My parents always told me that if it sounds too good to be true, it is. With very few exceptions, that advice has proven to be extremely valuable throughout my life. A few times I have ignored this advice, only to end up learning a lesson the hard way. The very few exceptions to this rule that I have seen are more like flukes; like someone winning the lottery.
Economist Bruce Bartlett makes a strong argument in this WSJ article that the FairTax is one of those things that is just too good to be true.
For those that are new to this debate, the FairTax is a type of flat tax proposal that would exchange the current federal income tax system for a national sales tax. Unlike value added tax (VAT), where taxes are levied at every exchange between initial producer and final consumer, the FairTax would be levied only at the final exchange. This is an important point, because VAT tends to hide taxes, while the FairTax would make taxation more transparent.
The main selling point of the FairTax is the claim that it would get rid of the IRS and government intrusion into the lives of individuals. Proponents argue that taxes would be collected through the same mechanisms that currently collect state and local sales taxes. They note that these organizations work directly with retailers and rarely directly interface with consumers.
While this sounds nice, Bartlett asserts, “Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits.” What is he talking about? He is talking about the fact that the FairTax is not, in fact, a flat tax, but is a progressive tax. The progressive nature of it is applied at the back end rather than at the front end, as occurs in our current system.
The whole argument behind progressive taxation is that a flat tax is not fair. A tax of 10% of a poor person’s income creates a much greater burden on that person than is created on a rich person by a tax of 10% of his/her income. The FairTax realizes this. Since everyone would pay the same percent of taxes on their purchases up front, the FairTax would send out monthly rebate checks to every household based on household income. In other words, some agency would still be collecting information — and performing audits — on personal income. FairTax proponents can argue that this agency would not be as intrusive as our current IRS, but there is simply no way they can prove this would be the case. The IRS by any other name ….
Bartlett goes to great length in his article to criticize the FairTax’s proposed 23% tax rate. He shows how this is a smoke and mirrors deception that hides the actual 30% tax rate. Bartlett demonstrates that the only way the proposed rate could work is for government spending to be simultaneously cut by a whopping 60%. I’m a small government type, so I think government spending should be cut. But does anyone reasonably think that cutting spending 60% is realistic?
The alternative is a tax rate of about 57%. Bartlett notes that it could be as high as 89% in a worst case scenario. He purposefully points this out because “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%.”
Bartlett includes a number of other criticisms, including the fact that the tax would be levied not only on goods, but also on services that have traditionally been exempt from sales tax. Imagine your medical bills immediately increasing by 30%. Bartlett discusses the fact that federal government would also pay the tax. FairTax proponents include in their calculations the revenue this would generate, but ignore the added expense to the government, as if it simply wouldn’t exist. Bartlett says that FairTax proponents ignore the costs of collecting the tax and distributing welfare checks to a huge percentage of the population.
FairTax proponents will say that Bartlett’s criticisms are over the top, fail to consider the economic growth that would result from the program, fail to consider the overall reductions in prices that would result from fewer taxing points, and/or ignore answers that have already been provided. That’s OK. They can say that. But frankly, their economic growth numbers are simply too good to be true.
Bartlett is not the first to point out shortcomings with the FairTax proposal, but I have yet to encounter cogent arguments that would satisfactorily counter all of the criticisms he raises. Perhaps more cogent posts will be forthcoming, but as of post time, the only FairTax proponent arguments I could find to specifically counter Bartlett’s contentions were devoid of substance but filled with ad hominem attacks. And many of these came from “esteemed” economists.
What we know for sure is that flat tax proposals play well with many audiences throughout America. Flat taxes play particularly well with conservative audiences. At least they play well at first blush. A broad swath of Americans also wants to make sure taxes are not too oppressive for those that can least afford it. Many people are in both camps. The FairTax seems to fit the desires of both camps — until you look under the covers and see all of the problems with the program.
FairTax proponents do not want to hear criticisms of the program. I’ve had too many discussions where proponents act like the three monkeys that can hear, see, and speak no evil of the proposal. They don’t care about the counter arguments; they simply feel that the FairTax should be enacted anyway. I suppose you’d call this faith-based legislation. That is not a good formula for creating national policy.