Huckabee’s “Fair Tax”

by on January 5, 2008 at 9:02 pm in Economics | Permalink

Tom Redburn nails it:

Whatever the rate, critics say, a steep federal retail tax, piled on
top of existing state sales taxes, would encourage widespread illegal
tax evasion, black market transactions and other forms of cheating,
creating a cycle that would require even higher tax rates.

“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson,
an economist at Harvard who opposes the plan but whose research into
problems with the current system is sometimes cited by supporters. “It
tries to roll everything into one tax, which simply can’t carry all
that weight.”

Here is Bruce Bartlett, here is Megan McArdle on same.  You can put this in the "things I am nearly certain about category."

Response to comments: Note that a "fair tax," or a national sales tax, isn’t the same thing as a standard multi-stage VAT (a better idea); for a standard VAT the dual reporting requirements make it self-enforcing to a much higher degree.

1 Cyrus January 5, 2008 at 9:16 pm

Any federal consumption tax faces a reasonable complaint from those with any savings: we paid income tax when we earned it, now we have to pay tax again when we spend it.

2 Josh H January 5, 2008 at 10:39 pm

There’s a flip side to the big percentage we’d have to pay under a single tax — transparency. By definition, FairTax would take just as much tax money from us as before, the only reason we’d have more motivation to cheat is because we’d actually clearly see how much we’re paying. Maybe that would lead people to demand a cut in spending to reduce the taxes. Unlikely, but possible.

3 anon January 5, 2008 at 11:20 pm

Hmmm…Megan says that one of the virtues of the tax is that it would slightly increase compliance because “Compliance is considerably easier to get from companies than it is from individuals…”

4 Ron January 5, 2008 at 11:54 pm

But the income tax is not all roses either. Don’t sink the Fairtax without considering the income tax: Invasive (report your income or else), Confusing (how much do I owe??), Wasteful (How much does it cost to enforce and administer?).

5 Eli January 5, 2008 at 11:56 pm

Tyler, can you address David Wright’s point, which I think is a good one, that compliance issues are basically solved by making the tax a VAT? There are big problems with the Fair Tax, but I don’t view compliance as one of them.

6 chris January 6, 2008 at 12:37 am

I was also going to say something about the VAT issue. Company A had an incentive to make sure Supplier B paid its portion of the VAT lest A be assessed the taxes for both A’s and B’s added value. With VAT, every transaction in the supply chain is self-audited. Surely this addresses the largest part of the compliance issue?

7 Finnsense January 6, 2008 at 2:17 am

This is odd Tyler. Denmark has 25% VAT and you don’t see much of a black market there. Most people in Finland don’t even realise they are paying VAT because it’s only shown on invoices, not in supermarkets. They know Americans pay less for the same goods but they don’t worry about it unduly. I think you’re ignoring the evidence here.

Second, the idea that a VAT will encourage more corruption than income tax is very hard to justify. The rich in Finland, like the rich in most countries, don’t pay a lot of income tax. They pay plenty of VAT though.

8 Tim Worstall January 6, 2008 at 7:30 am

Why is everyone pointing out that a VAT wouldn’t be so bad? The entire point about the “Fair Tax” is that it isn’t a VAT, that it’s claimed in one lump from the final retail transaction to the consumer. *That’s* the biggest problem with it.
http://www.adamsmith.org/blog/tax-and-economy/that-fair-tax-thing-20080105702/

9 Floccina January 6, 2008 at 9:04 am

Why so Little Tax Evasion? Becker

http://www.becker-posner-blog.com/archives/2007/11/why_so_little_t.html

All the rich countries are successful in raising sizable amounts of revenue from taxes with only a rather little tax evasion. Tax avoidance is the use of legal means to reduce taxes, whereas tax evasion uses illegal means. The federal government of the US raises almost 20 percent of American GDP through taxes on personal and business income, capital gains, estates, and the sale of gasoline and some other goods. The estimates from the 2001 IRS National Research Program indicate that the percent of income not reported is quite low for wages and salaries, but rises to over 50 percent for farm income, and about 40 percent for business income. Income tax payments overall are under reported by about 13 percent. What determines the degree of tax evasion?

10 Shawn January 6, 2008 at 12:47 pm

Scott W. – You are completely forgetting the many embedded taxes that are already in the cost of retail goods. The FairTax eliminates all of those taxes. We actually do tip the government everytime we buy a pack of gum, or any other item for that matter. Don’t forget that. Any supposed distortion in the taxes we pay through witholding are more than exceeded in every item we purchase at the retail level, considering embedded taxes. There’s nothing distorted about that.

