to reduce their income.

Posted by: Mo on August 27, 2007 at 4:23 PM | PERMALINK

The Fair Tax plan is predicated on a rate which will cover government expenditures. Nothing in the fair Tax addresses the spending side of the equation (neither does the Income Tax, but the connection is more tenuous since the FICA tax collections are used for general expenditures)nor does it address what happens when the collections aren't enough.
The Fair Tax is another three card monte playd by some in Congress to keep you from noticing how much the federal government costs. And as others have pointed out, the states would still be permitted to impose whatever taxes they chose. And so would the feds.

Posted by: TJM on August 27, 2007 at 4:27 PM | PERMALINK

Read the Fair Tax book. It really does make sense.

I have read it. It's snake oil.

Come on --the fact that they have to call it the "Fair Tax" is a dead giveaway.

Posted by: Gregory on August 27, 2007 at 4:32 PM | PERMALINK

Silver bullet? Why yes, as a matter of fact, I do!

As an opening caveat, please note that the specific numbers I propose are just examples, and up for debate.

I propose a progressive flat tax for both individuals and businesses, that exempts X dollars, whether they be income or capital gains, and has two flat rates above the initial exemption.

As an example, everyone from Bill Gates to Joe Sixpack gets their first $36,000 (my definition of a barely livable wage) tax free. Your next, say, $164,000 is taxed at X% (20?) and the highest rate floats starting with whatever it needs to be to equal the previous year's tax revenue, and is the only one subject to increase or decrease, first dibs.

No deductions for anyone. The top tier controls the government, so this plan produces a vested interest in them to control government waste. A person making $100,000 under this proposal, and math, pays 20% on $64,000, or $12,800, an effective 12.8% Federal tax nut.

Poor people with jobs have a higher likelihood of survival, even if they're low paying. Rich people have the incentive to eliminate wasteful government spending. Rich people can also say to poor people, "Get a job. It's on us."

The middle class doesn't get soaked too badly. Social Security regression? Gone. Same scale all the way up the board.

Applying the same principles to capital gains, exempt, for example, $12K/year. This encourages investment among low/middle class folks, and doesn't exactly break the budget for the people on the upper end of the income spectrum.

Simplify, simplify, simplify. We're collecting money here; not trying to send a man to Saturn. There is no reason whatsoever, other than entrenched and powerful interest, for Average Joe not to be able to figure out Bill Gates' tax nut, given some simple numbers.

Obviously there's more detail, but these principles would be wildly popular on both sides of the aisle were they explained well; I know of NO average people regardless of political persuasion who think the current tax code is sane.

The Democrats are FOOLS for not outflanking the GOP on the right of this issue. Well, OK, not fools, but too wedded to the social-engineering built into the tax code to abandon it.

So there. As a wise man once said, a great compromise is when everyone hates it equally. And I don't think "everyone" in this example includes any regular people; only special interest.

Posted by: John O on August 27, 2007 at 4:46 PM | PERMALINK

Ed: with the prebate, the poor pay NO TAX AT ALL! No other tax plan accomplishes that.

This proposal comes from the same sort of people that complain about the EITC, so I'll believe the prebate will be implemented just after I start believing in the Tooth Fairy (whose existence actually does have some empirical evidence).

Furthermore, a "prebate" can be implemented with any type of tax system - there is nothing about it that requires a retail sales tax.

Lastly, when anyone starts coining useless neologisms like "prebate", it's a dead giveaway that they're pushing snake oil.

Posted by: alex on August 27, 2007 at 4:48 PM | PERMALINK

One other caveat: I am not a total idiot, and understand this would never happen in my lifetime.

Too simple, too transparent, too tough on the wealthy.

Posted by: John O on August 27, 2007 at 4:52 PM | PERMALINK

Ed: With the fair tax ... No more hidden taxes!

Few taxes are less hidden than payroll and income tax. I can tell you how much I've paid, to the penny. Sales tax? Who knows.

Posted by: alex on August 27, 2007 at 5:05 PM | PERMALINK

So we want a tax policy that encourages both spending and saving? And contributing to charity, too. And buying houses. And paying for college.

And a pony.

