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Friday, December 28, 2007

Bartlett on Why the FairTax Won't Work

Bruce Bartlett has published Why the FairTax Won't Work, 117 Tax Notes 1241 (Dec. 24, 2007).  Here is the abstract:

In this article, he criticizes the FairTax, a tax reform proposal supported by former Arkansas Gov. Mike Huckabee, a candidate for the Republican presidential nomination. The proposal alleges that a 23 percent national retail sales tax collected by the states would be sufficient to replace all federal taxes. That would allow for abolition of the IRS and other benefits, supporters claim.

Bartlett argues that the FairTax is deeply flawed and has been systematically misrepresented by its supporters. Quite apart from the fact that there is zero chance that Congress would ever enact it, it is clear, writes Bartlett, that the FairTax simply would not work at all if it were tried, which is why no country has ever attempted to collect all its revenue from a retail sales tax.

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Excellent analysis. It definitely puts words to my feelings about why I really don't like the Fair Tax.

Thank you for pointing it out to me.

Posted by: Bryan Price | Dec 28, 2007 4:37:27 PM

A lot of attention is focusing on the fair tax, flat tax, and other efforts to (as one Congressman once put it) "tear out the income tax by its roots." Whatever happened to the idea of plain old income tax reform? Call me naive, but I still believe that there a lot of R's and D's who would support the idea of further cuts in tax rates in return for more aggressive efforts to limit tax shelters and many (often obsolete) tax subsidies. Where, for example, is the conservative principle in accelerated depreciation or transfer pricing? Or the liberal principle in high taxes on poorer cities like Philadelphia? There tends to be one round of serious tax reform in every generation; if so, why not now?

Posted by: michael livingston | Dec 29, 2007 6:14:37 AM

Mr Bartlett,

That was an excellent article. It was easy to understand and I certainly agree with your points.

You briefly mention double taxing those who have saved under an income tax system and then spend under the FT. I fully understand and agree with that but I wish there were more talk about it. This problem not only applies to those who are older, it also applies to anyone who has saved anything in any kind of account. Let me explain and want input if I am wrong.

Every dollar, including dividend, interest, gains, or any other type of return, in after-tax accounts has already had Income taxes paid on them. The dollars that were originally deposited into an after-tax account has also had SS and Medicare taxes already paid on them. In tax deferred accounts such as Traditional IRA and 401k, SS and Medicare taxes has already been paid on those dollars originally deposited in the account. For Roth IRAs, Income, SS and Medicare taxes have already been paid on those dollars originally deposited. I acknowledge that SS is taxed only to a certain income level.

It seems that almost everyone would see some impact on the double tax issue mentioned in the article, unless they never saved anything or never paid tax when it was earned. It is hard to believe that anyone is going to enjoy paying the same tax for the same purpose to the same government as we spend those hard-earned savings, either sooner or later in life.

If the above is valid point, it would be nice to see an article to educate more Americans about this facet of the FairTax.

John Higbie

Posted by: John Higbie | Dec 31, 2007 2:33:12 PM

"You briefly mention double taxing those who have saved under an income tax system "

Seems to me like the opposite would happen. People with appreciated assets would permanently avoid paying capital gains taxes, because the concept of "basis" would disappear.

And people who own houses would have a big windfall because the FairTax would then be capitalized into the price of their house.

FairTax defintely benefits those who have assets when the switch occurs.

Posted by: Half Sigma | Jan 25, 2008 8:32:14 PM