11 Matt Waters January 6, 2008 at 7:34 pm

PCCapitalist,

The Florida tax does not tax services while the FairTax does. I must admit, as a former FairTax supporter, that it’s too easy to imagine a doctor or auto mechanic forgoing the tax for a known customer.

12 G January 7, 2008 at 12:31 am

So, the fair/flat tax = more tax evasion and possibly less government funding? Sounds great to me!

…although I seriously doubt the incidence of evasion would be higher than our current income tax 🙁

13 1 January 7, 2008 at 3:58 am

Counter-intuitivetly, the Fair Tax may help gain revenue from the underground economy. The proceeds from these ‘illicit’ activities help pay for taxed goods and services.

14 Bernard Yomtov January 7, 2008 at 10:25 am

Denmark has 25% VAT and you don’t see much of a black market there.

But the incentive to cheat is much greater under Fair Tax than under VAT. The retailer in a VAT system effectively collects VAT only on his profit margin.

If I understand correctly the retailer buys from the wholesaler at, say, $40, which includes $10 VAT. The retailer then sells for, say, $60, including $15 VAT. When the retailer pays VAT he deducts the $10 paid to the wholesaler, and so owes only $5 on a $60 sale, 25% of his margin.

Under Fair Tax, assuming the same rate, retailer pays no VAT to wholesaler, and instead sells for $$45, plus $15 Fair Tax, and of course is responsible for paying the entire $15 to the govt.

So the retailer’s incentive to cheat is much higher under Fair Tax. The difference depends on the retailer’s margin, but it seems that for low-margin goods the retailer’s tax liability under VAT might well be less than typical US sales tax rates, while under Fair Tax it would be quite large.

15 Bernard Yomtov January 7, 2008 at 4:57 pm

Travel junkets to consume abroad would be standard as it would be so much cheaper.

That sounds right. And then there would be much stricter customs enforcement. Returning from a foreign trip, at least from some places, would involve a nightmare wait while lots and lots of bags got inspected. That means more inspectors too.

Want to visit Mexico? Better schedule a very long layover between your first landing in the US and your final flight home.

16 Theophanes January 7, 2008 at 8:44 pm

widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.

I just became a supporter of the flat-tax. The more money circulating in the real free-market (grey/black/informal) the better. Get people used to “cheating” the government and doing business outside the state. Seems like it would act like a huge tax on state-sponsored corporations (most of them) since they’ve got too much to lose by circumventing the system.

17 Sune January 8, 2008 at 12:50 pm

@Cory

Well you say kids don’t work, where do they get their money then? Allowance from parents, allowance is a share of the parents income – an income which, with the Fairtax is no longer taxed. Situation unchanged?

18 Elvis McNeely January 12, 2008 at 3:56 am

I know this fairtax idea is a bit confusing and we should be highly concerned. I would recommend everyone using this calculator (http://www.fairtax.org/calculator) to see if “you” will benefit at all. For us (family of 3) we would increase our spendable income which in the end means we can “save” more money. Something this country needs to learn how to do, government and citizens.

They (http://www.fairtax.org) also give a list of candidates who support the fairtax idea.

19 Michael Chase January 21, 2008 at 10:51 am

The Fair Tax will do away with all other forms of taxation! You will not be paying an income tax which is withheld from your check every pay period! Your tax would be when you spent the money–so there is a built in incentive to save as well here.

Underground sales maybe…there is always someone out here that wants to bilk any system.

In a short time it is believed that consumer prices would be reduced by about 20% thereby allowing spending power to be increased…..

The method of taxation we use today causes wide-spread confusion and misinterpretation of the code..Thisk of the massive savings by getting rid of the IRS! That is a good start toward reducing government and government spending…

20 Ed January 24, 2008 at 10:48 pm

The assumed reduction in prices is mostly based on the assumption that manufacturers will reduce the cost of their labor by the amount of taxes paid, and then pass on the savings to consumers (not much taxes on materials):
1. If our wages are reduced to the same as our after tax income, then we have the same take-home pay, but we will pay more for the goods we purchase (maybe not 30% but more (see 2))
2. If you believe businesses are going to pass all savings on to the consumer then you are not living in the real world.

Too many optimistic assumptions
The only solid fact everyone can agree on is that the rich will get richer.

21 Lee February 19, 2008 at 8:16 am

Many of you people are missing the point.

You’re discussing the FairTax as if it’s an entirely new source of funds — as if you (and in some cases, you’re children) are going to be paying more for consumer goods because of it. That’s plain nonsense.

