Les Jones: FairTax and Flat Tax Follies

August 28, 2007

Economics > FairTax and Flat Tax Follies

Bruce Bartlett doesn't like the flat tax:

State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly.
Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% to the federal government on top of the purchase price of your next house.

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.

Aside from the incredible complexity and intrusiveness of tracking every American's monthly income--and creating a de facto national welfare program--the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.

Ramesh Ponnuru:

I should address one point made in a number of the blog responses to Bartlett. Bartlett says that it's deceptive for Fair Taxers to say that they want a 23 percent retail sales tax. What they really want, he says, is a 30 percent tax rate. Under their tax, a $100 product will get slapped with a $30 tax and cost $130. Since 30 is 23 percent of 130, they say it's a 23 percent tax.
The point the Fair Taxers make in response is that 23 percent is the right number to use if you're comparing it to an income tax, and that's right. But most people who hear Fair Taxers say they want a "23 percent sales tax" compare it to the sales taxes they pay. The vast majority of listeners assume that the Fair Taxers are talking about a much lower sales tax than they really are. Every time I have explained the numbers to someone who was sympathetic to the Fair Tax, they immediately become less sympathetic. So whether it's intentionally deceptive or not, the 23 percent figure does mislead people.

One supposed selling point of a flat income tax is that it will make doing your income taxes easier, which is nonsense. You'll still have to figure your various sources of income and your various deductions. The only simplification from going to a flat tax is skipping the step where you look up your adjusted gross income in the back of the booklet to see what rate you have to pay. Whoop-tee-doo.

UPDATE: The title was originally "Flat Tax Follies" but that was inaccurate on my part, so I've corrected it.

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Comments

I thought the plan was to get rid of deductions.

Posted by: Alcibiades at August 28, 2007

Actually, the FairTax is not a flat tax, nor anything like it. It's a national sales tax that's included in the price of the item, It's an imbedded tax that will replace all the imbedded taxes (corporate income taxes, etc.) already included in the price of everything we buy. You do realize that the cost of corporate taxes are included in the price, I'm sure.

The 23% figure is not computed in the way Bruce Bartlett claims (nor does it have anything to do with Scientology - another howler). Mr. Ponnuru doesn't seem to understand it either - or at least if he does, he explains it in a dishonest way. It's really a pretty simple concept, and the cost of administering it would pale in comparison with the current tax industry, but there are a lot of people spending a lot of time distorting it. Either they haven't bothered to learn how the FairTax really works, or they have a stake of some kind in the current system. You decide. If you're interested, read something by the people who are actually promoting this - there are books and papers galore.

There are probably some valid objections to parts of the FairTax plan, but the ones mentioned here are nonsense.

Posted by: Kurt at August 28, 2007

Thanks Kurt. Couldn't have said it better myself.

There were so many falsehoods and inaccuracies in that screed that I really didn't even no where to begin.

I guess it's just the typical pro-big government tactic. If you can't argue with the actual points, make up your own and argue against them. The vast majority of people are uninformed enough to buy your misdirection.

Posted by: Sailorcurt at August 28, 2007

"I thought the plan was to get rid of deductions."

Call me cynical, but if you got rid of every deduction today your Congress critters would be lobbied all day and all night to put them right back in. And the next time the government wanted to shift people's buying or investment behavior they'd be putting in deductions to encourage the desired behavior.

Tax deductions are one of the government's most powerful tools. Imagining that they'd give it up is like imagining they'd give up taxation itself.

Posted by: Les Jones at August 28, 2007

According to the Wikipedia article on the Fair Tax, it is calculated the way Ponnoru describes it. "The sales tax rate, as defined in the legislation, is 23% of the total register price (23¢ of every $1—calculated the same way as income taxes), which is comparable to a 30% traditional state sales tax (30¢ on top of every $1)."

Posted by: Les Jones at August 28, 2007

"You do realize that the cost of corporate taxes are included in the price, I'm sure."

You really think corporation will reduce the prices on goods when they are paying less taxes? haha

Posted by: Scott at August 28, 2007

Scott:

Yes, corporations will reduce prices on goods as long as there is competition.

But either way, you now have your WHOLE paycheck to buy these goods rather than 70-75% of your paycheck as you do currently.

Posted by: Craig T. at August 28, 2007

Tax deductions are one of the government's most powerful tools. Imagining that they'd give it up is like imagining they'd give up taxation itself.

And that, my friends, is why the fair tax will probably never be adopted. Not because it is flawed (all human-designed systems are flawed), not because it is unfair, not because it is impractical, not because it is unworkable...

For no other reason than because, in pure form as proposed, it completely eliminates the ability of congressthings to dole out favors and "bring home the bacon."

Heaven knows we can't have THAT!

The only way this will ever be passed is if we, the constituents, with a united voice, tell congress to pass it or we'll throw them out on their ears.

Figure the odds of that happening any time soon.

Posted by: Sailorcurt at August 28, 2007

Fairtax book isnt about taxes -- its about snake oil, magic beans, and fooling people.

For one thing -- its math is nonsense.

Fair tax claims it will be 23% -- wrong. It would have to be over 50%. In fact, a presidential commission said such a tax would have to be 57%.

And it might have to be HIGHER than that.

Here is why.

Do you know that fairtax taxes the federal government, to pay for the federal government?

