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.

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Patrick
Patrick
11 years ago

Quick question, what would a 30% or 41% tax rate do for most businesses in the US? Maybe some things like car and home sales would still be fine, and perishable groceries, but what about everything else? What would happen to the brick & mortar Borders or Barnes & Noble? Clothes stores? Sears? JC Penney? The local small businessperson’s shop? Gone. I would buy everything from Europe or Canada. Wouldn’t you if you could go to Borders to buy a book for $28 or go to Amazon and get the same book for $20? Or how about non-perishable groceries? If you normally spend $100 a week on that stuff, would you spend $140 now? Or simply check a few boxes in a web site and get a delivery a few days later?
Other than that, it sounds like a great idea.

Warrington Faust
Warrington Faust
11 years ago

What this requires is an entirely new definition of “fair”. America has long accepted that the more you make, the more you pay, as the definition of “fair”. That “everyone pays their share” is an almost new idea.
Since most people below $50,000 pay a very small income tax (ignore FICA, Medicare, etc, they are not “income tax”)there would probably be severe dislocations.
There would probably be an explosion in the “underground economy” and a high demand for slightly used items. This is observable in the car market where prices have zoomed since the 1970’s. Manufacturers had to make leasing palatable to consumers and the 5 year note has made good used cars very valuable.
This does not mean I am opposed to the idea that everyone pays their share of government costs, it would bring home to everyone the cost of government. This might lead to more rational governance.
Since we are a “consumer society” I don’t feel confident in making predictions.

BobN
BobN
11 years ago

Once again, AR exposes the essential truth behind the smoke and mirrors. Libs should note that I am directly and harshly criticizing Mike Huckabee and his fellow big-government, phony “conservatives”. They want to maintain the nanny-state, and have priced their consumption tax to channel the same amount of money to the government as it extracts now. But the “fair tax” proposal puts the cart before the horse. In a rational plan, the first step is to shrink the government back within its constitutional limits so that the overall tax burden is reduced to a level considered “fair” by the taxpayers. The second step is to change the basis of taxation from production to consumption. The ridiculous level of the 30% “fair tax” reveals the extortionate price that the monopolist government charges us all. Remember, you get less of what you tax, and more of what you subsidize. Why do we have high unemployment, and why is Europe’s even worse? Simple – we tax production and drive producers away. I have a friend in Hong Kong who owns a company from which he profits several USD million per year. We were talking in 1997 about our respective tax systems. He said he was perfectly happy to pay his 15% tax rate in Hong Kong because (1) he considered it a “fair price” for his government and (2) he believed that the government was not wasting too much of the money. Since he considered it a fair deal, he wasn’t interested in paying for complex tax shelter plans. For a long time we have maintained a very high price for government which has offered a package of “services” that the vast majority of taxpayers does not want. This creates fundamental distrust, resentment and hostility towards government. The leftist attitude is “We don’t… Read more »

Patrick
Patrick
11 years ago

I have many times thought about trying to document every penny that I spend and how much I pay in taxes for everything. From my property tax to my fire tax, sewer tax, income tax, sales tax, gas tax, phone tax. Basically anything that goes to a governmental agency. So even car registration fees are included. Heck, why not include FICA and Medicare, that’s my money going to a government agency.
Then total it all up and figure out what percentage of what I make really goes to the government. I’ve often figured that 30-40% number cited is pretty accurate.

Warrington Faust
Warrington Faust
11 years ago

Patrick
I have always understood that 30-40% is accurate. It does require including the “hidden taxes” for instance “gasoline taxes” and the various income, property and employment taxes included in everything we buy.\
People seem to forget that when we tax GM it is not “absorbed”, it goes into the price of a car.

Chris
Chris
11 years ago

Patrick
Buying my stuff from Europe/Canada/Mexico, or online would be my first instinct also, but Uncle Sam would find a way to bleed his sales tax out of these transactions too, one way or the other. Many online retailers now collect state sales taxes, depending on where you are located, and lets not forget the Rhode Island “Use Tax” that most of us have been successfully ignoring, and that we suddenly may have to start paying for real if the mechanism for taxing online sales is strengthened.
Consider the “wisdom” of our steady move to a “cashless” economy, where the tax gestapo will someday know when and where you spend every one of your hard-earned cents, nevermind the creepy “mark of the beast” implications of such a system.

