Sunday, February 24, 2008

FairTax (national sales tax) now mostly criticized over collection enforcement

Mike Huckabee's ascension paralleled the ascension of the FairTax idea--replace the federal income tax with a national sales tax. That rise is evident on the editorial pages of the WSJ, where multiple pieces in opposition to the idea have been run in recognition of Huckabee's potential VP spot on the GOP side. The board's position is not surprising, as a large chunk of its readership earns their livelihoods through a better understanding than most people have of an arcane income tax structure.

But while the opposition is to be expected, the sloppiness with which it has been carried out is not. Bruce Bartlett incorrectly claimed that the monthly prebate to offset any regressive effects of the tax would be based on income. It calls for a set amount given to each citizen irrespective of income, varying only in that people with a greater number of children would get more. That Bartlett was unaware of one of the foundational aspects of the plan shows that he may not have even taken a cursory glance at it before leveling his critique. That does not speak well for the op/ed board's diligence, either.

He also wrongly claimed that the plan would add 30% to the price of every house sold. For one, he is using a tax-exclusive rate to gauge the national sales tax, while the federal income tax uses a tax-inclusive rate. If a tax-inclusive rate is implied, so that an apples-to-apples comparison can be made, it would add only 23% to the price of a home (a further flushing out is presented, about ten paragraphs down, in my long repudiation of Bartlett's piece). More importantly, it would only be levied on new homes, which comprise about one-in-four of the residences sold each year in the US.

Awhile back, the op/ed board gave Jerry Bowyer space to criticize the idea. His first two paragraphs are substantivally devoid:

If talk show hosts ran the world, we'd have a national sales tax. We'd have no immigration, and we would have long ago carpet-bombed the entire Middle East. We'd also have something called "fair trade," which means no real trade at all.

But they don't run the world; they just pretend that if they did, everything would be great. I would be a lot more confident that this was true if I didn't know so many talk show hosts. I would be even more confident if they had really run anything of consequence before. But I do, and they haven't.
This supercilious smearing is not meant to win over those previously supporting the idea. Instead, it attempts to intimidate those who may be on the fence or hearing about the idea for the first time. It is a standard tactic employed when a heretical idea is gaining momentum and needs to be stopped before it reaches 'mainstream consciousness'. Those who question the orthodoxy's view on catastrophic anthropogenic global warming, zero group differences, or unrestricted immigration regularly face similarly vicious insults.

Parenthetically, Bowyer used to be a radio talkshow host and has called for theocracy in the US in the past (so the word 'heretical' is appropriate enough).

A few points should be responded to:

We could simply declare that by switching from a federal income tax to a national retail sales tax, tax cheating would end, code complexity would be a thing of the past, and illegal immigrants would start paying taxes. And, of course, we'd switch into high economic growth -- forever.

The problem is that none of this would happen. People would simply switch from cheating on income taxes to cheating on sales taxes.
Of course proponents do not claim cheating would end. Whether or not the magnitude of avoidance would rise or fall is mostly speculative. Currently, there is more avoidance of income taxes than of sales taxes at the state level (as Bowyer implicitly implies). This is because individuals are largerly responsible for the former and large retail establishments for the latter.

Asserting whether or not that would hold on the national level is conjecture. The IRS estimates that about $400 billion in federal income taxes go uncollected each year (this is referred to as the "tax gap" in accounting parlance). On the services side, the cheating would almost certainly be more problematic than on the retail side, where it is difficult to imagine major retailers like Wal-Mart refusing to collect the tax.

A national sales tax would reverse the inherent advantage illegal immigrants enjoy in the labor market. Paying people under-the-table becomes a non-issue. Income isn't taxed. So paying the iillegal, Pedro, who shows up at the construction site $10 an hour no longer confers an advantage over paying John Smith who has a Social Security card, a residential address, and a accessible background the same amount. Both guys pay the same in taxes--it's forked over when they go to McDonald's for lunch and buy a pack of smokes at the convenience store.

Further, because illegals are not entitled to the monthly rebate that citizens are, they go into the labor market at a disadvantage. When the foreman is deciding between Joe and Pedro, Joe bargains for his wage knowing that he has a check for $300 coming at the end of the month.

Bowyers is incoherent on this point:

The immigrant stuff is nonsense on stilts. Let me ask you this: If they're here illegally, why won't they also buy and sell goods on the black market?
If they're here illegally, why won't they also break into your car or rob you at the ATM? The point is not that illegal aliens will somehow stop engaging in criminal activity. It's that employers will no longer enjoy the artificial premium that makes illegal labor so attractive to them now. If businesses find illegal labor less attractive, entering the US illegally becomes less attractive, and the problem is partially ameliorated. Unsurprisingly, that nonsense was all Bowyers had to say on illegal immigration in the entire piece.

The rest of Bowyer's submission isn't much worth reading. He uses the apples-to-oranges 30% figure and fallaciously insinuates it will be levied on everything that is bought and sold, not just new products.

He complains that decisions previously made due to tax considerations will no longer seem beneficial, like Roth IRAs (of course, people with traditional IRAs would benefit as much as the Roth guys would suffer). One-time transition pains would come with a complete overhaul. If the overhaul institutes something preferable though, these one-time pains shouldn't be decisive.

He also brings up questions of gradation--what if I use the internet for personal use but say its for work (business-to-business purchases are not to be subject to taxation)? Uh, what if you do that now? You claim it as a deduction. There's a good chance you slide by undetected. Maybe you're field audited and you get caught. Of course enforcement is still going to be a significant concern.

