WSJ Editorial: Fair Tax, Flawed Tax

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WSJ Editorial: Fair Tax, Flawed Tax

By JLP | August 26, 2007

I read an interesting editorial in this weekend’s Wall Street Journal titled Fair Tax, Flawed Tax. I have not read Neal Boortz’s The FairTax Book (affiliate link), which is a book about abolishing the IRS and the income tax and moving to a consumption tax. Boortz calls this a fair tax. In my opinion, it doesn’t seem fair. Why? Because the less money you make, the higher percentage of your income will be spent on consumption. In other words, it seems like a regressive tax, not a fair tax (for the record I’m not a fan of progressive taxation since it too is not fair).

Personally, I like the idea of a flat tax. I think it’s fair for everyone since everyone pays the same percentage regardless of income. I know, I know, I’m too simplistic!

UPDATE: For those who are interested, here’s Neal Boortz’s Response.

Topics: Flat Tax, Taxes |

Comments to “WSJ Editorial: Fair Tax, Flawed Tax”

Charles Says:
August 27th, 2007 at 6:18 am

There are rebates involved (not sure how that abolishes the IRS) that return money for basic cost of living items so that the burden to those living hand to mouth is much less. Yes - that means that there would be a list of items that don’t get taxed or get taxed less… so the IRS may not be abolished but retasked to monitoring those items? I don’t know.

One big benefit: since that abolishes income tax, all savings grow tax free! (Just pay when you eventually spend it.)

Easy E Says:
August 27th, 2007 at 6:34 am

You are forgetting about the prebate. Taxes that will be paid on the basic necessities of life will be covered by a pre-funded check. Therefore, if you only make the poverty level income and all you buy are the basic necessities of life, then you will pay no tax. Essentially the tax kicks in only after you go above and beyond the basic necessities of life in your spending.
I suggest that you do read The Fair Tax Book. It is not very long and the idea is fairly simple. Not to be rude, but if you haven’t read the book then how does your opinion on the idea, which you do not fully understand, matter?

Easy E Says:
August 27th, 2007 at 6:41 am

Charles, read the book. There is no list of items. It is simply a check issued to cover the taxes paid on the poverty level income (based on family size). No list, no special situations for retailers. Yes the government sets the poverty level and they also set the tax rate, but compare that to all the layers we have now. Two numbers is all we need and they will be visible to everyone. What do you pay in taxes now? Do you know how much you will have to pay in taxes or is it always a mystery?
I can not stress enough when I say “Read the book.” Then you will understand the idea much more completely than what you get out of some columnist’s misinterpreted thoughts.

Brian Says:
August 27th, 2007 at 7:11 am

Easy E: If the rebate only applies to those at or below the poverty level, what benefits will those right above the poverty level see? Sounds like they will be worse off than those right below the poverty level because of all the extra taxes.

Charles Says:
August 27th, 2007 at 7:23 am

Easy E - I’m not dissing the fair tax. I like the idea. However, regardless of the proposed idea, it would get changed somewhat based before it was ever passed into law. You think we’d end up with only two numbers? I doubt it. Sure, the tax rate would be one number, but the prebate would end up being a graduated system (much like now), creating a mini-1040-like form and retaining some of the IRS. (Of course, someone would have to police the collection of sales tax anyways - states have a hard time enforcing it as it is.)

Again, I’m not saying that the fair tax is a bad idea - I love it! However, be realistic in thinking about how it might come to pass in the U.S. The compromise required to get the idea passed will require some complexity enter the equation.

Bobby Says:
August 27th, 2007 at 7:35 am

Nothing wrong with being simplistic, ever heard of KISS? (Keep It Simple Stupid!)

Kevin Says:
August 27th, 2007 at 8:36 am

Brian,
The rebate doesn’t apply only to those at or below the poverty level; it applies to everyone. The “poverty level” is simply the “break-even” point at which net taxes paid are zero. Imagine a straight line on an X-Y graph where X is the amount spent and Y is the tax paid. The slope of the line is the tax rate. The Y intercept (which is negative) represents the rebate. Note that this tax is at all points “progressive” because as you move along the line, the ratio y/x increases as x increases.

Dave Says:
August 27th, 2007 at 8:53 am

No matter how much we might like the fair tax concept, it will never pass because Congress is not about to give up its ability to favor its friends with the tax code.

