The Fair Tax

Somewhat similar to the addition of Medicare Part D, the Fair Tax proposal is a means to become the voter’s friend – i.e. buy votes. The Fair Tax book was the national best-seller. Why isn’t the Fair Tax bill the rage of D.C.? Fair Tax advocates will tell you that it’s because the lobbyists are so powerful that they control Congress and won’t allow it to happen. Hogwash.

If you are a Fair Tax advocate, it’s likely that at least part of the reason why is that you have determined (perhaps via an online calculator) that you would pay substantially less tax under the Fair Tax than you currently pay. Join the club. Virtually everyone would pay substantially less tax. Corporations now pay 20-30 percent of all federal taxes. They would pay nothing under the Fair Tax. Logically: How can the Fair Tax be revenue-neutral (as its advocates say) if that is the case? It can’t be.

Fair Tax advocates will say that “the base will be expanded.” Would the economy grow more under the Fair Tax? According to most economists surveyed as part of a 1997 study by the Joint Committee on Taxation, conversion to a consumption tax system would grow the economy at a slightly greater rate than the rate of growth anticipated to be experienced under the current system. Still, directly or indirectly, all of the revenue must come from individuals. There are two “studies” that have said that the Fair Tax rate works or approximately works. Both studies were done by persons paid by the Fair Tax advocates. One of those studies reported that a 31.2 percent tax rate would work.  To my knowledge, there are no anti-Fair Tax studies. However, there are two (hopefully neutral) U.S. government studies.

A direct quote from page 217 of the 2005 Report of the President’s Advisory Panel on Federal Tax Reform is as follows:

In their submission to the Panel, proponents of the Fair Tax claimed that a 30 percent tax exclusive sales tax rate would be sufficient not only to replace the federal income tax, but also to replace all payroll taxes and estate and gift taxes and fund a universal cash grant. In contrast, the Treasury Department concluded that using the retail sales tax to replace only the income tax and provide a cash grant would require at least a 34 percent tax-exclusive rate.

Page 81 of the 2005 Form 1040 instructions provides pie charts of government revenue sources. The following percentages are provided: personal income tax-35%; corporate income tax-8%; payroll taxes-32%; borrowing-18%; and excise, customs, estate and gift taxes, and miscellaneous taxes-7%.

If the income tax produces 43 percent of the Federal Government’s revenue (i.e. 35 percent personal and 8 percent corporate), and the Fair Tax would not even cover that figure, then the Fair Tax would produce roughly half of the revenue of the current system. The total of income taxes, FICA tax and the estate and gift tax produced roughly 76.5 percent of Federal Government revenue.  Dividing 76.5 by 43 yields 1.78.  Multiplying 34 percent by 1.78 produces 60.5 percent.  Consistently, in 2000, the Joint Committee on Taxation, an arm of Congress, reported that the “tax-exclusive” revenue-neutral rate would be 59.5 percent for the first 5 years after enactment, and 57 percent thereafter. Neither major party will cut the size of the government-at all. How would you feel about the Fair Tax if the amount of tax you had to pay is double or more than double the amount calculated at www.fairtax.org? Some people who would still win: Those with all of the physical goods that they need yet have a high income. (Perhaps John Linder, Neal Boortz and friends.) Economically, big government necessitates big taxes.

I have analyzed the compensated Fair Tax opinion that produced a "revenue neutral" tax exclusive rate of 31.2 percent.  In my opinion, several flaws exist that, if corrected, push the revenue neutral rate to approximately 60 percent - the figure produced by the two government studies.  It is important to note that the 31.2 percent opinion assumed no reduction whatsoever in the prices of goods and services. 

The one major benefit of the Fair Tax relative to the present system is that it would be a simpler system. I believe in substantially simplifying the income tax system, at least for individuals.

Advocates of the Fair Tax proposal will tell you:

• the price of goods and services would go down by 20-30 percent, thus equaling the amount of the 23 percent “tax-inclusive” Fair Tax, meaning that prices of goods and services would remain the same
• the Fair Tax would fully fund the current expenditures of the federal government
• everyone, or almost everyone, would pay less tax
• you would keep your entire gross paycheck, instead of receiving the net after having taxes withheld
• the economy would grow at a substantially greater rate than the rate at which it would otherwise grow
• real estate values would not be negatively impacted
• evasion problems would not be widespread
• the IRS would be eliminated.

If the above were true, we would have been foolish to have failed to implement such a system in the past. It’s not true.

In reality:

• the price of certain goods and services would go down only to the extent employees and self-employed persons receive substantially less gross pay or compensation
• according to (1) a memo written by the Chief of Staff of the Joint Committee on Taxation (an arm of Congress) and (2) the President’s Advisory Panel on Federal Tax Reform: the “revenue-neutral” rate, necessary to fund the current expenditures of the federal government, is substantially higher than (i.e. approximately double) the 23 percent rate of the Fair Tax bill
• if enacted with a revenue-neutral rate, wealthy people would pay much less tax, while retirees and middle class people would pay much more tax, and the standard of living for the middle class and retirees would diminish
• the economy probably would experience slightly better growth than under the current system, but a transition would be very difficult
• without an IRS, evasion would be widespread, and major retailers would not accept a system with widespread evasion
• real estate values would be impaired.

By 2040, under current fiscal policy spending, BOTH the current system and the Fair Tax system will be necessary to fund the federal government.

In 2006, I wrote and self-published a book that provided the above conclusions and supplied the evidence for the conclusions.

See:  The Fair Tax magazine article (Author:  Allen Buckley; Publisher: BNA)

See:  Text of email sent regarding revenue neutral rate

See:  Press Release - Libertarian U.S. Senate Candidate calls "Fair Tax" a sham and challenges Saxby Chambliss to a debate regarding the Fair Tax.