[B]efore their plan goes into effect, the 18th Amendment (the one that says there can be a federal income tax) will have to be repealed.

That's the 16th, and it's not as important as it's made out to be. The authority for all taxes is in Art I Sec 8: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises,...." (capitalization in original) The 16th Amendment overrides some language in the following section that ties the amount of tax collected from each state to the population thereof.

Posted by: Thlayli on August 27, 2007 at 5:25 PM | PERMALINK

There is another reason why the "Fair Tax" and other "simple" tax systems are a bad idea. They are relatively bad at revenue stability.

The three main types of taxes used by modern wealthy nations are income, sales, and property.

Each of these responds to economic fluctuations differently. They respond with different magnitudes to different types of fluctuation, and they respond with different time profiles.

Because of these differences tax systems which use more types of taxes provide more stable revenue streams than those which use fewer types.

Really our present tax system isn't all that far from being a very good one. If we rolled social security into the income tax removed the differential rates for various kinds of investment income, hacked away every deduction, every credit, every sheltered account, switched from old style sales taxes to VAT's, fiddled with the rates a bit, and clamped down on the variability available to the states (eg just give them a set of rates they can adjust) it would be very efficient, stable, fair, and simple from the point of view of the least rich 99% of the population and simplest 90% of businesses. Those who would remain with significant complexity would be there because they are living very complex financial lives, and would nearly always be the kind of people who can easily afford to deal with it.

Posted by: jefff on August 27, 2007 at 5:46 PM | PERMALINK

We're in an awfully chaotic time economically and I hesitate to say there is any better solution to our situation. But, clearly everybody likes simplicity and the public would like for ALL corporations and rich individuals to pay their taxes instead of sheltering it abroad or in fake deductions.

I'd suggest a forward-thinking Democratic presidential candidate should get advice from someone like Krugman to suggest such a tax plan.

Given our current interest in Iraq and the housing crisis it would definitely be leadership in action.

Posted by: MarkH on August 27, 2007 at 5:47 PM | PERMALINK

"After all, among serious tax analysts a national sales tax ranks right up there with eliminating the Fed and putting the United States back on the gold standard. It's crankery."

Huhh??? Every country in Europe has a national sales tax of some kind (usually the VAT kind, but the differences are not important). Include Canada in that group, too.

This is crankery and akin to putting the US back on the gold standard? Did you have something special with your cereal this morning, Drum?

Posted by: Simon on August 27, 2007 at 6:22 PM | PERMALINK

To clarify why the FairTax MUST replace the income tax. It's:

* SIMPLE, easy to understand
* EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
* FAIR, loophole free and everyone pays their share
* LOW TAX RATE, achieved by broad base with no exclusions
* PREDICTABLE, doesn't change, so financial planning is possible
* UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
* VISIBLE, not hidden from the public in tax-inflated prices or otherwise
* PRODUCTIVE, rewards, rather than penalizes, work and productivity

Its benefits are as follows:

FOR INDIVIDUALS:
* No more tax on income - make as much as you wish
* You receive your full paycheck - no more deductions
* You pay the tax when you buy "at retail" - not "used"
* No more double taxation (e.g. like on current Capital Gains)
* Reduction of "pre-FairTaxed" retail prices by 20%-30%
* Adding back 29.9% FairTax maintains current price levels
* FairTax would constitute 23% portion of new prices
* Every household receives a monthly check, or "pre-bate"
* "Prebate" is "advance tax payback" on monthly poverty consumption level spending (based on family size, per Dept of HHS)
* FairTax's "prebate" ensures progressivity, poverty protection
* Finally, citizens are knowledgeable of what their tax IS
* Elimination of "parasitic" Income Tax industry
* NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
* Those possessing illicit forms of income will ALSO pay the FairTax
* Households have more disposable income to purchase goods
* Savings is bolstered with reduction of interest rates

FOR BUSINESSES:
* Corporate income and payroll taxes revoked under FairTax
* Business compensated for collecting tax at "cash register"
* No more tax-related lawyers, lobbyists on company payrolls
* No more embedded (hidden) income/payroll taxes in prices
* Reduced costs. Competition - not tax policy - drives prices
* Off-shore "tax haven" headquarters can now return to U.S
* No more "favors" from politicians at expense of taxpayers
* Resources go to R&D and study of competition - not taxes
* Marketplace distortions eliminated for fair competition
* US exports increase their share of foreign markets