Where does their allowance come from? Likely, your own pocket. Instead of having a chunk of your paycheck deducted for income taxes, you now get 100% of it to play with. So who cares that the $20 shirt now costs $24.60? You’ve probably saved yourself at least $7 in income taxes, which more than compensates.

You talk of economic education for your children — what’s more economical than the act of saving? With consumer goods increasing in price, your children can learn the value of saving money, with the real price tag now reflected on every purchase. Instead of taxes hidden in the purchase price — employee withholdings, corporation tax, and every other – the taxation is now clearly reflected. Again, what could prove a better lesson for your children?

22 Thomas October 15, 2008 at 3:26 pm

Also the fairtax plan is nothing like the VAT, which they have in germany and other European countries. The VAT taxes retail at many levels of production, the fairtax will be applied one time and once only, at the cash register. Also under the fairtax plan all low to middle class americans will recieve a prebate check every month to cover neccesities up to the poverty level.

23 NDT November 10, 2008 at 4:49 am

Ok – so new cars and homes are taxed at a 23% rate but used cars and used homes are not. So much for home builders and auto manufacturers seeing a boost from this plan. Not only is that high tax levied on those new purchases, most people would have to get financing on those items, and do you really think banks are going to forgo charging interest on the tax portion of the purchase? I think not… Therefore new car & new home sales would be limited to foolish people who don’t care what they spend their money on, or the wealthiest among us that can pay in cash.

Did eBay come up with this plan? Because it really seems like it would push alot of people to buy slightly used goods… so what happens when manufacturing slows to a crawl because more and more used goods are changing hands? Don’t get me wrong, if this is a sneaky way to increase sustainability I’m all for that, I just see a booming Black Market of stolen and imported goods existing through already established avenues like eBay and craigslist, let alone new websites that may pop up.

Now what the solution may be in the aspect of a National Sales tax: Skip collection of monies for Social Security and leave it in the peoples hands to invest. Skip collection of monies for Medicare and leave it in the peoples hands to use for their health care (oh, and don’t tax health care, at least not as heavily). Use the monies collected for infrastructure, defense, and a handful of forward investments such as alternative energies, technologies, medical research, and paying down our debt. I would support something along the lines of a 10% tax in that scenario.

24 Chris April 6, 2009 at 3:35 am

I have found an article that may interest you regarding Fair Tax. I am an independent thinker and patriot of this country.

With the fair tax proposal all they have done is shift the debate from how much of the wealth of the American people the federal government confiscates to the manner in which the wealth is confiscated.

The Flat Tax Is Not Flat and the FairTax Is Not Fair
Posted on 4/3/2009 12:00:00 AM
http://mises.org/story/3389#

25 aion moeny May 12, 2009 at 9:24 pm

we should make more thinking about the paper

26 David Schwartz June 1, 2009 at 8:12 am

“It’s not obvious that tax evasion would be higher under the consumption tax than income tax. Can you elaborate on why one tax regime might be more evasive than another?”

There a variety of reasons why tax evasion would be higher under a Fair Tax type consumption tax than under an income tax:

1) There is no competitive pressure to evade personal income tax. But if a grocery store evades 15% of a tax like the fair tax, it can cut prices 5% or so. This puts huge pressure on competing stores to also cheat.

2) Income taxes have withholding and cross-reporting (W2/1099). This makes the taxes much harder to evade.

3) The cost of evasion is roughly flat, but the benefit scales with the tax rate. So a higher tax rate means more evasion.

Of course, it also depends on the enforcement regime. If you think the IRS is bad, trying to enforce a straight sales tax as high as the Fair Tax proposes would be truly Draconian.

27 Erin Dunn March 15, 2010 at 7:33 am

There is so much misunderstanding here about the FairTax and so many assumptions that seem logical, but don’t play out in reality. Everyone should do themselves a favor and learn about the FairTax, find a local group/leader who has studied and understands the plan and can answer your questions clearly, honestly, and with research to back it up. All FairTax Members (with the exception of 3 people in the home office) are volunteers who have studied the plan and believe, based on the research, that it would bring jobs (opportunity!) to our country, greatly broaden the tax base to include people who currently don’t pay income taxes (i.e. criminals making money illegally and illegal immigrants), and would allow every U.S. family to determine their level of taxation. Anyone who thinks compliance would be lower than under the current system hasn’t studied the issue and those who don’t understand the concept of embedded taxes are misled as well. Visit http://www.fairtax.org to learn more and find local volunteers who will take the time to answer your questions. We need the FairTax!

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