The FairTax Crowd Answers Jerry Bowyer

In a piece published on January 9th for Townhall, economics writer Jerry Bowyer posed some common questions about the FairTax. The FairTax would replace personal income taxes, payroll taxes, capital gains taxes, corporate income taxes, and the death tax with a national retail sales tax. The FairTax has become a prominent subject for discussion as Mike Huckabee, its leading advocate among the presidential candidates, has risen to the top of the national polls.

In politics, as in life, “context” (which could also be called, “basic point of view” or “the framing of the issue”) trumps “content” (in this case, the specific factual questions asked). However, let me first address the “content” of Mr. Bowyer’s questions.

Q. Why do you think that a sales tax is less prone to corruption and complexity than an income tax?

A. There are three major reasons that the FairTax would be less problematic than an income tax:

1. It applies to actual transactions where money changes hands, rather than “income”, which is a concept so abstract as to be almost ethereal. Most of the 60,000-page U.S. tax code deals with the definition of “income”. 2. There would be only about 20 million entities that would need to file FairTax returns, compared with 140 million who must file income tax returns now. 3. At the proposed 23% (inclusive) rate, the FairTax rate is much lower than the current 35% top tax rates on personal and corporate income. The lower the rate, the less incentive for avoidance, evasion, and special pleading.

Q. Are sales taxes, where they are currently in operation, simple and free from special interest lobbying?

A. Nothing in the manifested universe is perfect, but sales taxes are, in practice, simpler and less prone to special interest lobbying than income taxes. Right now, the huge Washington lobbying industry on K Street gets half of its revenue from lobbying the income tax code.

A. The FairTax applies to retail sales of new goods and services. If a non-profit sells new goods and services, it will collect the FairTax on them. However, in general, charity involves giving things away, not selling them. Also, the FairTax would eliminate the payroll taxes that non-profits pay under current law.

A. Yes—the FairTax applies only to sales of new goods and services. However, the nation as a whole obviously cannot replace newly-produced goods with used goods. If I sell you my car, I don’t have it anymore. All of the new parts and labor that would go into “rehabilitation” and “refurbishment” of used items would be subject to the FairTax. This having been said, the FairTax would shift U.S. GDP from current consumption toward investment and exports. Most economists would applaud such a move.

A. People respond to incentives, and there would be an incentive to delay income and accelerate spending ahead of the FairTax effective date. This could well result in a short-term increase in debt. However, debt will be easier to repay under the FairTax because people will have more take-home pay. This aside, America has been around for 232 years. There are many things that could be done to ease the transition, and it makes no sense to avoid a change with huge long-term benefits because of one-year transition effects.

Q. Isn’t it true that the rate is not really 23% but 30% at least, because it’s tax-inclusive?

A. Yes and no. Both the FairTax and the income tax can be stated as either an “inclusive” or an “exclusive” rate. For an “apples to apples” comparison with the rates of our existing tax system, the 23% “inclusive” FairTax rate is the correct number to use.

A. Interest above the rate on 10-year Treasury bonds is subject to the FairTax. This will prevent suppliers from discounting prices and making it up with high interest rates on financing. The 10-year Treasury rate is a market-determined interest rate that is not targeted by the Federal Reserve.

Having addressed the “content” of Mr. Bowyer’s questions, I would like to turn to the more fundamental issue of “context”.

A “contextual” question that shapes a person’s entire experience of life is, “Is the glass of life half empty, or is the glass of life half full?” Think about the people you know and you will see that this is true.

The analogous political question is, “Is the glass of America half empty, or is the glass of America half full?” The FairTax is an expansive, optimistic, “half full” concept. It has a natural appeal to people for whom the glass of life, and the glass of America, is half full. The FairTax speaks to “possibility” rather than “fear”.

I do not know Mr. Bowyer personally, so all I can say is that his questions about the FairTax struck me as coming from a “half empty” point of view. This was not surprising to me. Most “elite opinion”, including virtually the entire Mainstream Media, has embraced the “the glass of America is half empty” point of view and has dedicated itself to proving this position right.

The FairTax is about America’s future. When it comes to matters pertaining to the future, facts and logic cannot bridge the gulf between hope and fear, the chasm between “half empty” and “half full”. All we can do is to pose the question to the American people and let them decide.

There are some points as to how The Fair Tax will reduce the bureaucracy you need to consider…. Another factor that will reduce bureaucracy is The Fair Tax and it's 133 page tax code will replace the 67,000+ page tax code by abolishing the IRS. The existing Treasury Department will administer the consumption tax.

