Time Magazine: The Fair Tax has its moment in the sun

Americans For Fair Taxation ^ | January 4, 2008

[Man50D]

Could there be more to come?

Mike Huckabee's victory in Iowa Thursday was a big victory also for the "Fair Tax," the radical revamping of the federal tax code that he endorses. And while Huckabee's Iowa win may be a one-off, one gets the feeling that the Fair Tax campaign will be with us for a while. The resurgent John McCain is mildly supportive of it as well. And the legions of Fair Tax fanatics aren't going anywhere.

The Fair Tax is a proposal to abolish the Internal Revenue Service, throw out all existing federal taxes and replace them with a 30% nationwide retail sales tax that would, it is hoped, raise about as much as income taxes, payroll taxes, excise taxes and the lot do now. You'll hear a lot of the Fair Taxers saying it's a 23% tax, which it is, if you think of it like an income tax. (No use getting bogged down in that here; I'll explain at the bottom of the post.)

Anyway, on the occasion of Huckabee triumph, I called up Leo Linbeck Jr., the Houston businessman who together with two friends launched the Fair Tax movement just over a decade ago. I'm not sure what I expected from the conversation--maybe a little gloating over the Iowa results, I guess. What I got was two hours of mostly fascinating discourse, ranging from tax theory to feudal nature of modern Washington D.C. to the ideas of philosopher/theologian Michael Novak.

The Fair Tax got started like this, Linbeck told me: Three old rich men in Houston talked over lunch in 1995 about what they could do to leave the country better off before they died. They hit on reforming the tax system, and in particular simplifying it, as a worthy goal. "I've been a beneficiary of the complexity of the tax code," is how Linbeck puts it.

Linbeck set out to find economists who had done work on what an optimal tax system might look like and ask them to put together a plan. He ended up with eight, among them such prominences as Harvard's Marty Feldstein and Dale Jorgenson and Boston University's Larry Kotlikoff. Economists who care a lot about optimal taxation tend to lean to the political right, and Feldstein is of course a Republican Party eminence. But the plan was to be nonpartisan. Kotlikoff, in fact, has been advising Democratic presidential hopeful Mike Gravel, another Fair Taxer--albeit a far less successful one than Huckabee.

What they came up with, mainly out of their economic studies but with feedback from market research that Ogilvy & Mather was conducting at the behest of Linbeck's Gang of Three (they ended up spending $23 million on the overall effort) was the national retail sales tax, with rebates for all ($2,348 per adult last year if the tax had been in effect) so that the poor would end up paying little or nothing.

The main idea behind shifting taxation in this direction is to remove the burden on investment and production and place it all on consumption, thereby presumably stimulating long-run growth and exports. Lindbeck also argues that with the payroll tax gone, low-income workers would stand a much better chance of saving up money and rising out of poverty.

One big catch is that the Fair Tax would dramatically lower tax rates on those with the highest incomes. Linbeck had an interesting if not entirely convincing (to me, at least) response when I brought that up. "I don’t know many poor people that buy a G5, and I don’t know that many that buy a Bentley. The best indicator of people’s well-being is what they spend and how they spend it." This was a reference to the work of W. Michael Cox, chief economist of the Federal Reserve Bank of Dallas. Consumption is wealth, the argument goes, which makes a consumption tax the fairest kind of tax.

All in all, it's an extremely radical plan--Steve Forbes' flat tax was a similar attempt to shift taxes onto consumption, but would have left most of the current tax structure intact. It's fair to object to it as simply too radical for our political system to handle.

But much of the criticism from the Washington wonkosphere is that the Fair Tax is some kind of scam. (The two most-discussed recent critiques have come from conservatives Rich Lowry and Bruce Bartlett). As far as I can tell, it's not. Those who say that the Fair Tax rate will have to be much higher than 30%/23% (again, I'll explain that discrepancy in just a bit) are all assuming that Congress will never levy the tax on things like medical services, food, houses, etc. Which may be true, but it seems kind of unfair to blame the Fair Taxers--who want the tax to hit everything--for that.

So, back to Linbeck, a retired construction magnate (this was his company). He's not endorsing Huckabee, although he does say this: "The thing I observed about Gov. Huckabee as I watched the debates, the interviews, is that he understands it, he gets it."

Linbeck & Co. didn't reach out to Huckabee or any other candidate. After a disappointing foray into paying lobbyists in Washington to push the cause in the late 1990s, his group, Americans for Fair Taxation, has been working mostly on the grassroots level--with lots of help from libertarian radio talker Neal Boortz, who has been the most prominent Fair Tax advocate. Or at least was until Mike Huckabee won the Iowa caucuses.

Oh, and as for that 23%/30% thing: If you earn $100 and pay 23% in taxes on that, you're left with $77. If, however, you buy something and pay a total of $100 for it, of which $23 was taxes, we would usually say you paid a 30% tax on the $77.

