Nathan Moore's Thoughts
More Problems with the Fair Tax
Economist Bruce Bartlett (no liberal, by any stretch) comes out with a fourteen page offensive demonstrating the many drawbacks to the Fair Tax. Among the many problems noted by Bartlett, these struck me as the most notable. My summary, in order of importance:
1. Prices and wages can be sticky. The implementation of the 22% (or 23%, or 30% – see below) sales tax will be immediately felt in an inflationary way, even though, from a balance sheet perspective, the elimination of the income tax should result in an eventual wash. In the meantime, until wages fall and reach the new equalibrium of the post-income tax world, we have a significant problem.
2. There’s no guarantee the federal reserve can manage the money supply sufficiently to ward off the deleterious effects noted above.
3. The actual Fair Tax rate is more like 30%, not 23%. Bartlett notes the discrepancy in salesmanship this way
Unfortunately, the Fair Tax rate is not really 23%. It’s actually 30% when thought about the same way we think of state sales taxes. The 23% figure is what is known as the tax-inclusive rate; the 30% rate is called the tax-exclusive rate. Think of the difference this way: You go to the store now and buy something for $1.00. The FairTax adds 30 percent for a total price of $1.30. Since the 30-cent tax is 23% of $1.30, this is where the 23 percent figure comes from.
It’s in the details, but you never hear about. The new, revised sales tax rate is now at 31.27%.
4. The inclusion of state and local governments as part of the tax base is deceptive. Any increase in the costs to local governments will necessarily be borne by the tax base under their respective jurisdictions. This means, on average an average increase in local sales taxes by 80%. If you take the governments out of the tax base, the actual rate of the national Fair Tax increases to absurd levels. Further, the rebate portion of the plan is accounted for as an expansion of the tax base, not government spending, which it is.
There are many more holes in the concept. Read the Bartlett article in its entirety for the rest of the skinny. Ilya Somin has a brief summary here.
December 31st, 2007 at 8:36 am
[...] Nathan Moore points out that the much heralded “Fair Tax” is being sold in a deceptive fashion. Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. [...]
December 31st, 2007 at 10:15 am
The fact that this Bartlett fellow is using the 30% ruse (ALL sales taxes are inclusive – he is comparing apples to oranges) tells me he needs to study the Fair Tax more before he starts commenting on it. Whatever the exact rate turns out to be, it’s a better deal than what we have now.
December 31st, 2007 at 11:17 am
Anyone who puts any stock in what Barlett has to say MUST realize that he has a vested interest in the current system. He’ll have to look for a new job when the FairTax is enactd.
December 31st, 2007 at 12:36 pm
Well, no – the problems he notes are legitimate. The Fair Tax is no panacea. I still cannot figure out what benefits we are supposed to see in the Fair Tax that we wouldn’t see in the flat tax.
Bartlett is an economist, not an accountant. I don’t think the man would lack for work if the Fair Tax was enacted. In fact, the mess it would create would ensure him a full calendar until he gets sick of it all and flees to the Caymans.
January 1st, 2008 at 7:26 am
Bartlett ties together most of the arguments against the Fairtax plan, and makes a case for the VAT. I’d still prefer a consumption tax, but not the Fairtax plan. Too many moving parts. Tries to do too much too quickly?
Here’s a little circular question. If Bartlett is correct, and all the States switch to an income tax when the Feds move into the sales tax arena, then why would the States vote to repeal the 16th Amendment? And if the States don’t ratify the Amendment repealing the income tax , then the Fairtax expires in five years according to Congressman Linder’s new plan?
What a mess??
January 1st, 2008 at 12:10 pm
Agreed. It’s both economically and politically problematic, viciously altering a slow moving system. Still, for me, the monetary concerns are the greatest, and it’s those concerns that Fair Tax advocates never seem to have an answer for.
As a side note, I get the feeling a lot of Fair Taxers would also be content if we went back to the gold standard.
January 2nd, 2008 at 11:25 am
I think a Flat Tax would be much better than our current system, however, let’s not forget that what Regan did in 1986 was basically a flat tax. This plan has been amended over 14,000 times since than.
If the FairTax is such a bad idea, why does the media always report on consumer spending and how important that is to the economy? Why do Florida, Texas and other states do so well without an income tax? About 40% of Americans actually pay taxes. Is it not better for everyone who sets foot on American soil to pay into the system? The FairTax will solve the S.S. problem by increasing the number of tax payers.
I , and I venture to say , no one else who posts here were around in 1913 and had nothing to say about taxing our incomes. I and we do now! The FairTax does not promise Utopia but it is so much better than what we have. The ignorance and apathy prevailing through the general public has always been a blessing to those in congress who continually use the tax code for social engineering to their benefit.
January 28th, 2008 at 4:22 pm
I do not understand why people would support our currant tax system. I would love to take home my entire paycheck. I believe that the FairTax would boost are economy. Now foreign vistors would pay the tax, the underground economy would now pay. We would all pay. We would do it on our own terms. Why gross is $1560 every two weeks, only take home 1201. Woth that extra money I can get out of debt, be able to save for a nice vacation. The list is endless on what I could do with that extra money. America needs the Fair Tax!
January 29th, 2008 at 2:53 pm
That is the dumbiest and most sit aside Leberal view I’ve ever read about!
February 12th, 2008 at 5:50 pm
How about addressing the problem of people who have assets bought with money that has been taxed already? Every retiree in the country will see their assets — stocks, their house, bank accounts — devalued about 30% overnight?
February 15th, 2008 at 12:28 am
But Fairtax is essentially a farce. It can’t work — because about 1/2 of the income from is is the government taxing itself.
