The Consequences of Fairness?
I’ve been intending to look into arguments for a “Fair Tax,” but they seem so unnecessarily complicated that I’ve continued to demur. In his usual manner of breaking such things down to the basics, Ramesh Ponnuru suggests that it sounds too good to be true because it is:
It is not at all clear that this 30 percent sales tax would raise enough revenue to eliminate income and payroll taxes. Brookings Institution economist William Gale has estimated that to replace current federal tax revenues, the tax rate would have to be 44 percent (or 31 percent the way the FairTaxers calculate rates: A $100 product would cost $144 after tax). Gale’s calculation assumed that nobody would evade the sales tax and that Congress would not narrow the tax base by, for example, exempting medical services from the tax. Relaxing those assumptions increases the rate required even further. …
The middle class would also pay higher taxes. Under the FairTax plan, the federal government would give all legal residents of the U.S. a “prebate” to cover sales taxes on all purchases up to the poverty line. That would protect the poor (except for illegal immigrants; higher prices are supposed to induce immigrants to come legally so they can get their prebate). And the rich would pay less than they do now, since returns to investment typically are a large share of their income, and these would go untaxed. So if revenues are to stay the same, the middle class will have to pay more. If the change in tax policy increases economic growth, this effect will be mitigated — but it will take a very long time for it to disappear under any plausible assumptions. Governor Huckabee’s claim that voters in all income groups would come out ahead while the federal government would raise the same amount of revenue as before is of course unsupportable.
As ever, problems arise whenever government seeks to determine fairness. In the intricacies by which politicians seek to persuade constituencies that they won’t be harmed by changes that must ultimately have some effect on somebody, plenty of limited interests manage to insert advantages. It therefore strikes me as necessary to shrink government before manipulating taxation, rather than using taxation to (maybe) shrink government. Anything short of a frankly simple flat tax (or similarly straightforward approach) will quickly deteriorate in the current system of government.