GLM Says:
August 27th, 2007 at 8:54 am

The Prebate applies to everyone - so effectively no one pays tax on the necessities. Now if you think $200 shoes and a luxury car are necessities you will pay tax on what you spend over the povery level.

I am bothered by those who change how the Fair Tax would work - thru ignorance or to sabotoge the concept - then knock it. READ THE BOOK or at least go to FARITAX.ORG

Also the system Taxes illegal activity as Crooks spend money too - now their income is not normally taxed! I love it and have read the book. I am convinced it would be a Boon to our economy. It would be the best thing for our children!

Brad Says:
August 27th, 2007 at 8:54 am

To reiterate Kevin’s explanation, everyone gets to make purchases up to the poverty level tax-free due to the rebates. That means everyone in America gets to buy the “necessities” with no taxes. This means that many, many people that don’t pay any taxes now will still not pay any under the fair tax. It rewards those who save and invest instead of spending way beyond the necessities.

There’s nothing whatsoever regressive about the Fair Tax. Without the prebate it would be. But with the prebate, it’s as progressive (if not more) than the income tax. One problem many have with income tax is that it taxes productivity– when you tax the “rich” at a higher income tax rate, you’re really taxing the higher earners at a higher rate. These are nearly always the biggest contributors to the economy. Meanwhile, the inherited rich sitting on a pot of gold may pay very little, as they don’t have nearly the earned income. The Fair Tax hits THEM harder . . . as it taxes their spending instead of their income. I like that scenario much better as it is more prone to tax wealth than productivity.

With all this said, I can’t see this changeover ever actually happening. Sadly, I just can’t see major tax reform like this coming through. It’s too much effort and too much risk for a politician to take on.

Easy E Says:
August 27th, 2007 at 9:00 am

Brian, the prebate applies to everyone. That is why it is ‘Fair’

GLM Says:
August 27th, 2007 at 9:40 am

ok just read the article and I am aggast theat the WSJ would publish such an inacurate article.

From the Church of Scientology? No way but a good way to didmiss fair tax supporters as Kooks. would be funny if I was not afraid the rumor would catch on. The Fairtax concept was developed by a a body of economists and market researchers that sought to develop the best revenue nutral tax system from scratch.

The inclusive / exclusive argument is used by opponents who know we do not tend to think of our current tax rates inclusively - although they are . If you earn a dollar now you pay at least 15-35 cents Federal tax as well as 7.65cents from both you and your employer for social security. These taxes total 30-50 cents on every dollar earned - and are eliminated by the fair tax . (depending on your tax bracket.

The author then goes on to address government spending and how the government will pay sales tax too. This levels the playing field for private business vs government - a good thing . The article conviently avoids desscribing how business will no longer pay taxes and how this will impact the the prices they need to charge to pass on the cost of taxes to consumers. Goods we buy now have the business’ tax costs added to them - with those costs eliminated competition will drive the cost of goods down.(I think the extensive studies say roughly 22%) This is virtually a wash when the 23% tax is added - and you keep your whole check !

Same thing with the intangables argument - Doctor’s pay business tax too !

The prebate is not based on family size- not on income . It does not do it base on income or as he states “

GLM Says:
August 27th, 2007 at 9:45 am

ok just read the article and I am aggast theat the WSJ would publish such an inacurate article.

Same thing with the intangables argument - Doctor’s pay business tax too !

The prebate is not based on family size- not on income . It does not do it base on income or is it as he states a

an incredible complex and intrusive- tracking every American’s monthly income- that is our current system .

The cost of paying the prebate would be minimal - the Feds already pay out social security payments easily and economically

David B Says:
August 27th, 2007 at 9:47 am

I have to agree with Easy E. You guys need to read the book. The writer of the WSJ article clearly doesn’t understand either. If I remember correctly, many of the things that were mentioned (one of them being housing) actually would NOT be taxed. Also, nobody’s monthly income would be tracked, that would defeat the purpose. It wouldn’t need to be tracked because the prebate would be given to everyone.

JLP, I agree with most of what you say (especially when it comes to politics/economics) and I would think that if you researched it a little more you’d like it too.

Dave, sadly, you are probably right.

lorax Says:
August 27th, 2007 at 10:00 am

While I haven’t read the book, I have listed to the author on EconTalk.org.

The fair tax has a huge advantage: it gets rid of the inefficiencies created by the business of tax collection (and tax evasion) by simplifying the IRS and putting tax accountants out of work. That’s a good thing.

