Bruce Bartlett debunks the “fair tax”
August 28th, 2007 by Brendan SteinhauserBruce Bartlett has a good piece on the “fair tax” in the Wall Street Journal.
For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the
Church ofScientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists’ idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government’s revenue and thereby get rid of their hated enemy, the IRS.***
State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly.
Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% to the federal government on top of the purchase price of your next house.
***
Rejecting all the tricks of FairTax supporters and calculating the tax rate honestly — by including the higher spending that it mandates and by being realistic about what could actually be taxed — professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.
***
Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.
Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.
August 28th, 2007 at 8:04 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 billâ€Â
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 )
August 29th, 2007 at 12:22 pm
This article is so inaccurate and full of baseless attacks it defies reason. Why would someone with Mr. Bartlett’s credentials stoop to such a level?
Anyway, the WSJ just published rebuttal letters at http://online.wsj.com/article/SB118835673922011955.html?mod=googlenews_wsj . They are reproduced below.
Be Fair to FairTax — Throw the Red Herrings Back in the Water
August 29, 2007; Page A13
It is apparently getting so difficult to defend the current income tax system that its guardians must use smear tactics to slow down its best replacement. Bruce Bartlett (”FairTax, Flawed Tax,” editorial page, Aug. 25) is the latest status quo defender to use fiction to slander the FairTax plan.
The FairTax was developed many years ago, totally independently of any other proposal, group or movement. It is a product of more than $20 million of advanced economic research, as well as detailed conversations with citizens as to their preferences defining the best possible national tax system. Many groups and individuals have agitated to replace the deeply flawed income tax system, including, apparently, the Church of Scientology. As a founder of Americans For Fair Taxation, I can state categorically, however, that Scientology played no role in the founding, research or crafting of the legislation giving expression to the FairTax.
Mr. Bartlett is equally wrong about many other aspects of the FairTax. We are disappointed but hardly surprised by such distortions about it coming from the very economist who once opined that the income tax system just needed a little “tweaking.”
Leo Linbeck
Chairman and CEO
Americans for Fair Taxation
Houston
My guess is that few readers made it with an open mind past Mr. Bartlett attributing the FairTax’s origins to the Church of Scientology. That organization may have a similar proposal or a proposal with a similar name, but I know for certain that the mainstream FairTax proposal found at http://www.fairtax.org has no connection to it.
I know this because the two principal founders of the FairTax movement, Leo Linbeck and Bob McNair of Houston, are friends of mine who served on my board at the Dallas Fed. I was there as they began to develop their proposal in the mid-1990s. I watched them pitch their fledgling idea to their friends and business associates, and I watched them urge prominent economists to do independent research on their proposal. I even accompanied them to San Francisco to pitch it to Milton and Rose Friedman. (I still remember Rose’s homemade cookies.)
We should give the FairTax a fair chance. In fact, I posted a blog with that title a few weeks ago. See http://www.bob-mcteer-blog.com. A fair chance means a thorough evaluation and discussion of its merits without the distraction of a red herring.
Bob McTeer
Distinguished Fellow
National Center for Policy Analysis
Former President of the Dallas Fed
Frisco, Texas
The FairTax would replace the federal corporate and individual income tax, payroll taxes and the estate and gift tax with a 23% national retail sales tax on all goods and services. Each household would be provided with a monthly prebate equal to the sales tax rate times the federal poverty level plus a small extra amount in the case of a married couple to prevent a marriage penalty.
The FairTax bill (H.R. 25) was developed by economists, business people and tax lawyers who understood that the current tax system is dysfunctional. Specifying the criteria by which successful reform should be evaluated, they engineered the tax around the notion that reform should minimize the adverse growth effects of the tax system, be neutral between debt and equity, consumption and savings, and among industries, should reduce compliance burdens that waste more than a quarter trillion dollars today, respect civil liberties instead of requiring Americans to reveal virtually every aspect of their lives to government, eliminate favoritism shown imports and remove the penalty on exports, enhance the competitiveness of the U.S. as a investment destination and a location for headquartering businesses, eliminate the bias against upward mobility, and increase transparency and comprehension of the tax system.
Mr. Bartlett questions economic claims that under the FairTax proposal the gross domestic product will rise 10.5%. In fact, Arduin, Laffer & Moore Econometrics estimates GDP gains up to 24.4% greater than under the current system by the 10th year. Michael Boskin, former chairman of the Council of Economic Advisers, estimates long-term gain to GDP from a consumption-based tax reform would be about 10%. Laurence Kotlikoff estimated a 7% to 14% increase in GDP. Many others find high single digit to low double digit gains. Lowering marginal rates and eliminating double and triple taxation of savings will increase the well-being of the American people by a trillion dollars per year and perhaps much more.