Update: An interesting speculation from James Pethokoukis at U.S. News:

As an insurgent candidate, Huckabee didn't have the dough to hire economists to create an economic plan. So he went with the off-the-shelf FairTax. Not only does it call for abolishing the IRS—a nice populist touch—but it has the added benefit of a built-in constituency. With Huckabee needing to flesh out his policy agenda, don't be surprised if the sweeping FairTax recedes a bit from sight and becomes more of a policy end goal, as when opponents of abortion talk about banning it after first creating a stronger "culture of life."

This article was originally published on Time Magazine's online blog.

[Man50D]

Fair Tax ping!

[taxcontrol]

I’d rather a flat tax than the fair tax. In fact, I would like to see the Republicans put forward a constitutional amendment that would limit the amount of tax the federal government can collect from an individual.

[wastedyears]

That’s why it would be a consumption tax. You give the government taxes through products and services you purchase. As far as I know at this moment, it’s the best way to control how much money the government gets.

[griswold3]

Limits?? on the government??? what are you some kind of conservative or something???

[SomeReasonableDude]

It’s more or less an American VAT. Honestly, I’d take anything over the current income tax system. I can only bend over for so many years before I lose the smile.

[ontap]

What’s to keep them from just upping the rate like the states do?

[Man50D]

I’d rather a flat tax than the fair tax.

The Fair Tax is a flat tax but on consumption instead of income. A flat tax on income has already been tried and has turned into an abysmal failure. It's called the income tax. When the income tax was enacted in 1913 it taxed people 1% of their first $20,000 and 7% above $500,000. Most people were taxed 1% since so few earned above $500,000. At the time less than 5% of the population was taxed. Today that figure has ballooned to more than 80% of the population being taxed. Another flat tax on income will eventually morph back into the same monstrosity we have today only faster thanks to lobbyists.

[Man50D]

It’s more or less an American VAT.

Actually it is not a VAT. VATS impose taxes at each stage of production. Hidden corporate taxes are passed on as costs to the consumer in the form of higher prices. The Fair Tax will eliminate hidden taxes by abolishing corporate taxes and will tax only the final stage of production

[xcamel]

several propagandist versions posted today due to the scathing WSJ editorial..

(see here: http://www.freerepublic.com/focus/f-news/1950158/posts)

Have Phun..

[phil_will1]

“What’s to keep them from just upping the rate like the states do?”

The founders got it right!

“It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ‘in political arithmetic, two and two do not always make four.’ If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.”
Alexander Hamilton in Federalist #21

It is very likely that every man, woman and child would know what the tax rate was before the FairTax was ever implemented. After all, there would be at least a 6 month delay between its enactment in congress and its implementation date. Can you imagine the pressure on congress to reduce the rate if everyone were paying the same rate on everything?

[DivaDelMar]

From Federalist No. 21:

“...It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ``in political arithmetic, two and two do not always make four.’’

If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country....”

[weef]

A flat tax on income has already been tried and has turned into an abysmal failure.

So very true. It's funny but I never considered the original income tax as a flat tax but it really was. And it most definitely has morphed into an abysmal failure.

[DivaDelMar]

There’s that GMTA thing again. :)

[Amendment10]

Regardless if taxes are fair or flat, our tax dollars should not be used for constitutionally unauthorized federal spending programs. I wish that people would press the following issue with every presidential candidate where constitutionally unauthorized federal spending is concerned.

Back in the 1930s, FDR needed to uphold his oath to defend the Constitution with respect to establishing his New Deal federal spending programs. More specifically, he needed to rally the states to amend the Constitution to essentially add his federal spending programs, SS for example, to Sec. 8 of Article I in compliance with the 10th Amendment.

Instead, he essentially made a fool out of himself with respect to trying to get his way by expressing his plan to stack the Supreme Court. It's almost as if FDR didn't understand the Founder's requirement for constitutionally enumerated federal powers, particularly those powers associated with federal spending.

Part of the damage that FDR did to the country is as follows. He essentially got the Supreme Court to not only agree to his wide, politically correct interpretation of the general welfare clause, but to also ignore 10th A. protected state powers.

Article I, Section 8, Clause 1: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare (emphasis added) of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

10th Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

With the 10th A. essentially politically repealed, FDR and Congress were able to bypass the Article V power of the people to amend the Constitution to formally delegate powers to the federal government. In other words, thanks to FDR's folly, the federal government can now write its own powers by simply inventing new ways to spend taxpayer's money in the name of the vaguely worded general welfare clause.

Fortunately, Thomas Jefferson comes to our rescue with respect to the Founder's intentions for constitutionally limited federal spending. Jefferson noted that regardless that the federal government has the power to lay taxes, the good intentions of the president or federal lawmakers are no substitute for constitutionally enumerated federal powers which reasonably direct how our taxes should be spent.