This isn’t demagoging — Neal Boortz wrote “The federal government itself will become a major taxpayer” (Page 148 in his Fair Tax Book,)

A major taxpayer – to itself?

Right then, people should have said “Say what?"

This is one of the most astonishing fallacies, but its not even the biggest. But lets look at it, first.

Isn’t that a bit like me, pretending I can pay myself 10,000 to cut my own grass? I can write the check, I can even deposit the check. And I can do this every day.

But at the end of the month, I don’t have 300,000 dollars.

Fair tax advoates want to claim the government “will become a major taxpayer” because on PAPER – Fairtax has to claim revenue streams that will form a lake of 2.3 trillion.

But the checks that the government would write to itself CAN NOT possibly be revenue to the government.

So this error (deception?) alone, means the fairtax rate has to be more like 35% -- not 23% -- to collect 2.3 trillion dollars.

Are there any other fallacies?

Yes.

Fairtax only works IF it can collect 460 billion in taxes — from people who get health care.

This isn’t demagoguery, Fairtax really puts a large sales tax – at least 35% -- on all medical cost. From everyone – on everything. From childbirth, to cleaning your teeth, to routine check ups, to ER visit, to second opinions, lab work, EVERYTHING.

People who get heart bypass surgery, cancer surgery — people who are in nursing home. These are the people who suddenly will get BY FAR THE LARGEST TAXES IN AMERICA.

In effect, Fairtax shifts the tax burden to two main groups – the government (which we have shown is really impossible) and to people getting health care.

Families fighting leukemia and other expensive illnesses will get incredibly hard by the “fairtax”. One family, who has a child with leukemia — could get a 40,000 SALES tax.

One nursing home patient, who gets by on her social security — would get a sales tax of 25,000 a year — plus more tax for any other medical costs.

One cancer patient, with surgery, chemo, and radiation, could have 50,000 in “sales taxes”.

What will happen when millions of people suddenly get huge taxes on their health care? On their cancer surgery? On their chemo? On their child’s leukemia?

They will scream like bloody murder – that’s what.

These patients will get exemptions, either defacto exemptions — by not paying it. Or dejure exemptions - by getting an official exemption.

EIther way, the Fairtax can’t possibly collect 460 billion-dollars from these folks.

Most likely, the outcry from even attempting to tax an 80 year old stroke victim in a nursing home, would result in Congress exempting all health care cost from the “fair” tax.
Any OTHER groups that fairtax plans to tax – but wont be able to?

Yes – renters.

Renters will get the fairtax.

Fair tax has to get 150 billion in taxes — from people as a tax on their rent.

Now supposedly Fairtax lowers cost so much, that most prices will drop so much, the added fairtax “will be a wash” as Neal Boortz claims.

According to the fuzzy math of Fairtax, your rent can go down 22%, because the landord saves so much.

Really?

By far the biggest expense on apartment complexes are the payments they make to banks. Less that 1% of an apartment complex expenses is FICA- for the employees. That’s the biggest “embedded tax” that can be passed on, if it were removed. And its less than 1%.

How can an apartment complex cut its price 22%, when the biggest savings they would get, is less than 1%?

Our family has a business and we looked over the numbers. We save less than 2%, if Fairtax were enacted. Our employees also save — they save more in fact, as a group.

But they save that, we don’t. They wouldn’t pay income tax or their FICA. Great! But we don’t save that. We can’t pass along what they save.

Thats not demagoguery . Thats simple facts.

To cut our prices even 6% — not 22 — our employees would have to give us ALL their income tax and FICA. To cut our prices 22%, our employees would have to work FOR FREE.

So Fairtax has a lot of problems. Not the least of which is math.

Sure, it sounds great, as long as you don’t look real close.

Imagine if you wake up one day, and the fairtax is passed. Suppose you rent a nice place near the ocean, for 2,000 a month, and you just had a knee replacement.

You open your mail, and get 400 dollars prebate. And you get your entire paycheck in the mail, since you are off for the surgery. So you are happy, you will be ahead 1500 a month!

Then you open your rent statement.

Your 2000 a month rent went up to 2800. Wow, Thats 800 gone, of that 1500.

Then you open your utility bill. You were paying 300 month, but that went up to 500 — fairtax 200.

Then you open up your medical statement. Hope you are sitting down. Your 30,000 knee replacement is now 40,000 — 10K taxes.

And you get your car insurance -- . It was 200 a month, but now its 300 month, fairtax added.

And you get your cable bill, your phone bill, your health club bill. Fairtax added.

You haven’t even gone outside to buy gas, or food, or a restaurant. Yet you have 14,000 in taxes. For one MONTH. Hopefully you won’t have other big medical expenses.

So — some people will get CLOBBERED with this tax, absolutely clobbered. If you rent, if you have medical cost, if you pay insurance premiums.

There is a notion in defense of Fairtax, that you can buy USED products, so dont worry. Just buy used cars, and used homes.

Fine - but you can’t get used rent. You can’t get used cancer chemo. You can’t get used nursing home care. And if everyone got used everything – there goes the economy.

That’s not demagogueing. That’s simply fair tax, how it will work, if its passed.
If its passed– those people who are clobbered — nursing home patients, cancer patients, renters — will scream bloody murder, and get exemptions.

Im sorry, Fairtax can’t work.

Posted by: MarkC at February 14, 2008