The FairTax would untax existing homes that represent three-quarters of all homes bought and sold. And by allowing mortgage interest payments to be paid with both pre-income and pre-payroll tax dollars, the tax is the equivalent of allowing mortgage interest to be deductible against payroll taxes today. Interest rates will drop by 25% for the same reason municipal bond rates are lower than taxable bond rates. Interest would not be taxable to the recipient. And of course there is the benefit of having the only developed economy in the world with a zero rate of tax on income.
Dan R. Mastromarco
David R. Burton
Alexandria, Va.
(Messrs. Mastromarco and Burton are principals in the Argus Group, a law and government relations firm.)
August 29th, 2007 at 12:52 pm
In addition, to answer Bartlett’s claim of increased governmental taxation see a video Q&A here: http://easylink.playstream.com/fairtax/16-willGovPayTax.wvx and research published in Tax Notes that details how the FairTax does not impose additional burdens on government’s here: http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf
Again, it’s extremely puzzling why someone with his reputation would basically reclycle old falsifications that he published in 1999 especially with all the latest research available that he ignored.
August 29th, 2007 at 1:48 pm
As a Scientologist who was involved with the CATS (Citizens for an Alternative Tax System) starting in 1990 I can assure you the Church had no involvement. As private citizens we decided that instead of just complaining we would do something. The fact that the leaders were Scientologists was no more significant than a group of Baptists who started something. Attacking one’s religion is the refuge of someone who doesn’t have a valid argument.
The proposals we created did not include payroll taxes and were different in many ways but they did eliminate the income tax and replace it with a NRST.
The Fair Tax does tax everything consumed but it also reduces tha cost of everything consumed. You are currently paying a significant amount for goods and services to cover the taxes that are paid by the companies that deliver them. The payroll taxes and income taxes and cost of complying with same are being paid by the consumer now. Under the Fair Tax those costs go away and the retail prices will drop to offset the tax added back on. It is a simple concept that you haven’t grasped. YOU ARE ALREADY PAYING THE TAX NOW YOU JUST CAN’T SEE IT
The economists involved with the research behind this bill have their numbers right. Read the book before you spread untruths.
As to State income taxes, which states have income tax that isn’t tied to the Federal income Tax? when the Federal goes away so will they. They will be turned in to consumption taxes in all likelyhood.
Why does this concept upset you so? Have you read Boortz’s book so you really understand it? If you do you will come to support it or you have some other agenda for maintaining the current system. Because you don’t think it will pass isn’t a good reason to use false data to help that happen.
August 29th, 2007 at 5:16 pm
You really don’t have a good grasp of the concepts included in the FarTax.
If you remove all of the embedded taxes that exist in everything you buy, the cost will go down by just about the same amount as the FairTax adds back. So you won’t be paying any more after the FairTax goes into effect than you are paying now. Not to mention the prebate. Not to mention the fact that you will take home 100% of your pay check. Not to mention the fact that you no longer have to keep records to pay the tax. it is all transparent on every receipt you receive so will know how much you are paying every time you buy something. If you don’t think you are paying it now then you better read up on basic economics.
Also, people who are avoiding paying any tax now such as illegal aliens, drug dealers and others who live under the radar will now be paying their own way as well instead of being a major burden to the tax payers of this country.
In addition, by eliminating the payroll taxes, medicare, medicade, etc. from the cost o goods made here, the US will become the largest tax haven in the world and the flight of capital that has been flowing overseas will reverse and all that money and the jobs they produce will come flying back into this country. The FairTax will be like steroids for our economy. You would have to be hiding under a rock to avoid getting a job.
I say this as someone who has a degree in economics and was taught traditional Keynsian economic principals. But when you open your mind to new ideas and follow them all the way through to the full conclution instead of stopping part way and then analyzing the concept you will see that the FairTax make a lot of sense on many levels.
I would suggest that you read the book by John Linder and Neal Boortz. They explain it a lot better than I can.
August 29th, 2007 at 8:04 pm
Mr Steinhauser, to my profound disappointment, has accepted Mr. Bartlett’s misstatements and misleading arguments about the Fair Tax on face value and without further inquiry. Mr. Bartlett is no authority on the Fair Tax and has demonstrated his ignorance with his piece in the Wall Street Journal.
To begin, the Bartlett cannard about the origins of the Fair Tax in the Church of Scientology is undefiled fabrication. There was once a link of an unrelated sales tax group to Scientology, but the effort that gave expression to the Fair Tax was that of Leo Linbeck and Bob McNair, two Texas businessmen. They and others raised over $20 million to commission advanced academic and polling research into how to reform the tax system. These men agreed in advance to abide by the recommendation of their researchers, wherever it may lead. This was the birth of the Fair Tax.
