Larry Kotlikoff defends the Fair Tax

Here is the link, via Greg Mankiw.  If we are comparing the Fair Tax to the traditional VAT, compliance is issue number one and I’m not convinced by Kotlikoff’s defense:

This [compliance] is a reasonable concern, and one I share.  In examining the real revenue-neutral FairTax rate, my co-authors and I ignored compliance issues, not because they are unimportant, but rather because we had no firm basis for estimating their impact…

…it’s clear that the incentive to cheat will be significant. But it’s also clear that the incentive to evade income taxes is greater than would be the incentive to evade the FairTax.  Moreover, much of the evasion under the FairTax would come in the same form and done by the same actors as evasion under the income tax; for example, a waitress who fails to collect FairTax on tips is also, presumably, not paying income taxes on those tips under the current system….   

The reasons I’m not overly worried about evasions number five.  First, the vast majority of retail sales occur in major retail outlets, like WalMart.  Second, we’ll have vastly fewer taxpaying entities (14 million rather than more than 100 million) on which to focus our enforcement efforts.  Third, we’ll have hundreds of thousands of otherwise unemployed IRS agents, accountants, and tax attorneys to enlist to enforce a single tax.  Fourth, we can always compel firms to report, via 1099-type forms, their sales to other firms.  This will provide the same records that arise under a VAT.  Fifth, the government can stipulate that all retail sellers provide buyers with a written receipt, regardless of whether the transaction is or is not in cash, specifying that the FairTax has been paid. Thus if sellers don’t mail in the taxes, there will be a paper trail of the evasion. Sellers who try to bribe buyers to forgo receipts and split the FairTax among themselves run the risk of having the buyer turn them in.   

I would say this: push for a Fair Tax and if you’re lucky you’ll get something like a VAT, if only for reasons of enforcement.  Plus you’ll also get the same income tax we have now, which isn’t going away anytime soon.  New Zealand, of course, did something like this.  "Fair Tax = Tax Increase"; it’s a pretty good and simple slogan.

On most of Kotkiloff’s other points, he’s simply "fighting for a draw," as they say.  Think through federalism with no federal income tax as a base for state and local taxes.  The transition issues are a monster.  If encouraging savings is the main goal, why not just eliminate the taxation of capital income under the current scheme?


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