FOR THE COUNTRY:
* 7% - 13% economic growth projected in the first year of the FairTax
* Jobs return to the U.S.
* Foreign corporations "set up shop" in the U.S.
* Tax system trends are corrected to "enlarge the pie"
* Larger economic "pie," means thinner tax rate "slices"
* Initial 23% portion of price is pressured downward as "pie" increases
* No more "closed door" tax deals by politicians and business
* FairTax sets new global standard. Other countries will follow

If you agree that we ought to pay for government that way that hard-working American families are paid - when something is SOLD: http://snipr.com/scrapthecode

Posted by: Ian on August 27, 2007 at 6:33 PM | PERMALINK

Sorry, the Fair (except for the fact that it shifts the burden down to those who work for a living and away from those who invest) Tax will not bring any of the magic ponies to life.

Here's a quick question for loons like Ian: what effect will a 30% tax rate have on stock transactions? And, don't bother to lie about the 23% - it isn't 23% unless you calculate it differently than every other person talking about sales taxes - if $100 in purchases costs $130 out of my purse, then the rate is 30%.

Posted by: heavy on August 27, 2007 at 7:03 PM | PERMALINK

"Huhh??? Every country in Europe has a national sales tax of some kind (usually the VAT kind, but the differences are not important). Include Canada in that group, too."

A national sales tax itself isn't complete quackery, but a tax system composed of only a national sales tax is high order quackery, as is the idea of replacing the income tax with a sales tax.

Canada has national consumption taxes, and they account for 19% of its national government revenue, however income taxes provide 66%.

Posted by: jefff on August 27, 2007 at 8:17 PM | PERMALINK

Okay, Ian, I have a few questions and you may be able to cut and paste the answers:

Those possessing illicit forms of income will ALSO pay the FairTax
Enforcement would be carried out by whom? What %age of the "black" market would be captured?

Savings is bolstered with reduction of interest rates
Say, what?

Business compensated for collecting tax at "cash register"
Would that be in the form of a prebate or a rebate? Who would check to see that all transactions are reported?

Jobs return to the U.S.
By plane, train or automobile? Why?

Tax system trends are corrected to "enlarge the pie"
Well, this one fools me; I thought the "Fair Tax" per se fixed the trends (whatever that means)?

Also, could you tell me who enforces the retailing? I have a sense that a lot of products are going to be "used" or sold at lowball retail values and become more valuable in the aftermarket. How does the government defend the integrity of the system?
Do you think the enforcement arm of the gov't will be larger or smaller than he IRS?


Posted by: TJM on August 27, 2007 at 8:24 PM | PERMALINK

Part of the reason that 23% isn't enough, is that the "fair tax" (hah!) idea put out by conservatarians or whatever is about taxing retail purchases, just the sort of thing done most by average folks and not the investment activities of the rich (of course!) If we taxed all transactions, including of financial instruments, by a modest amount/s, that might raise enough because of how much more it would cover - and would be more truly fair, instead of being a scheme to let capital avoid taxation.

tyrannogenius

Posted by: Neil B. on August 27, 2007 at 10:27 PM | PERMALINK

Upthread, Horatio Parker recommended reading about Bretton-Woods, which I dutifully did. (It didn't convince me that a return to the gold standard was a feasible way to achieve stability and open markets though.) What struck me most was that in 1945 the US was still run by people who were competent. They were planning ahead and envisioning a world order that would be peaceful, sustainable, fair. Such a contrast to the dim bulbs that flicker in DC today.

So why does the modern media and political establishment treat any modern Republican policy seriously? The FairTax reeks because it is obviously not meant to work for the good of the nation. I mean, seriously, Scientology?!!?? And yet the culture keeps acting as if these are serious proposals. Is it just a habit left over from the days when the Republicans still cared about governing well? Is it reflex courtesy? Policy fatique? Stupidity? Corruption? The lack of a bully pulpit?