The regressiveness of the described system is somewhat debatable. But it won’t happen. The mortgage deduction is the third rail of politics; the fair tax touches it, and is thus DOA.

Griffin Says:
August 27th, 2007 at 11:07 am

A “flat tax”, i.e., a tax that is the same percentage of income for everyone is not fair. Why should I pay $100,000 in tax if I make $1,000,000 in income while someone else pays $1,000 in tax on $10,000 in income?

The only fair tax system in my opinion would be one under which everyone paid the same amount of tax regardless of income (for example, everyone would pay $1,000 or $10,000).

We will probably never have a fair tax system in this country because: a) the politicians use the tax system to buy votes; and b) there are many people in this country who think it is a good deal if they can vote themselves an income.

Apart from the fact that there’s nothing about a consumption- based tax that would prevent Congress from adding (or keeping) an income tax, a consumption-based tax would be great for building net worth — if you don’t buy as much stuff (which will save you money), you won’t pay as much tax (which will save you money).

Richard Says:
August 27th, 2007 at 1:08 pm

Another tax discussion. While I think a consumption tax is the best on paper, it’s the execution of it that is the problem. “The devil is in the details.”

1. It wouldn’t eliminate the IRS, some government body still has to collect the household information, pay out the prebates, and then collect the tax revenue.

2. What if I room with other people? It’s not uncommon for people to change residences and for roommates to come and go. Registration is only once a year for the prebate and then it only goes to one person in the household. So if I get into a bad living arrangement and want to leave I wouldn’t get the prebate. I also wouldn’t get it if the “head of household” doesn’t pay my portion of the prebate out to me. It’s a good plan if you’re the “typical white collar family”, but the real world isn’t so typical.

3. Instead of one large government body collecting taxes there would be millions of small businesses collecting the taxes then sending it to the state then from the state it goes to the federal government. Do you see how there are too many hands in the pot? We have states that are already mad that the federal government doesn’t give them as much money as other states. What stops a state from not counting collected tax money so that they can use it instead of sending it to the federal government?

4. I don’t think it would have any affect to the underground economy. If I wanted to get around the tax instead of buying new goods, I would just buy used goods and avoid the tax. You really think the drug dealer with his ILLEGAL money is really going to buy LEGAL goods from a store? He’ll just buy stolen goods instead and still doesn’t get taxed.

5. You’re also taking away the Mortgage Deduction that homeowners get to take and replacing it with a national sales tax on the price of homes of 23% or more. You thought the Subprime problem was bad, now you’re telling everyone with a mortgage they can’t deduct interest and future homeowners will now pay a quarter of the price more for a home.

Griffin, the problem with a Flat Tax is it punishes those that choose to do “what they love” as opposed to just doing what makes the most money. Why in my right mind would I want to be a teacher, police officer, fireman, or any type of civil servant if I have to pay the same amount in taxes as someone in middle management? Either people will stop working in those professions or the salaries will have to increase which will increase taxes for everyone.

Easy E Says:
August 27th, 2007 at 1:53 pm

How about this? Our government used to function without an income tax and everything worked out just fine. Then one day everyone decided that they had to get their share. What ever happened to the idea that people should be providing for themselves and not sitting there with their hands out? Our government was founded on the idea of people being free, because the rest of the world wouldn’t let them be. Now that same government has mutated into something of an oppressive form in which everyone is treated unfairly. I say the government shouldn’t be treating anyone. We are no longer a government based on freedom; instead we are a government based on free lunch. The fact that those of you who recognize the simplicity and fairness of the Fair Tax, yet realize the impossibility of it ever becoming law, perfectly illustrates the ineptitude of our government.

jack bauer Says:
August 27th, 2007 at 3:21 pm

WE can ALL agree that the current system is broke. I think the solution (flat or fair or ???) would be too much stess on the system, thus, no positive changes can be made without braking the treasury. The employees of the federal gov are not skilled enough to see such a change through.

jack bauer Says:
August 27th, 2007 at 3:21 pm

Ian Says:
August 27th, 2007 at 9:36 pm

Naysayers railing against the FairTax become, ipso facto, defenders of the INCOME TAX system. Prof. Larry Kotlikoff believes that the current tax system IS bringing the country to nothing less than an “economic meltdown (*)” by virtue of the invisibility of actual taxes paid. If Americans do not understand the true cost of their government, they’re unlikely to hold Congress accountable - thus the enabling mechanism to continued profligate spending.

