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August 28, 2007

The Oxymoronic "Fair Tax"

By Gus Van Horn from Gus Van Horn,cross-posted by MetaBlog

Back in 1996, I supported the candidacy of Steve Forbes, which centered around simplifying the income tax through a "flat tax". My rationale at the time was based partly on the notion that this simplification of the tax code would at least reduce the intrusiveness of the IRS and partly on the naive assumption that this would represent a first step by the Republicans towards reducing spending as well as taxes.

A decade later, I have been disabused of the notion that the Republicans really care about reducing the size of the welfare state. Nobody is talking about a flat tax anymore, but this might be due to the fact that, politicians being what they are, the bloom came off that rose when they realized that the idea was not popular enough to win an election. But at the same time, nobody is talking about spending cuts anymore, either.

The political debate has, thanks to the adoption of the welfare state by the Republicans, shifted away from rolling back the welfare state as have noted before. And yet, as I also noted, the Republicans continue to enjoy an undeserved reputation as defenders of economic freedom.

Furthermore, it remains easy to hate the IRS, so despite the electoral non-viability of the flat tax, some Republicans who want to run against the IRS have come up with a new gimmick: the "fair tax". Just the name should clue you in that the Republicans have no opposition on principle to taxation: What's "fair" about the government confiscating your money?

But this Wall Street Journal article shows that it's even worse than that. The idea is being sold with a mountain of lies, damn lies, and statistics. Worse still, it incorporates an element of wealth redistribution that would make any Democrat proud:

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) ...

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

...

Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income. [bold added]

Not to defend income redistribution in any way, but wouldn't Americans still have to file reports subject to audit to make sure people were not lying about their income in order to get these rebate checks? This wouldn't even really get rid of the IRS as far as I can tell.

Oh, and there's more:

A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion [e.g., non-collection --ed] were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).

As I noted, the public debate ceased being about reducing spending long ago: Just look at the emphasis of this article -- in a presumably pro-business publication -- on how impractical Linder and Chambliss's proposal is as federal income replacement! Granted, that is the focus, but the remarkable fact remains that it would take a 57% sales tax to replace the federal income tax. I can't believe something wasn't said about the need to cut spending!

The obscene amount of wealth our government seizes to finance the welfare state is, thanks to this debate, being made impossible not to notice. It will, however, be up to those of us who understand the nature of capitalism and who value our individual rights to interject that this is inexcusable and that Americans can and should change this by demanding, at least for a start, a reduction in size of the welfare state.

This is a chance -- no thanks to the "Fair tax' Republicans -- to bring the public debate on the welfare state back to where it belongs: on how to eliminate it.

-- CAV

Originally posted by Gus Van Horn from Gus Van Horn, ReBlogged for Meta Blog

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