Another View of the "Fair Tax"

I know, I know, most of us are bored to tears with this topic and I keep going back to it. Since my grandson is napping I have extra time on my hands. I wondered if there might be an antidote to the propaganda site that Truth keeps pushing and found a whole litany of debate, pro and con (unlike her site) from the Washington Post. Here is one bloggers thoughts put much better than apparently I am capable of. (Pay special attention to point 10.)

For those of you who have drank the Kool-Aid and actually believe all the propoganda spewed out by the FairTax proponents, please consider the following (which I gurantee you will never hear from Neal Boortz, John Linder or AFFT):

1. Numerous independent studies have concluded that in order to be revenue neutral, the tax rate for the FairTax would need to be at least 44%-60%. The most detailed of these studies was prepared by William Gale and published in the May 10, 2005 edition of Tax Notes (i.e., three months before The FairTax Book was published.) Although fairtax.org publishes so-called "rebuttals" of critism of the magical 23% tax rate, it somehow has been unable to rebut this study. Boortz, on the other hand, just lies about it and hangs up on listeners who bring it up.

2. Other studies have reached similar conclusions, the most recent being the President's Tax Reform Commission, which had a whole chapter on the FairTax in it's report last fall. It concluded that in order to replace ONLY THE INCOME TAX (i.e., not the Social Security Tax, Medicare tax or Estate tax)would require a tax rate of AT LEAST 34%, and probably much higher (i.e., 49%) when tax evasion was factored in. In 2000, the Congressional Joint Committee on Taxation reached a similar result. There are plenty of other reports and studies out there as well that came to similar conclusions.

3. In stark contrast, despite claiming to have spent "over twenty million dollars" in research developing their plan, the FairTax proponents are apparently unable to produce a single independent study that supports the magical 23% rate. I, for one, would love to see one made public if for no other reason so that those studies could be examined by folks like William Gale and we could have a real debate about what the true rate would likely need to be.

4. Boortz and AFFT will regularly claim that the magical 23% tax rate was "produced" or "confirmed" by economists at Harvard and MIT, but it turns out the economists they are talking about do NOT support the FairTax and do NOT believe that a 23% rate would be anywhere near revenue neutral. For example, Jim Poterba of MIT was a member of the Tax Reform Commission that concluded that the FairTax rate would need to be much higher than that proposed by the FairTax folks.

5. Regarding the so-called "embedded taxes", it is a theoretical proposition at best that prices will drop by the supposed 22% embedded taxes if the FairTax system is implemented. At worst, it's wishful thinking.

For those who believe that prices will automatically drop by the amount of the "embedded taxes" if our current tax system is replaced with the FairTax, here are a few questions to ponder. Did credit card compaines reduce the interest rates they charged when their cost of borrowing dropped over the last several years? Why would the price of imported goods drop 22% just because the US tax system was scrapped? Did those imported goods somehow contain an "embedded tax" as well? Why would companies like Microsoft that have virtual monopolies reduce their prices just becase their tax costs were reduced? They can effectively charge what the market will bear.

FairTax proponents ignore all of this and simply repeately chant the mantra: Prices will drop under the FairTax because embedded taxes will be eliminated. But what if they're wrong?

And one last question: Do you realize that the "embedded taxes" include taxes you pay as an individual? Thus, for prices to drop by the amount of the "embedded taxes", then your salary will also need to drop by the amount of taxes you currently pay. In other words, you might keep your entire paycheck on payday, but your paycheck would just be a lot smaller. Dale Jorgenson of Harvard (who the FairTax proponents cite as the guru of embedded taxes), has made this point quite clear lately, much to the chagrin of Boortz and Linder who misrepresented his work in their book.

6. Under the FairTax plan, tax avoidance will become a national past-time, not just for the rich, but for all of us. Think about it for a second, if new goods and services are taxed at a rate of 30%-60%, but used goods are not taxed at all, many of us will choose to buy a used car tax-free instead of buying a new car and paying the tax. What about homes? Jewelery? Furniture? Children's clothes? You name it. Ebay and garage sales might benefit for the explosion of purchases of used goods, but I think home builders, manufacturers and retailers might suffer just a tad. And how many of us will choose to vacation in Mexico and Canada instead of Florida and Colorado in order to avoid paying the FairTax on our hotel bills, car rental, food, lift tickets and entertainment? Well, lots of us will do just that in order to avoid paying the FairTax. After all, nobody likes paying taxes.

And when enough people change their purchase patterns in order to avoid paying the FairTax, then the tax rate will need to increased even further in order to make up for the lost revenue (which will just increase people's incentive to alter their purchase patterns to avoid the tax.)

7. Tax evasion will also be a big problem. Under the FairTax plan, purchases for business and investment purposes will not be taxed. Thus, people will have an incentive to set up bogus business (think network marketing) and call everything they buy a "business expense" in order to avoid paying taxes. Similarly, people who buy vacation homes will claim they are for rental or investment purposes in order to avoid paying the FairTax on those purchases. Boortz claims that such behavior would be "wrong" and illegal under the FairTax statute. Well, no kidding, but without an IRS looking over our shoulders, the temptation to cheat would be enormous. While Boortz and AFFT acknowledge that there would be "some" tax evasion under the FairTax, they make no provision of it in their magical 23% rate.

8. What about the "underground economy?" A common argument is that the FairTax will tax drug dealers, who currently aren't paying income taxes on their illegal activities. But why would drug dealers suddenly start collecting and paying the FairTax on their illegal activities? The answer is: they won't. But won't they pay the FairTax when they go out and purchase their Mercedez Benzes? Yes, but the car dealer current pays an income tax on that sale, which will be eliminated under the FairTax system, so the tax ramifications will be a wash. Besides, according to Boortz and Linder, the Mercedez Benz currently has a 22% "embedded tax" built into the purchase price, so the drug dealer is already paying taxes everytime he makes a purchase.

9. Just who's taxes will go UP under the FairTax system? Well, Boortz, et. al claim that the poor will see their taxes eliminated (because of the "pre-bates." The rich would see their taxes drop substantially because they tend to spend a smaller proportion of their incomes on goods and services than to the rest of the country (plus, the estate tax would be eliminated), so they'd make out pretty well. So, let's see, who would be left to make up the difference in the tax revenue lost from the poor and the rich? Oh, yeah. The middle class. Gee! Shafted again! Who's a thunk it?

10. Retired folks would really get shafted. They've already paid taxes from a life-time of work, now they'll be taxed again everytime they make a purchase. I guess that's just the price they have to pay for being old.

11. One last question. Why is it you never see the FairTax proponents actually DEBATE their proposal in public with critics who actually know something about the plan? Boortz, for example, has turned down numerous offers from critics to debate the FairTax, and he conveniently breaks to a commercial whenever one of his callers actually starts asking tough questions. But he loves showing up a campaign-style rallies (to sell his book) where no real questions are allowed.

If the FairTax plan is really so great, don't you at least wonder why Boortz, Linder and the AFFT folks so afraid to actually debate it?

Posted by: Hayden Kepner | January 17, 2006 07:59 PM

For more, and there is loads more, here is the website:

http://blogs.washingtonpost.com/thedebate/2005/12/taxing_question.html