No tax code is designed or can be designed specifically to address spending. However The Fair Tax does reduce spending to some extent by abolishing the IRS and its $11 billion dollar price tag.

Well, I have considered these “points” (perhaps more accurately termed “claims”) and, as desperate as I am to enact significant federal tax reform, I am still not convinced. Overall, the problem I have with your response to my post is that it does not even recognize the revenue neutrality assumption embedded in the proposal and what that means for how the tax must operate in the real world. Your answers presume a feature of the fair tax that is ruled out from the beginning, that changes in consumption will be allowed to influence tax revenues.

While I focused on the need for any tax reform proposal to reduce spending you focused on the claim that it would reduce the IRS bureaucracy. But, according to the “revenue neutrality“ pledge it doesn’t matter how much bureaucracy is reduced in the IRS, the fair tax must still raise the same amount of revenue as before reform. So even if we spend less on the taxing bureaucracy, which I am not ready to admit will likely happen, it will not matter overall because the government will get the same amount of tax money as before which it will just spend on some other government programs which will be administered with another governmental bureaucracy. It is not the total number of people employed by the IRS that is the central problem, it is the total amount of money spent by the government.

I’m not sure what you mean by “No tax code is designed or can be designed specifically to address spending.” They are inextricably linked. Governmental spending is necessarily limited by the tax revenues raised and taxing schemes are designed with that in mind. Right now federal revenues depend on peoples’ incomes. When incomes go down the federal tax revenues are decreased and governmental spending must either be cut or income tax rates must be raised to meet spending demands. With the fair tax revenue neutrality pledge, if individuals consume less to avoid the fair tax, the fair tax rates must be raised until revenue neutrality is reached. It won’t matter that you quit buying some things to avoid the fair tax, rates on everything else you do buy will be raised to make up the difference. Without this happening there can be no “revenue neutrality.”

I appreciate your quote from James Madison, my favorite founder, but I believe his analysis of how a consumption tax would work was based on the assumption that people could determine with their consumption behavior how much tax they would pay. He says in Federalist 21: “The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal’ and private oppression may always be avoided by a judicious selection of objects proper for such impositions.” Under Madison’s example, if the consumption tax was too high, people would not buy the goods and tax receipts would go down. Allowing tax revenues to go down in response to lowered consumption is a necessary component if a consumption tax is to work as you (and Madison) claim. But this simply can’t happen under the fair tax because revenues by definition will not be allowed to decrease due to the revenue neutrality assumption.

Lastly, I also do not accept the argument that because the IRS is already extremely intrusive that we should accept an equally intrusive “fair tax” bureaucracy and no one will convince me that a government agency that hands out money every month to a large portion of the population will not be extremely intrusive. One signal advantage of the sales tax is that it is administered more or less automatically and without the need to identify individuals. The “prebate” part of the fair tax negates that benefit and opens the door for what is supposed to be essentially a sales tax to be administered as a welfare program with all the concomitant lobbying, need for personal identifying information and politically correct posturing by politicians.

If the fair tax prebate is truly not determined by income, spending or any other factor other than family size, as I understand you to claim, then it also has no connection to the amount of sales taxes that have been (or will be) paid. If there is no connection to actual taxes paid then the governmental payment is not a rebate at all, it is merely a transfer payment made by head count. I really do not see any advantage at all and many serious problems this with this “prebate” concept. In my view we have enough people getting transfer payments from the government right now and expanding this to a greater portion of the citizenry just further impairs our ability to maintain our system of republican self-governance.

“Why are accountants for it?”

A friend of mine has his own small CPA practice and he tells me that about 60% of his billings come from tax work. He is a big FairTax supporter because he sees just how dysfunctional the current system is and how the same transaction can get entirely different tax treatment with different taxpayers. He tells me that I would be amazed at how many clients he can’t get to take perfectly legitimate deductions because they are afraid that it will trigger an audit. His view is that that should not be happening in America, the home of the brave and the land of the free.

As for his own business, he feels that there are plenty of other services he can perform for expanding and growing businesses in a post-FairTax world and most of them are more interesting and satisfying than doing tax work.

I know other people who work in the tax field who don’t grasp the big picture as this friend does and who are scared to death of the FT. The tens of billions of dollars that we spend on compliance don’t just evaporate into thin air; they go into the pockets of some Americans and those who benefit personally aren’t eager to see their tax knowledge depreciated.

I have no doubt that a substantial number of the SQLs here on Free Republic are in that category. The more momentum the FT picks up, the more strident and emotional their attacks are.

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