"1. To lay taxes to provide for the general welfare of the United States, that is to say, "to lay taxes for the purpose of providing for the general welfare." For the laying of taxes is the power, and the general welfare the purpose for which the power is to be exercised. They are not to lay taxes ad libitum for any purpose they please; but only to pay the debts or provide for the welfare of the Union. In like manner, they are not to do anything they please to provide for the general welfare, but only to lay taxes for that purpose. To consider the latter phrase, not as describing the purpose of the first, but as giving a distinct and independent power to do any act they please, which might be for the good of the Union, would render all the preceding and subsequent enumerations of power completely useless.

It would reduce the whole instrument to a single phrase, that of instituting a Congress with power to do whatever would be for the good of the United States; and, as they would be the sole judges of the good or evil, it would be also a power to do whatever evil they please."

--Thomas Jefferson concerning the constitutionality of establishing a national bank, 1791 http://www.yale.edu/lawweb/avalon/amerdoc/bank-tj.htm

The bottom line is that the people need to wise up to major corruption in the federal government where constitutionally unauthorized federal spending is concerned, a consequence of FDR era politics. The people need to quit sitting on their hands and petition lawmakers, judges and justices who are not upholding their oaths to defend the Constitution, demanding that they resign from their jobs.

[Tenacious 1]

I’d rather a flat tax than the fair tax.

Been there. Done that. Got a T-shirt?

Reagan did well to get it close to a Flat Tax. It had on a dress and some cosmetic jewelry, but it was a flat tax at its core. It too was molested, cajoled, twisted, fed and corn-holed to what we have today.

The flat tax is much simpler to explain and understand, in theory, but it is still subject to pre-paid tax contributions that can always be altered through legislative schemes.

[Man50D]

What’s to keep them from just upping the rate like the states do?

The Fair Tax will be transparent since the hidden taxes will be eliminated and the Fair Tax rate will be a separate item on the receipt. If Congress were to attempt a tax hike people could see the raise and respond immediately. More importantly if the rate is raised too high then people will respond by reducing their purchases. Doing so would lessen the amount of taxes collected. It will force Congress to keep The Fair Tax within reasonable boundaries. Founding father and first Secretary Of The Treasury Alexander Hamilton stated this concept in his Federalist Paper #21. To quote:

It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed-that is, an extension of the revenue. When applied to this object, the sayin is as just as it is witty that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

[esarlls3]

What’s to keep them from just upping the rate like the states do?

Today, Congress and lobbyists divide up the tax code to reward or punish small segments of the population. It's popular to tax the rich and most who are not rich will not object to that. Farmers or Oil companies want a break on certain activities? Just slide it into the tax code and you have corporate welfare without it showing up as an expense of Government.

Under the FairTax, everyone is treated equally. If Congress wants to raise the rate, it will be raised equally on everyone. Also, although the poor will pay little or no net tax, everyone pays the same marginal tax rate. This gives all taxpayers a vested interest in keeping rates as low as possible.

Ultimately, at all levels of government and with all means of taxation, it's the voters and taxpayers who are the only force restricting how much taxes are extracted from their pockets. The Government bureaucracy will grow to consume all the taxes that the population will bear. When taxes get too high, the population revolts and politicians either lower taxes or get replaced.

[Tenacious 1]

What’s to keep them from just upping the rate like the states do?

WE ARE! When a state talks about upping the sales tax, it is usually pretty big news and is hotly contested. The reality is, citizens can see it. It is right in front of them. They know immediately how it affects them. They can understand and fight against it.

Under the system today, hardly anyone has any idea what they actually pay out in taxes because it is muddled in withholdings, exemptions, returns, etc. At the end of the year, we fools just want to know how much we short paid the government or how much we overpaid them.

When tax legislation is debated at the federal level, it is mired in lengthy bills that add some here, take away some here, make exemptions for this or that until someone sells it as a tax code revision instead of a hike. We don't understand it and neither do half the people voting for it. But nobody knows any better to argue for it or against it because we don't know how it affects us until it is implemented. By then it is to late.

Fair Tax? They say, we need more of your money so we are raising taxes by 1/2%. We say "Hell no!" There should be no new laws added to modify a Fair Tax Code that involve extra taxes or exemptions.

It might actually make a different with citizens when they go to buy something and realize that 37% of everything they make is taken by the State and Federal Government (More if you get income tax taken out in the state you live in).

People do not realize that our state and federal governments combined are fleecing us already at a rate of about 40%. ALMOST HALF OF OUR EARNINGS GO TO GOVERNMENTS!

The Fair Tax would at a minimum put the number out there and expose what we are paying for all these social niceties.

[xcamel]

No guarantee that the same exact thing couldn't/wouldn't happen to the FT. None whatsoever.