The next Bartlett cannard that is the claim that the Fair Tax would add 30% to the cost of goods and services today. Missing from the analysis is the fact that we already pay that much, and more, in income taxes, payroll taxes, and the tax costs of goods and services that are embedded in their price. The Fair Tax removes these costs.
Newly-constructed homes would continue to do well under the Fair Tax. One must consider the business conversion credit the builder receives on the land (and on the house he tears down) and lower interest rates as a result of the Fair Tax, that are a substantial part of a builder’s cost.
The Fair Tax does not exempt any items because it handles the regressivity problem through a prebate instead. The Fair Tax neither favors nor disfavors any group, good or service. It removes from the hands of politicians the ability to play favorites.
I challenge Mr. Steinhauser to find mendacity in the way the Fair Tax rate is expressed. The tax-inclusive rate of 23% is no different from the way we express European-style value-added taxes, which are most like this new tax. The tax-inclusive method is also the way in which we express the rates on the taxes which the Fair Tax replaces, namely: income taxes, payroll taxes and death taxes. Under the Fair Tax, when the sticker says a loaf of bread costs $2.00, that is exactly what you pay at the cash register. The tape shows the $.46 tax and the $1.54 price.
True, the Fair Tax is federal legislation, and those who live in states with income taxes will continue to have to file state income tax returns. We Fair Taxers never said differently. However there is an incentive in the bill for states to enact “conforming state taxes.” We think constituents will press their state legislators to follow the example of the six states that today have no income taxes.
Steve Moore of the Wall Street Journal has likened the Fair Tax to putting the economy on steroids. He is right.
Those such as Bruce Bartlett, who think the current tax code merely needs tweaking, are beginning to write screed, like that we just saw, out of insecurity. They are finding it harder to defend the indefensible tax code and are seeing that the Fair Tax is garnering attention from national media. Perhaps the silver lining is that the sensational bunk from the pens of such writers will call the public’s attention to the Fair Tax. The hope is that some will take the trouble to look beyond the Bruce Bartlett fiction and get the facts.
~Jim Bennett
August 30th, 2007 at 8:23 am
The FairTax on the Web - August 28, 2007…
…
August 30th, 2007 at 1:16 pm
Bruce Bartlett might have a good piece on the “fair tax†in the Wall Street Journal if there was one shred of truth.
I would have expected more from the former deputy assistant secretary of the Treasury for economic policy from 1988 to 1993.
Did Mr. Barlett really write this or was there a ghost writer from some tax accounting firm?
“originally devised by the Church of Scientology�?? Wrong. They had a similar idea, but no connection to the FairTax Act. H.R 25. But so what? Karl Marx is behind our current income tax. See item 2 of the Ten Points of Communism.
Of course there is not 30% on top of current prices under the FairTax. If he had researched the issue he would know better.
It is 23 cents on the dollar at retail on before tax dollars. Our “former deputy assistant secretary “ forgot to remove the income tax. . Prices stay the same. Did he fail to do the math?
The income tax equation is income - taxes - compliance dollars = spending
The Fair Tax equation is income = spending + taxes + compliance dollars, so here we are taxed as we spend and keep the compliance costs.
Further, did Mr. Barlett look at any dynamic analysis of:
Adding 12 million tax payers ( illegal aliens and the underground economy)?
Returning an est. $11 trillion in off shore accounts to U.S. banks deposits?
The affects of a lower service cost of capital?
The revenue feedback and job growth from zero corporate income tax?
By research I don’t mean the FairTax book. I mean the works of his fellow economists. See below
I smell another motive here. Remember, after truly understanding the FairTax,
the only people who hate it are career politicians, lobbyists, tax lawyers, tax accountants, the non working rich, IRS agents, and illegal aliens. Those who derive their livelihood from the unproductive income tax hate the FairTax.
Ashford Schwall
Taxing Sales under the FairTax – What Rate Works?
http://people.bu.edu/kotlikof/BHI-LK%20Taxing%20Sales%20under%20the%20FairTax-%20What%20Rate%20Works%209-25-06%20FINAL.pdf by Paul Bachman
Director of Research, Beacon Hill Institute, Suffolk University
Jonathan Haughton Associate Professor of Economics Senior Economist, Beacon Hill Institute
Suffolk University
Laurence J. Kotlikoff Professor of Economics, Boston University
Research Associate, National Bureau of Economic Research
Alfonso Sanchez-Penalver Economist, Beacon Hill Institute, Suffolk University
David G. Tuerck Chairman and Professor of Economics
Executive Director, Beacon Hill Institute Suffolk University
September 2006
An Open Letter to the President, the Congress, and the American people Concerning Reform of the Federal Tax Code
(signed by 80 business and university economists)
http://www.fairtax.org/site/PageServer?pagename=news_commentary
A MACROECONOMIC ANALYSIS OF THE FAIRTAX PROPOSAL
February 2006 http://www.arduinlaffermoore.com
©2006 Arduin, Laffer & Moore Econometrics. All rights reserved.