Even with the foregoing notwithstanding, do FairTax naysayers really believe:

• Workers love having their pay confiscated, hourly, through gov’t withholding and don’t mind getting their money back by involuntary servitude - to the tune of 50 hours/year (on average) - preparing an annual tax return?

• That certifying the number of persons in your family (annually, and, ancillarily, upon change in household) is an abrogation of our freedom - more intrusive and complex than filing a tax return every year subject to threats and intimidation by theIRS.

• It’s better to have theIRS fishing through citizens’ income transactions (complete with audits, interest, penalties, and threats against individuals, families, businesses as well as confiscation of their homes, property, and bank accounts) rather than - Gawd forbid - issuing a gov’t check to an individual (while pretending that Social Security payments disbursement logistics really can’t work for “prebates”)?

• That an monthly advance tax rebate is the same thing as “being on the dole” ? (Only lobbyists, special interests, and business deserve “handouts” ? - the politician gets a payoff from a lobbyist, the lobbyist gets a payoff from its client, and the citizen gets higher taxes and/or prices that pay for it all.)

• “Hidden taxes” in higher prices are fine because they’re not “taxes,” per se? (Hey, forget that families are really paying business’s costs for complying with a business income tax code - staff, consultants, submittals, etc.)

• It’s far better to have a gargantuan tax collection “service” in Washington, than to have 50 decentralized, smaller, leaner state collection agencies collecting taxes from fewer sources?

• That the work by notable economists (paid tens of millions of $’s by Americans for Fair Taxation) doesn’t carry weight because it was paid for by private funds instead of some gov’t / quasi-gov’t enterprise?

• That FairTax’s backing by many economists (**) doesn’t carry any weight because (the Brookings’) Wm Gale’s testimony before the President’s Commission on Tax Reform is - somehow - above all that?!

(NOTE: The Commission/Gale made up their own “consumption tax” requirements, as if that constituted a legitimate rebuke of the FairTax plan. Dr. Kotlikoff has requested - but never received - Gale’s technical “modus operandi” which would definitively explain just how Gale’s conclusions can be reconciled with Kotlikoff’s well-documented technical work (***).

(*) http://snipurl.com/meltdowninprogress (If what Prof. Kotlikoff is saying is true, timely replacement of the income tax with the FairTax consumption tax MUST HAPPEN SOON.)

(**) http://snipurl.com/econsopenletter (Lists every tax that FairTax will eliminate, together with the power they represent to pol’s and lobbyists.)

(***) http://snipurl.com/taxpanelrebutted (No fair equating the Tax Panel’s idea of a consumption tax with the FairTax plan.)

America’s working families are paid because the companies they work for sell goods and services. Let’s pay for government the way America’s families are paid - when something is sold. Let us work, together, to end the enslavement of the Tax Code and to restore Liberty to America’s working families: http://snipr.com/scrapthecode

JimmyDaGeek Says:
August 28th, 2007 at 8:43 am

You must realize that no matter how much money you have (savings and checking accounts, stocks and bonds, mattress stuffing) and earn (income, dividends, and interest), this money is worthless unless you use it to acquire things. These things could be goods, like food and clothing, or services, like transportation and medical care. Until that money is converted into goods and services, it is useless, unless, of course, you want to start a bonfire. How many stories have you read about recluses that live like paupers, yet, after they die, are found to have substantial bank accounts? A lot of good that money did for them!

While taxing income is easy, it makes no sense because money represents potential. But, when you tax consumption, you are taxing the use of money. The more money you use, the more tax you pay. So, everyone pays the same tax if they spend the same amount money. They have control of their taxation.

You can counter that while all people are obligated to use a certain amount of money to survive, poor people don’t have the option of spending more money to offset any tax they pay. For that, I believe, the Fair Tax advocates giving all taxpayers a fixed refund so that it erases the tax on the poorest. The effect is to raise the consumption tax rate as a percentage of money spent.

You can’t get any fairer than that!

Richard Says:
August 28th, 2007 at 2:10 pm

Seriously I don’t know why I even try. If you Fair Tax advocates actually addressed the issues I raised instead of reverting to your talking points (even copying and pasting your responses) we could actually have a real conversation about HOW to put your plan into action instead of you just repeating ad nauseum that it’s fair. If you can’t actually address the concerns of people on the fence about the “Fair Tax” how are you ever going to pass a large sweeping bill like this through Congress?