That the bulk of his piece focuses on compliance concerns does evince the growth in the idea's popularity (HR 25, its legislative embodiment, now has 59 sponsors in the House). As the knowledge base of its readership grows, the op/ed board is no longer able to slip in falsehoods as easily as it was able to in the past (a similar trend has occured on the immigration front, where the board has given up the mythical 44% figure, dropped some of its hysteria over the importance of the Hispanic vote, and stopped asserting that favoring immigration restriction is a minority-held position among the public).

And the WSJ recently let Leo Linbeck, President of the FairTax movement, run a piece to even the playing field a little. Granted, it was during the dead time in between Christmas and New Year's, but it is astonishing that a proponent's voice was even allowed to be heard. Now, if Gigot and company would just let Steven Camarota or Roy Beck have some space, we'd really be getting somewhere!

Primary reasons I see to support the FairTax:

- Ending (and reversing) the wage advantage illegal immigrants enjoy over the native working class.

- Encouraging conservation. The plan hasn't been pushed for its environmental merits, but slapping a 23% premium on new goods relative to used goods will extend the 'useful' life of a host of products and increase second-hand purchasing.

- Relative to the income tax structure, it encourages exports and discourages imports. While US exporters must pay income taxes in the US, their products are also subject to the taxes of the nations they are exported to. Several European countries refund VATs for goods that are exported, and East Asian currency manipulation serves as a furtive tariff on imports there. Why not similarly favor our exporters as the rest of the developed world favors their own?

- It will reward wealth creation and penalize personal expenditures (relative to the current structure). An income tax does just the opposite; Penalizes wealth creation and encourages personal expenditures.

- Businesses and individuals will make economic decisions based on efficiencies that are not distorted by income tax considerations (postponing equity sales into early January that should have been made previously, etc).

8 comments:

John S. Bolton said...

Currently illegals are frequently getting the earned income tax credit. It's amazingly difficult ot get the government to stop throwing money at these foreign criminals, even though the use of fake ID's means it's possible to collect multiple checks. Remember that these people are mainly not workers, but dependents of one sort or another. They're called workers in the same way that a black area is called a 'working-class' area; a fiction to fool the gullible and win sympathy for scam 'workers'.

c.o. jones said...

The only real objection I have to the Fair Tax is that I do not trust our politicians to implement it honestly and correctly. I can very easily picture a scenario where we're told the Fair Tax has to be "phased in" while the old tax on income is "phased out," but somehow they just never get around to do the latter. Then we're stuck with a federal tax on both income and consumption, as well as the same at the state level.

One of two things will happen then: DC will be awash in money (for a while anyway) which will be spent on various vote buying schemes. Of course, what could also happen is that tax avoidance will become a national sport, much as it is, let's say, in Italy, with evasion and corruption becoming the norm rather than the exception.

Either way, we're headed for a banana republic sort of status.

Audacious Epigone said...

JSB,

Right. Another plus for the consumption tax. Prebates would be subject to identity fraud as well, but would be actively verified instead of just being subject to random field audits (although the EITC is one of the putative 'flags', from the IRS perspective it's hardly worth going after). By accepting some amount of false negatives (that is, erring against the prebate without certainty and then potentially catching up upon verification), the problem seems pretty manageable.

CO Jones,

Yes, I've heard on more than one occasion those who've argued a consumption tax is too regressive state they're open to some form of the tax 'worked in' (that is, added on) to the current structure.

John Linder and the FairTax crowd is aware of this. He is going to add a sunset provision to HR25 stating that the 16th Amendment must be repealed within five years of the bill's passage or the consumption tax disappears. Without the 16th gone, I'm as apprehensive as you are. Repealing it is a must for the FairTax to 'work' (in the ways I'm arguing it will).

Tkrop said...

I have participated in The President's Tax Panel's Forum, countless online debates, personal lectures and conversations. I always encounter uneducated critics and many intentionally misrepresented facts about the FairTax. Try as I may to see the point of view of many of these critics , I just can't get my head that far up my ass.

Audacious Epigone said...

Tkrop,

Keep fighting the good fight. I'm sure it's frustrating, but there are reasons to be encouraged. The FairTax idea clawed its way onto the 'public' scene in '05. In less than three years, its legislative embodiment has more co-sponsors than the much 'older' flat tax does, and a potential VP candidate has made it a centerpiece of his surprisingly successful campaign. The vested interests (many of the critics you refer to) are having trouble ignoring it any longer, so they're going on the offensive. These are positive developments, I think.

Tkrop said...

I surely will. I've been involved for 7 years now, and see the continuing growth of the movement.
I truly feel the passage of the FairTax is no longer IF, it has become WHEN,do to the many people like us.

Fat Knowledge said...

Fairness is the enemy of simplicity and simplicity is the enemy of fairness - Senator Mitchell

The irony of the FairTax for me is that I like it more for it's simplicity than its fairness. I would rename it the SimpleTax, but maybe that isn't as catchy.

I just came across the CBO figures for who pays which taxes by Quintile. For me, I like the progressive aspect of the current income tax. Do you know how the distribution by quintile for the FairTax would compare with the current income tax? I assume that the FairTax just replaces the income tax and not the payroll/social security tax.

Audacious Epigone said...

FK,

Thanks for those CBO figures. Very handy.

The FairTax plan does aim to replace payroll and SS taxes in addition to the federal income tax. I'm not aware of the estimates for total tax contributions by quintile. The prebate will insure that the bottom quintile continues to essentially pay nothing, though.