If someone came up to you and said “The government can just cut taxes in half, and pay itself half the money” you would laugh, and walk away.
Well, thats pretty much what Fairtax is about. Neal Boortz (page 148) says “The federal government itself will become a major taxpayer.)
Fairtax depends on taxing the Navy on submarines, NASA on space shuttles, the airforce on jets, etc.
The problem is — math, logic. You can’t pay yourself a tax. You can PRETEND to, sure. But since the government has to WRITE the check, in order to DEPOSIT the check, you can’t count that as revenue.
Plus – if the sales tax on itself wasnt loony enough -Fairtax says they will send out 500 billion in “prebate” checks for people to pay their taxes. Incredibly — they count the receipt of those taxes as revenue.
Totally wacked out stuff.
ANd it doesnt end there — Fairtax puts a tax on medical care, on cancer, on nursing homes, ect. But they say it will be FREE in effect, cause prices will go dow.
Let me be real clear. Its a farce. Its a complete farce. Its a shell game.
And thats why I hope it passes. I pray it passes. I would love to see the Fairtax happen. I would laugh myself silly.
http://fairtaxabsurdity.blogspot.com
February 16th, 2008 at 10:48 am
I love when people post their opinions about the FairTax. Everyone is intitled to their opinion but they can’t change the facts. Try as they may two minutes of thought do not match 11 years of research done on the FairTax.
March 22nd, 2008 at 6:16 pm
I got news for you poor souls who think Fairtax will let you take home your entire paycheck.
Fairtax groups, a group of Fairtax experts, are saying that doesnt mean you take home your gross pay. They are backpeddling on that like a circus bike rider. They are saying they dont even IMPLY you keep your gross pay.
http://fairtaxgroups.com/index.php?topic=2753.60 Read those fairtax experts — they say that “keeping your whole paycheck” has NOTHING to do with getting more on your paycheck on payday – they say the EMPLOYER can keep that money you paid before, and cut prices with it.
I know — whack, huh? You thought they meant you would keep your whole paycheck.
Fairtax is just slippery nonsense, a farce, another bunch of liars who are fooling gullible people.
April 8th, 2008 at 8:51 pm
I will wash your ass and drink the water, if Fairtax rate is 23%. It won’t even be 30%. That whole Bullshit is based on the ABSURD nonsense of the federal government paying ITSELF 800 billion. PLus more absurd nonsense — its based on cancer patients, nursing home patients, everyone paying the worlds HIGHEST tax — on their medical cost.
Not gonna happen you fools.
What the hell are you gonna do, you Fairtax idiots, when 1.2 trillion ISNT there — when you CAN’T collect it?
What the hell are you gonna do? You will HAVE to raise the tax rate you morons.
So the fairtax rate won’t be ANYwhere near 23%, or 30%. Try 50%, 60%.
And when the national sales tax is 50 or 60%, guess what happens? People avoid those sales tax like the plague. And the rate will have to go EVEN HIGHER.
I hope this farce passes, I really do. I want to see this farce tax blow up. If it passes — and it won’t — I just wonder how long before we rescind it. A month? Three months?
My guess is — four months. But again -Fairtax can’t pass.
It can’t pass cause the Fairtax leaders already KNOW its a farce, they KNOW its bullshit. They aren’t ABOUT to let it pass. They KNOW the government can’t pay itself 800 cents a year — much less 800 billion dollars.
They know that cancer victims aren’t going to be taxed. They know that nursing home patients won’t have to pay this farce tax.
They know there will be all kinds of exemptions.
They know exemptions are INEVITABLE — and needed. They know all this.
They are lying to you gullible idiots.
Wake up.
June 13th, 2008 at 2:47 pm
I am looking for a spokesman…or an association…who could provide a speaker to address my associates on the pitfalls of the Fair Tax bill.
June 14th, 2008 at 2:59 pm
We are looking for a speaker for the July, Aug, and Sept meetings to talk about the negatives in the Fair Tax bill.
June 15th, 2008 at 11:10 am
The pdf article this artile links to makes no mention of the costs of embedded taxes. Those are the income taxes that businesses have to pay which they pass on to us through higher prices- 22% higher on average. If you’re paying less than 23% income and payroll taxes, embedded taxes more than doubles it for you.
1. A sudden increase in incomes due to the elimination of the income tax system would have an inflationary effect if it resulted in a sudden major increase in consumer spending. But sales taxes are inherently deflationary, not inflationary. The deflationary effect of a 23% national consumption tax would balance the inflationary effect of increased incomes.
2. No deleterious effects for the Fed to worry about.
3. This topic is fully explained on the fairtax.org web site. It’s not an attempt to be deceptive or misleading. Simple put, 23% tax-inclusive is equal to 30% tax-exclusive.
4. Including all levels of governement in the tax base is not an attempt to fool anyone. As is described in plain English version of the bill, it is not intended to generate actual revenue, it is designed solely to close loopholes so that government officials and employees can’t take advantage of government accounts to buy things tax free for themselves and their friends. That’s an important part of writing good legislation.
May 18th, 2009 at 9:31 am
[...] Critics are quick to point out the “inclusive in the price” 23% number is misleading because sales tax is always calculated “exclusive from the price”. When figured this way, the real number is actually 30.4%. In truth, both numbers are correct in different ways. [...]
September 27th, 2009 at 10:55 pm
[...] Critics are quick to point out the “inclusive in the price” 23% number is misleading because sales tax is always calculated “exclusive from the price”. When figured this way, the real number is actually 30.4%. In truth, both numbers are correct in different ways. [...]