http://www.arduinlaffermoore.com/PDF/A%20Macroeconomic%20Analysis%20of%20the%20FairTax%20Proposal%20–%20Summary.pdf
August 31st, 2007 at 8:26 am
Bruce Bartlett, stop spreading lies! Are you some sort of perverse defender of the status quo? Must be taking kickbacks from H&R Block and the IRS. For shame!
August 31st, 2007 at 3:07 pm
Brendan, Question for you…
Did you know:
That a middle class worker in the 25% income tax bracket [& paying 7.5% to social security] wishing to work overtime to cover a $100 retail purchase has to earn $148 to clear that $100 that he needs? [do the math 100/67.5%]
That’s the equivalent of a 48% sales tax!!!!
Makes a 30%** Fair Tax [with no Inc Tax or Soc Sec Tax] look pretty good doesn’t it? **[It [effective rate] is actulaly less than 30% for this case]
Remember:
$148 Under current system
> $130 Under the Fair Tax
September 2nd, 2007 at 5:35 pm
Brendan Steinhauser is wrong. Bruce Bartlett is correct about the “Fair Tax”. If you look at the site:
http://www.fairtax.org/site/PageServer?pagename=about_main
you will see that the “fair tax” is a national sales tax. It is not called a “flat tax” and Bruce does not call it that. The Fair Tax site says a “prebate” is given to every taxpayer (how do they define who that is?) So if the Government is going to issue a check for the fair taxes paid on the poverty level of existence, how do we get rid of the IRS? Someone must track wage earners or citizens to know to whom and where to mail the checks. Boy will this frost the unregistered illegals!.
The prebate is issued to whom? every citizen? What about children? Do they count the same as adults. Are single and married persons counted the same? Presently, parents are given deductions for children. So the prebate under the Fair Tax should continue that benefit and give a larger prebate to parents? What about retirees? As for retirees, many pay very low Federal income tax - mine being 2% of all income. To replace that with a “fair tax” that replaces FICA taxes makes me start paying FICA in my retirement.
As for the states with income tax, many rely on figures from the Federal tax form to calculate the state tax. The states will have to totally revamp their forms and calculation methods.
The truth is that neither the “fair tax” or the “flat tax” will happen because there are too many special interests. The changeover upheaval could even trigger a mild recession because of the disruption and the one-time cost of paperwork “reduction” for companies. I agree that the current tax code is too complex and convoluted. That makes a “fair” tax even more difficult to sell.
September 4th, 2007 at 6:42 pm
The prebate will be administered by the Social Security Administration. One could criticize this feature as a Big Government solution but for the fact that today 7 out of every 10 households rely on the federal government for some sort of benefit. By merely expanding the address list by 42%, the country is covered.
The Fair Tax itself will be administered, in most states, by state tax authorities and by merchants. Each will receive 25 basis points out of their collections for their trouble. The tax, therefore, will be practically self-administering.
The prebate goes to everybody - as long as they are citizens or non-citizens lawfully residing in the United States. There is no means test. The relative benefit is disproportionately in favor of the poor.
A check goes to one member of each household, and the measure for the amount of the check is household size. The amount is based on the poverty level for the given household size - as determined by HHS (i.e., we don’t make it up), but the marriage penalty is removed. It’s a mechanical process.
All members of a household 18 or over must sign the application for the prebate and designate the persons in the household who will receive the check. The check can be split only once.
The genius of this system is that people who earn minimum wage are usually members of households that earn substantially in excess of the poverty level. Thus, household size is a more accurate measurement of essentials.
States indeed will have to revamp their tax schemes. Some will opt for “conforming state taxes” as defined by the bill.
I agree that special interests will not like the Fair Tax. That is why, over time, organized grass-roots support will drown out the special interests. Just remember, it is people who vote, not special interests.
~Jim Bennett
September 13th, 2007 at 11:43 am
I really thought that a site called ‘freedomworks’ would have done more research before printing such mis-information. I’m disappointed.
February 1st, 2008 at 1:10 pm
I think that we shouldnt cut taxes AT ALL
February 1st, 2008 at 1:14 pm
GOD LOVES US ALL AND WHY CANT WE ALL JUST BE FRIENDS?
February 4th, 2008 at 12:42 pm
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