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Thursday, September 27, 2007

Response to Bartlett's Criticism of the FairTax

I previosuly blogged Bruce Bartlett's criticism of the FairTax in the Wall Street Journal (FairTax, Flawed Tax ) and The New Republic (Fred Thompson Channels L. Ron Hubbard: Dianetics, the Tax Plan).  For a contrary view, see:

http://taxprof.typepad.com/taxprof_blog/2007/09/response-to-bar.html

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The debate about FairTax reminds me of a conversation I once had with radical anti-tax crusader, Grover Norquist. He said that he loved the AMT because it made people hate the income tax.

I feel the same way about the FairTax. It would require ridiculously high rates and spur the creation of a giant underground economy. It is a perfect strawman for people who want to discredit the idea of a consumption tax.

Since Bruce probably would favor moving to a non-nutty form of consumption tax (like Bradford's X-tax), I can feel his pain.

Posted by: Len Burman | Sep 27, 2007 1:27:58 PM

Apparently, this type of misinformation is a long-standing tradition by Mr. Bartlett. Witness:

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”

FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

( Source )

Posted by: Ian | Sep 27, 2007 3:00:42 PM

Fairtax can only work if math doesn't matter.

Fairtax depends on taxing the federal government 500 billion dollars, to pay the federal government.

Neal Boorz wrote "(Under the fairtax).... the federal government ITSELF would become a MAJOR taxpayer" (Page 148).

Oh really? Well the federal government can write all the checks to itself that it wants, but it can't get any revenue from itself, its just an absurdity, a farce.

Fairtax also depends on nursing home patients, cancer patients, Alzehimers patients -- all patients - paying 460 billion in sales taxes. Thats a sales tax on cancer surgery, sales tax on nursing home care, sales tax on the parents of a leukemia patient. Many of those people simply wont have the 20,000-- 70,000 dollars such a "sales tax" would levy.

There would be a lot of very surprised people if fairtax passed. SOme would pay far less taxes -- some would pay 100, even 1000 times more. Cancer patients would probably be taxed 1000 times more, as would heart patients, and nursing home patients.

Renters would have huge taxes to pay -- and probably have no idea that fairtaxers are working very hard to put a tax on their rent.

People who pay insurance premiums -- health insurance, car insurance, homeowners insurance -- would be taxed on all premiums.

A person could wake up one morning, a month after fairtax passes, and get 50,000 bill for sales tax - on their knee operation, their surgery, their rent, their utilties, their insurance premiums.

Fairtax would be far different for many people than the theory would let us believe.

Posted by: MarkCD | Feb 20, 2008 3:14:27 PM