In folklore one doesn't need silver bullets to finish off mean-spirited, bad sports who can't do basic math. In fairy tales, the character who was rude and refused to share her food with the disguised fairy ended up with toads, snakes and lumps of coal spilling from her mouth whenever she spoke. A simple, but effective deterrent.

Kevin Drum is right that Barlett deserves a round of applause for remaining a calm and even demeanor. Bartlett may be the last of a rare breed, the sane conservative.

Posted by: PTate in FR on August 27, 2007 at 11:00 PM | PERMALINK

* SIMPLE, easy to understand

Its one potential virtue.

* EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes

This "benefit" is incoherent. The decisions the income tax promotes are, for the person making the decision, optimal given the existence of the income tax. They may not be the decisions that would be optimal for that person without the income tax, but that's hardly relevant. Further, often (though certainly not always) tax minimization strategies work because they involve doing things that have been determined to be socially desirable (that is, they serve the broad national interest), so failing to encourage them harms the national interest, and is in that sense counter to efficiency.

* FAIR, loophole free and everyone pays their share

Actually, its not. A consumption tax implemented as an income tax with deductions for retained income wouldn't be simple and easy to understand and will have exploitable accounting loopholes, one implemented as a VAT or simple sales tax is easy to avoid if you are rich since you have more freedom to shift some of your consumption out of the US where it is outside the coverage of US consumption taxes. Either way, it has evasion methods that are most available to the rich and the rich won't pay their fair share.

* LOW TAX RATE, achieved by broad base with no exclusions

Except that the math on this simply doesn't work.

* Reduction of "pre-FairTaxed" retail prices by 20%-30%

Not going to happen. One might generally assume that, given that the modern corporate income tax is effectively a tax on profits, retail markup might drop by a proportion approximately equal to the corporate tax rate, but prices, rather than markup, wouldn't drop by this amount under any reasonable set of assumptions.

* Adding back 29.9% FairTax maintains current price levels

Well, no, it doesn't, for the reasons discussed above. It raises prices dramatically, particularly on products with an already narrow margin, making them unviable in the marketplace and killing the associated business and jobs.

* FairTax would constitute 23% portion of new prices

True, but not a good thing. I'll get to the rest later.

Posted by: cmdicely on August 28, 2007 at 11:03 AM | PERMALINK

Scientology is out to destroy the IRS. Something about whether they're a religion or a marketing scam...

Posted by: ElWrong Hubbard on August 28, 2007 at 11:18 AM | PERMALINK

Thlayli writes: And a pony.

Yes! Of course, a pony!

Posted by: Daryl McCullough on August 28, 2007 at 11:35 AM | PERMALINK

One point (to me, anyway) in favor of having a sales tax, property tax, and/or inheritance tax in addition to a pure income tax is the basic unfairness of the situation in which making a million dollars by working hard is taxed so much more than making a million dollars by having a rich uncle die.

Posted by: Daryl McCullough on August 28, 2007 at 11:43 AM | PERMALINK
* Every household receives a monthly check, or "pre-bate"

IOW, we create a massive bureaucracy to hand out to everyone with one hand while taking away with the other.

* "Prebate" is "advance tax payback" on monthly poverty consumption level spending (based on family size, per Dept of HHS)

IOW, instead of filing income tax forms, you have to file "family description forms" with the new taxing bureaucracy, and instead of filing them on a regular annual schedule, you have to file them immediately on changes in family structure, mailing address, etc., to avoid getting the wrong advance payment, or not getting it at all, etc.

Congratulations, you've replaced the IRS with an equally perceive, more wasteful, bureaucracy that more people have to deal with more often than in the status quo.

* FairTax's "prebate" ensures progressivity, poverty protection

No, it doesn't ensure poverty progression, and the one-step progressivity aimed at the poverty level means, at best, that rather than replacing the income tax with a consumption tax being a massive redistribution of tax burden from the wealthy to the poorest of the poor it is, instead, a redistribution from the wealthy to the middle class. Which is not much of a selling point.

* Finally, citizens are knowledgeable of what their tax IS

With income and payroll taxes, people get a regular statement of what they've paid currently (with their paycheck) and, for income taxes, an annual total is part of the tax return.

With a consumption tax, not so much. So, this claim is a dubious one of solving something that is not even defensible as a problem with the income tax.

