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Huckabee's "Fair Tax"
Tom Redburn nails it:
Whatever the rate, critics say, a steep federal retail tax, piled on top of existing state sales taxes, would encourage widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.
“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson, an economist at Harvard who opposes the plan but whose research into problems with the current system is sometimes cited by supporters. “It tries to roll everything into one tax, which simply can’t carry all that weight.”
Here is Bruce Bartlett, here is Megan McArdle on same. You can put this in the "things I am nearly certain about category."
Response to comments: Note that a "fair tax," or a national sales tax, isn't the same thing as a standard multi-stage VAT (a better idea); for a standard VAT the dual reporting requirements make it self-enforcing to a much higher degree.
Posted by Tyler Cowen on January 5, 2008 at 09:02 PM in Economics | Permalink
Comments
Any federal consumption tax faces a reasonable complaint from those with any savings: we paid income tax when we earned it, now we have to pay tax again when we spend it.
Posted by: Cyrus at Jan 5, 2008 9:16:00 PM
This is a fair criticism of high consumption taxes, but it seems a stretch to claim the problem is so bad as to make such taxes unworkable. Plenty of European countries have ~20% consumption taxes, and although they certainly do drive transactions underground, they don't drive so many underground as to make the taxes unworkable. It also helps to use a VAT instead of a straight-up retail sales tax, so that some reveue is collected from each stage of the consumption chain; that not only reduces the marginal tax rate at any given link, it also creates an auditable trail to the next link in the chain.
Posted by: David Wright at Jan 5, 2008 9:27:33 PM
There's a flip side to the big percentage we'd have to pay under a single tax -- transparency. By definition, FairTax would take just as much tax money from us as before, the only reason we'd have more motivation to cheat is because we'd actually clearly see how much we're paying. Maybe that would lead people to demand a cut in spending to reduce the taxes. Unlikely, but possible.
Posted by: Josh H at Jan 5, 2008 10:39:23 PM
It's not obvious that tax evasion would be higher under the consumption tax than income tax. Can you elaborate on why one tax regime might be more evasive than another?
Also, has anyone seen data on how much time and resources are spent on income tax preparation and planning (individuals and corporations)? I've always thought it was a shame that we have a non-trivial number of brilliant people in the tax accounting and tax law industries, who would have valuable alternative uses. Again, I've never seen the numbers on that either.
Posted by: Scott W at Jan 5, 2008 11:16:02 PM
Hmmm...Megan says that one of the virtues of the tax is that it would slightly increase compliance because "Compliance is considerably easier to get from companies than it is from individuals..."
Posted by: anon at Jan 5, 2008 11:20:55 PM
Josh H. (and others who mention it) present an often overlooked point. Tax witholdings probably distort how much people see they're paying in taxes. Tax outrage will occur at least once a year at tax time (or possibly every pay period depending on the information on your pay stub) with the income tax system. Imagine if you were hit with the cost of government everytime you bought a pack of gum. Everyday.
While it might be easier for government to collect consumption taxes (thus more compliance and higher revenue), it may be offset by the increased visibility of the high cost of government.
Posted by: Scott W at Jan 5, 2008 11:35:00 PM
But the income tax is not all roses either. Don't sink the Fairtax without considering the income tax: Invasive (report your income or else), Confusing (how much do I owe??), Wasteful (How much does it cost to enforce and administer?).
Posted by: Ron at Jan 5, 2008 11:54:43 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 - Addit'l at FairTax.org Whitepaper - May republish in whole or part. - Ian)
Posted by: Ian at Jan 5, 2008 11:55:53 PM
Tyler, can you address David Wright's point, which I think is a good one, that compliance issues are basically solved by making the tax a VAT? There are big problems with the Fair Tax, but I don't view compliance as one of them.
Posted by: Eli at Jan 5, 2008 11:56:46 PM
David Wright makes an interesting point about the many European countries' vat taxes.
From my experience traveling throughout Europe, consumers don't appear to purchase their products via the black market.
yes, that's anecdotal evidence. But I've never heard of European countries having the issues with the VAT that Tyler speculates will be likely with a fair tax.
Posted by: thehova at Jan 6, 2008 12:17:42 AM
I was also going to say something about the VAT issue. Company A had an incentive to make sure Supplier B paid its portion of the VAT lest A be assessed the taxes for both A's and B's added value. With VAT, every transaction in the supply chain is self-audited. Surely this addresses the largest part of the compliance issue?
Posted by: chris at Jan 6, 2008 12:37:23 AM
This is odd Tyler. Denmark has 25% VAT and you don't see much of a black market there. Most people in Finland don't even realise they are paying VAT because it's only shown on invoices, not in supermarkets. They know Americans pay less for the same goods but they don't worry about it unduly. I think you're ignoring the evidence here.
