On the FairTax

I’ve not read the original FairTax book, and have only flipped through the follow-up written to answer the critics, but I have spent many hours reading about it online over the years, and back when I listened to Boortz of course he pushed it. At the moment, I don’t see it as workable and I think its rollout could be disastrously disruptive to the economy. Many of the goals and incentives set up by the FT are good, but there are a number of critiques I’ve read more recently that have not been adequately answered IMO.

Primarily, there’s Bruce Bartlett’s excellent piece “Why the FairTax Won’t Work” (pdf). This should be the first stop for those who’ve only read pro-FT literature. It begins with a decent description of the FT, but obviously it shouldn’t be the only thing you read about the FT to make an informed opinion.

Several folks commenting at the Fair Tax Blog make some compelling arguments against the FT, including weighing in on Bartlett’s critique. Many agree with him that a VAT would be a better consumption tax. This post has some lively discussion worth reading.

A lot of the selling points of the FT just seem too good to be true:

  • You keep 100% of your paycheck. This is the most obvious deception—a mechanical truth of the FT system with the emotional appeal of effectively raising your income. Of course, your paycheck would be either be smaller or your expenses larger, too. With the FT’s guarantee of being revenue-neutral, the FT cannot be a win for everyone, and when you start to look at who would greatly benefit from it, it should be obvious who the losers will be. This is not to say that everyone’s current tax level is just, but this particular line of rhetoric seems targeted towards the middle class, who I think would end up paying more under the FT. And retirees living off savings—having already been taxed on earnings—will be taxed again to get by.
  • It’s under 200 pages. Does anyone really believe that suddenly Congress would just have no way of cutting breaks for special interests? The problems of loopholes, unfairness, and the ballooning of the tax code is due to the people who amend it, and the FT won’t replace them. With not even most Republicans willing to touch it, getting a FT through Congress would take a number of sweetheart deals right off the bat and probably provisions making it easier to tamper with going forward. Remember there would be $485B going to citizens yearly in “prebate” checks, and Congress would determine who gets what; more room for deal-cutting.
  • No more IRS! For those who strongly believe federal taxation is out-of-control, the notion of sticking it to the IRS will sound satisfying, but if a national consumption tax became the sole source of revenue for the federal government, you’d better believe it would build a new, huge bureaucracy to ensure compliance. Also, since the FT would no longer allow state and local governments tax-free purchasing, the states would likely need to jack up their income taxes to compensate.

Bartlett’s piece really is well-researched and a must-read, and if you know of a serious critique that takes on his arguments head-on, I’d love to read it.

3 thoughts on “On the FairTax

  1. Mr Ray says:

    I love the simplicity of the FairTax. Congress would no longer be able to manipulate the tax code, because there would be none! The only control they would have is to increase the tax rate (discourage spending, encourage savings) or decrease the tax rate (encourage spending, discourage savings). Messing with the prebate would be very touchy because it affects everybody.

    The thing most people have to come to grips with is that corporations don’t pay taxes – they never have. They have to pass all their costs on to their paying customers in the form of higher prices. So untaxing businesses is not so radical. It just reduces the price they have to charge for their goods and services.

    The FairTax favors the rich. SO WHAT? Rich people don’t put any greater burden on the federal government than anyone else. Why do we have a federal tax system that punishes their success and hard work? Besides rich people are the biggest investors in existing and new businesses, giving the rest of us jobs. By untaxing their investments, more money will stay in this country instead of going overseas. The bottom line is your income should be your own concern, not the government’s.

    FairTax would make the real cost of government transparent to everyone. Some people might look at the 23/30% tax and say its a lot. Well guess what, thats what your government costs now, without hiding the numbers via the shell game that they have been using for years. Only when we know the true cost can something be done about it. Its time we face facts and adopt this simple honest and fair system.

  2. says:

    My argument is that the FT wouldn’t be so simple after it was amended to a Congress-passable form. We can dream up all kinds of great simple bills but if they have no chance of passing as-is they’re just exercises in policy design, not solutions.

    That the FT would so favor the rich just means that fans of progressive income taxation (lots of folks) will oppose it.

    Some argue having to file 1040s with a year’s total makes the total cost of government more transparent than the FT would. If the goal is to get the word out that the government spends too much, there are more politically possible strategies to do that without the dangers inherent in implementing a tax system untested anywhere in the world.


  3. “Rich people don’t put any more burden on the federal government than anyone else”

    I don’t think that this statement is provable. In fact, I have heard fairly convincing arguments to the contrary. At their simplest, they go something like: the United States government doesn’t spend $782 billion on the military each year to protect the interests of poor and middle-class people. Rather, it is the assets and interests of the very richest people that must be protected, be it protection from actual physical invasion (less likely), or the defense of their financial interests around the world (a very common use of our military resources).

    Or, as a friend of mine put it, “Al Qaida doesn’t hate us because of our two bedroom/one bath houses and ten-year-old cars. They hate us because of our dedicated gift-wrapping rooms and pet spas”.

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