* Elimination of "parasitic" Income Tax industry

I wasn't aware that killing well-paying jobs for educated workers was a benefit. Then again, as noted below as regards business, this isn't really true, anyway.

* NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals

No, you've replaced it with a different, more pervasive bureaucracy with equally onerous and intrusive filing needs.

* Those possessing illicit forms of income will ALSO pay the FairTax

Only on their legitimate consumption. OTOH, those doing illicit forms of consumption will not, even if their income is legitimate. People buying diapers for their children with cash income from informal work will pay the "Fair"Tax, people using their paycheck from their job to buy cocaine won't.

* Households have more disposable income to purchase goods

Which will, as discussed in the previous response, cost more by, in many cases, a substantially greater amount than the increase in nominal disposable income.

* Savings is bolstered with reduction of interest rates

Reduced interest ratings don't bolster savings. So, if it were defensible to argue that "Fair"Tax would reduce interest rates, this isn't the benefit you'd want to claim. You'd want to claim that it relieved the burden on debtors, not that it bolsters savings.

* Corporate income and payroll taxes revoked under FairTax

True, instead of being taxed on labor costs and profits, businesses are taxed on gross sales, destroying (as discussed above) entire low-margin industries.

This is not, however, a benefit for business as a whole, though it might enhance the profitability of certain existing businesses that already have a high profit margin.

* Business compensated for collecting tax at "cash register"

So, as well as making so that every American family is getting monthly checks from the new tax bureaucracy, you're going to make it so that every American business is also getting regular checks from the new tax bureaucracy?


* No more tax-related lawyers, lobbyists on company payrolls

Wrong, especially given the immediately preceding. Once you've established a "reimbursement" mechanism for tax collection, you've guaranteed that businesses are going to lobby for reimbursement terms (keeping their lobbyists) and spending effort to assure that they maximize their reimbursement (keeping the specialized accountants and lawyers).

* No more embedded (hidden) income/payroll taxes in prices

Sure, instead you've got embedded (hidden) "Fair"Taxes in prices. Sure, you've got the overt tax in the price, but you've also got the embedded tax in the form of increased labor costs due to the tax (and the resulting increased prices), which works exactly the way income and payroll taxes paid by (or on behalf of) workers are currently embedded into prices. You can't get rid of indirect tax impacts on prices if you have taxes; pretending you can requires selective ignorance.

* Reduced costs. Competition - not tax policy - drives prices

Wrong. Consumption taxes drive prices as much as any other taxes, and a tax on gross retail sales rather than essentially on profit has a very big impact on prices (and on which industries can survive at all.)

There's no evidence of or reason to believe in overall decreased prices from the "Fair"Tax, either, though of course it will redistribute prices so something will be relatively cheaper and others relatively more expensive.

* Off-shore "tax haven" headquarters can now return to U.S.

Except that having employees that consume outside the US is now the way to avoid costs imposed by US taxation, so there is even more incentive to move operations out of the US.

* No more "favors" from politicians at expense of taxpayers

Well, no, you've already said that businesses are getting a handout from government for collecting taxes, which is precisely a "favor" from politicians at the expense of taxpayers. You've built that into the system from square one.

* Resources go to R&D and study of competition - not taxes

Resources will be more rationally be expected to go the same place marginal dollars go now, and "R&D" isn't particularly high on that list, often below lobbying (which includes lobbying on non-tax policy, so even if "Fair"Tax eliminated tax lobbyists, which it wouldn't, it wouldn't change this fact.)

* Marketplace distortions eliminated for fair competition

Taxing gross retail sales is a marketplace distortion of rather substantial magnitude. Any tax system, of course, is a "distortion" compared to a no-tax system, but a tax on profits (which is effectively what the corporate income tax in the US is, or at least approximates) is arguably the least "distorting" since any activity profitable without such a tax remains profitable with it, and any activity not profitable without it remains not profitable with it. A tax on gross sales (or consumption, effectively the same thing) makes low-margin businesses that would be profitable without the tax (or with a tax on profits) unprofitable, and makes those activities stop or move underground.