Second, the idea that a VAT will encourage more corruption than income tax is very hard to justify. The rich in Finland, like the rich in most countries, don't pay a lot of income tax. They pay plenty of VAT though.
Posted by: Finnsense at Jan 6, 2008 2:16:38 AM
This is odd Tyler. Denmark has 25% VAT and you don't see much of a black market there. Most people in Finland don't even realise they are paying VAT because it's only shown on invoices, not in supermarkets. They know Americans pay less for the same goods but they don't worry about it unduly. I think you're ignoring the evidence here.
Second, the idea that a VAT will encourage more corruption than income tax is very hard to justify. The rich in Finland, like the rich in most countries, don't pay a lot of income tax. They pay plenty of VAT though.
Posted by: Finnsense at Jan 6, 2008 2:17:02 AM
Right. We need a lot of different small-to-medium size taxes or otherwise people will figure out how to pay no taxes at all.
Posted by: Steve Sailer at Jan 6, 2008 3:58:38 AM
Why is everyone pointing out that a VAT wouldn't be so bad? The entire point about the "Fair Tax" is that it isn't a VAT, that it's claimed in one lump from the final retail transaction to the consumer. *That's* the biggest problem with it.
http://www.adamsmith.org/blog/tax-and-economy/that-fair-tax-thing-20080105702/
Posted by: Tim Worstall at Jan 6, 2008 7:30:29 AM
What is the extent of the black market in cigarettes?
What is the extent of the black market in alcohol?
What is the extent of the black market in gasoline?
Posted by: Floccina at Jan 6, 2008 8:01:34 AM
Why so Little Tax Evasion? Becker
http://www.becker-posner-blog.com/archives/2007/11/why_so_little_t.html
All the rich countries are successful in raising sizable amounts of revenue from taxes with only a rather little tax evasion. Tax avoidance is the use of legal means to reduce taxes, whereas tax evasion uses illegal means. The federal government of the US raises almost 20 percent of American GDP through taxes on personal and business income, capital gains, estates, and the sale of gasoline and some other goods. The estimates from the 2001 IRS National Research Program indicate that the percent of income not reported is quite low for wages and salaries, but rises to over 50 percent for farm income, and about 40 percent for business income. Income tax payments overall are under reported by about 13 percent. What determines the degree of tax evasion?
Posted by: Floccina at Jan 6, 2008 9:04:50 AM
Regarding my earlier comment, sorry, it sounded like VAT. I appreciate the difference now.
Posted by: Finnsense at Jan 6, 2008 11:56:16 AM
Scott W. - You are completely forgetting the many embedded taxes that are already in the cost of retail goods. The FairTax eliminates all of those taxes. We actually do tip the government everytime we buy a pack of gum, or any other item for that matter. Don't forget that. Any supposed distortion in the taxes we pay through witholding are more than exceeded in every item we purchase at the retail level, considering embedded taxes. There's nothing distorted about that.
Posted by: Shawn at Jan 6, 2008 12:47:11 PM
How can states like Florida and some countries have a fair like tax but when it comes to one in the U.S. we reject it?
Posted by: PCCapitalist at Jan 6, 2008 1:07:09 PM
PCCapitalist,
The Florida tax does not tax services while the FairTax does. I must admit, as a former FairTax supporter, that it's too easy to imagine a doctor or auto mechanic forgoing the tax for a known customer.
Posted by: Matt Waters at Jan 6, 2008 7:34:35 PM
The Beacon Hill Institute at Suffolk University has conducted extensive research on the FairTax.
As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a "prebate" to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level.
Previous studies suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. But according to the Beacon Hill Institute, a 23% rate is eminently feasible and suggests why others reached the opposite conclusion. In addition to determining the FairTax rate, BHI has also studied its effects on the economy at large and charitable giving and tax equity.
Here are the five studies:
A Comparison of the FairTax Base and Rate with Other Tax Reform Proposals
A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the Fair Tax Plan
The Economic Effects of the FairTax: Results from the BHI CGE Model
The FairTax and Charitable Giving
Tax Administration and Collection Costs: The FairTax vs. the Existing Federal Tax System
Fiscal Federalism: The National FairTax and the States
Comments welcome.
Posted by: Frank Conte at Jan 6, 2008 10:13:31 PM
So, the fair/flat tax = more tax evasion and possibly less government funding? Sounds great to me!
...although I seriously doubt the incidence of evasion would be higher than our current income tax :(
Posted by: G at Jan 7, 2008 12:31:42 AM
A VAT could work, but that would show up all the faults of the FairTax arguments about simplifying collection. Perhaps they should propose donations. Then their wouldn't be a need to audit anything.
Posted by: Lord at Jan 7, 2008 2:04:36 AM
Counter-intuitivetly, the Fair Tax may help gain revenue from the underground economy. The proceeds from these 'illicit' activities help pay for taxed goods and services.
Posted by: 1 at Jan 7, 2008 3:58:23 AM