Stuart
Stuart
11 years ago

Why is it that 90% of this complaining was not being done when GW Bush was spending trillions in taxes for his optional wars?
Sure, the selfish rich have always lobbied for flat (lower) taxes, and they have already won that! Heck, the very wealthy now commonly pay 15% (dividends) and 15-20%) capital gains, much lower than the rate I pay!
There is really nothing in life, including taxes, which meets everyone’s idea of “fair”. The question does not become what you pay in tax, but what you have left over – and what you get for it.
So, drive on your government funded interstates, use your government developed GPS, then go to the doctor and get cured using government financed Genetic Research, then come home to your secure home which is protected by the government funded military and police and fire fighters, and then get on the government developed internet and complain that you don’t use all those services and don’t need them!
Honestly, do you know how stupid that sounds?

Patrick
Patrick
11 years ago

“Why is it that 90% of this complaining was not being done when GW Bush was spending trillions in taxes for his optional wars?…Honestly, do you know how stupid that sounds?”
Yes. It sounds very stupid. Listen to talk radio sometime, especially sports radio. You’ll hear people complaining that the Red Sox manager left the pitcher in there too long and then the next night he took him out too early. Guess what, they’re not the same people. I’m very certain that some of the people discussing tax issues today were discussing them during the Bush era too.

Warrington Faust
Warrington Faust
11 years ago

“Why is it that 90% of this complaining was not being done when GW Bush was spending trillions in taxes for his optional wars?…Honestly, do you know how stupid that sounds?”
Where were you guys, we had a candidate that ran on a “flat tax”. in ’94. Forbes, wasn’t it?
“then go to the doctor and get cured using government financed Genetic Research,”
Don’t you read?
The government financed “Human Genonme Project” bgean in 1990, and basically got no where.
According to politically correct Wikipedia “A parallel project was conducted outside of government by the Celera Corporation.” Coing further than Wiki, you will find that Celera did it in about 6 months after the government got no where in 10 years. Then, the government threatened to put Celera out of business if they did not “share” the research.

Stuart
Stuart
11 years ago

Yes, Faust, I read – I recently read Craig Venters book so I do know the history. He himself worked for the government health service and they got quite far! He then used a lot of the government data as he went, which is why he agreed to a partnership where they would work together.
Again, I am not knocking industry. As I clearly said, it is individuals who do most everything. Government just sets the stage and deals with stuff that is too big for industry (interstates, etc.)…
Good one on the sports comparison, Patrick…..a bunch of monday morning QB’s, for sure.
But even sports nuts don’t make up the games 100%….well, some do in fantasy sports!

mangeek
mangeek
11 years ago

I’m not well-versed enough to endorse the ‘fair tax’ plan, though it does seem pretty well figured-out. Obviously, your ‘amazon’ purchase -would- be taxed, since this would be a federal sales tax.
What I can say is that it’s rather unlikely that people will -actually- find ways around the consumption tax. A pack of cigarettes costs about $0.38 to make, and the market bears $10 retail cost (just bought a pack in NYC for a Hamilton). Even regular items you see sold at retail are typically marked-up 50%-150% from wholesale costs. Most women I know feel perfectly justified wearing $180 jeans. Dress shirts cost $75. A grocery trip for our family of two for a week typically costs over $100. Frankly, I couldn’t care less -when- the taxes are coming out, so long as they’re not higher in the end.
There -would- be a push for people to buy second-hand, but in my opinion that’s a good thing. Everyone I know complains about how much ‘junk’ they have. Dialing-down our overeager consumerism and focusing on more gainful activities seems like a winning side-effect of this plan.
Also, I know that this is a forum dominated by purists, but imagine that we reserve a small income tax for people who earn the BIG money, something that scales from 0% at 5x average income to 15% at 25x average income… Wouldn’t that dramatically lower the needed levy for the consumption side, while still encouraging people to earn more money? If we could incentivize upper-middle-classdom instead of punishing it, wouldn’t that be ideal?

Patrick
Patrick
11 years ago

” Obviously, your ‘amazon’ purchase -would- be taxed, since this would be a federal sales tax.”
Except for the strong possibility that Amazon would simply pick up stakes and move to the Caribbean or Switzerland or wherever they have very friendly income tax laws.
The world has gotten a lot smaller thanks to Al Gore’s interwebz thing.

Warrington Faust
Warrington Faust
11 years ago

“but imagine that we reserve a small income tax for people who earn the BIG money, something that scales from 0% at 5x average income to 15% at 25x average income…”
Isn’t that exactly how our current system started? Why let the camel’s nose back in the tent? It will be a government program, it will “grow”.

Mangeek
Mangeek
11 years ago

Good point, Warrington, but if the number was based on indexes like average income instead of hard dollar amounts, it would be harder for the government to inflate itself into taxing lower real incomes and out of previous obligations. It’s not perfect, but certainly easier to keep an eye on.
Patrick, my understanding is that this tax would be collected even in the scenario you propose. Sales made inside the US would be taxed, sales from outside are even easier to keep track of.

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