* US exports increase their share of foreign markets

This is a possible benefit, as the higher effective cash-register US prices of goods under "Fair"Tax wouldn't be reflected in exports; OTOH, its exactly why those who could afford to would evade the "Fair"Tax through foreign consumption.

* 7% - 13% economic growth projected in the first year of the FairTax

Anyone can "project" anything. Wehther those projections are reasonable or even remotely credible is another story.

There is certainly no reason to expect such growth.

* Jobs return to the U.S.

This conclusion seems to be based on several of the false premises discussed previously, and is therefore dubious.


* Foreign corporations "set up shop" in the U.S.

This is just a rephrasing of the immediately preceding and likewise dubious.


* Tax system trends are corrected to "enlarge the pie"

By destroying low-margin activities, the pie would shrink, not be enlarged.

* Larger economic "pie," means thinner tax rate "slices"

Which would be relevant, perhaps, if it was rational to assume there would be a larger pie to start with.

* Initial 23% portion of price is pressured downward as "pie" increases

The initial ~30% rate (or 23% share of tax + base price total) would be inadequate to start with, and would be pressured upward by that inadequacy as well as by the shrinking of the legitimate market pie as it squeezed out entire industries and forced them to shutdown or go underground, and since it would do more of that the higher it went, it would be a positive feedback loop.

* No more "closed door" tax deals by politicians and business

Really? How do you think the reimbursement policy is going to get set?

* FairTax sets new global standard. Other countries will follow

Plenty of other countries have some form of consumption tax in their tax systems, and they've got quite a good idea of how they work and what their limits are. The poorly conceived "Fair"Tax isn't unlikely to change their approaches.

Posted by: cmdicely on August 28, 2007 at 12:28 PM | PERMALINK
One point (to me, anyway) in favor of having a sales tax, property tax, and/or inheritance tax in addition to a pure income tax is the basic unfairness of the situation in which making a million dollars by working hard is taxed so much more than making a million dollars by having a rich uncle die.

Always seemed to me that's an argument for just having an income tax that includes all income rather than excluding inheritances, capital gains, etc., etc., etc.

Posted by: cmdicely on August 28, 2007 at 12:29 PM | PERMALINK

2006 Wall St bonuses; $25 Billion
As the big boys on Wall Street direct trillions in capital flows to derivatives, rank speculation and the latest hot packaged products like sub-prime mortgages they whet their beaks, like the mob, at every turn.
Why not place a one one hundreth of a per cent tax on these flows to fund social security and health care.
It would be a manifest boon to American workers who toil at multiple jobs to create this capital and keep the economy going.
ps. I mentioned this idea to a staunch corporate conservative friend who said the idea is 100% valid; but without a guaranteed mechanism that the Dems would not keep increasing the tax, it was dead on arrival.

Posted by: cognitorex on August 28, 2007 at 3:17 PM | PERMALINK

Did you know?
That a middle class worker in the 25% income tax bracket [& paying 7.5% to social security] wishing to work overtime to cover a $100 retail purchase has to earn $148 to clear that $100 that he needs? [do the math 100/67.5%]

That's the equivalent of a 48% sales tax!!!!


Makes a 30% Fair Tax [with no Inc Tax or Soc Sec Tax] look pretty good doesn't it?

Remember:
$148 Under current system
$130 Under the Fair Tax

Posted by: Clint on August 30, 2007 at 1:13 PM | PERMALINK

Anyone saying sales tax is "crankery" is seriously deluded and thinks most of our state governments are too. The income tax is what's "crankery" and always has been. Only a very well-thought-out campaign of trickery and lies got it put into the Constitution in the 1st place. The Founding Fathers would have favored a consumption tax 100%. So the Fair Tax really is the ONLY option to save this country's economy, which is going downhill fast. Expect the USA to become a 3rd world country very soon unless the Fair Tax is adopted as is and soon.

Posted by: illumineer on August 31, 2007 at 8:43 AM | PERMALINK

If you think a "sales tax" of 30% is either enough or the ceiling, (federal, state, county or who ever decides in the future to raise said taxes), then we're already a 3rd world country, smarts wise, don't ya know. Illumineer, indeed.

Posted by: TJM on August 31, 2007 at 10:26 PM | PERMALINK




 

 

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