The problem with the “inept” government (also with some readers of this blog) is that each individual thinks that their idea is the only way for the country to proceed and no one wants to actually discuss pros and cons and come to a NEW MIDDLE POSITION that both sides can see SOME merit to.

David B Says:
August 28th, 2007 at 6:31 pm

Ok Richard, I’ll play.

You’re right that some government body would still have to pay out the prebates etc. However it would be drastically reduced in size from the current IRS. There would no longer be the 60,000 pages of tax code to be enforced and 300 million individual returns to be tracked, each with a unique set of complicated deductions and exemptions. I don’t think that I need to explain it more than that. Suffice it to say that there will be significantly less work to do.

Rooming with other people would not be as difficult as you are trying to make it sound. This aspect would not be much different from the current system. Does one of your roommates currently claim “head of household” on their return, with each of you being his/her dependent? Why would this be any different? If each of you are single, independent people, then you would receive the prebate accordingly. You would each receive the prebate of a single person. Very simple.

“You really think the drug dealer with his ILLEGAL money is really going to buy LEGAL goods from a store?” Um, yeah. Where else will he get his food? At the secret, underground, grocery store for drug dealers only? Same with his Cadillac Escalade, he’ll buy it from a dealership. I don’t think criminals will be able to perpetually drive around in a stolen car without getting caught. Even if they wanted to, they wouldn’t be able to buy most things from some kind of under-the-radar merchant. It is inconceivable that there would be an underground economy vast enough to provide a criminal with everything he wishes to purchase. Most, if not all of there money will end up being taxed, as opposed to none of it now.

In regards to the mortgage deduction, you’re only looking at one side of it. Yes, it’s nice to get a deduction on your taxes each year, but you also pay property taxes each year. With the FAIR Tax, you will pay taxes once on a new home, when you purchase it. Currently you pay taxes on your home forever, even after your home is paid off, and even as your home’s value continues to gro. On top of that, only new homes will be subject to the tax. You will not have to pay it on previously built homes. According to their studies (again, you should read the book) the cost of new homes will go down, despite the tax. This is because the cost of doing business for the mortgage company, contractors, etc. will go down so much without having to pay tax attorneys, accountants, etc., to interpret and manipulate our ridiculous tax code.

“Why in my right mind would I want to be a teacher, police officer, fireman, or any type of civil servant if I have to pay the same amount in taxes as someone in middle management?” Life is about tradeoffs, everybody has to make a decision about the proper balance between money and happiness in their career. This has nothing to do with taxes. But do you really think that people choose those jobs because of the tax benefits, and that if we change the tax code, fewer people will be willing to take those jobs? You’re really stretching now. Nobody is going to throw their hands in the air and switch occupations because they suddenly don’t have the option of skipping out on Social Security. There wil continue to be people who will take those jobs, even with unions restricting entry as they do now.

@Ian, well said.

Ian Says:
August 28th, 2007 at 11:39 pm

Wait, there’s more . . .

There is no reasonable equity of distribution under the current INCOME tax system. What’s more, the TAX CODE has become a TINKERERS’ PARADISE for 53% of the lobbyists who game it in Washington DC. It’s a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (a hidden tax which is incomprehensible to the average working person). Prices AFTER FairTax would look SIMILAR to prices BEFORE FairTax - NOT 30% HIGHER as opponents contend; competition would see to it.

So, the FairTax rate on new items would be 29.9% (on the new, reduced cost of items because business isn’t taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag - this is the way INCOME TAX is figured (parts of the total dollar).

The effective tax rate percentages that would be paid are calculated by crediting the monthly “prebate” (rebate of tax on necessities, precalculated, and delivered monthly) against all likely spending that citizen families (sized 1-member, and greater) are likely to spend. (Dept. of HHS would serve as the basis upon which prebates would be calculated. A single person might receive ~$200/mo. A family of four might receive ~$500 - in addition to receiving their WHOLE paycheck.)

With regard to these effective percentages that different income groups would pay under the FairTax, Prof.’s Kotlikoff and Rapson (10/06) have said,

“…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”

Study: http://snipurl.com/kotcomparetaxrates

Further,

“…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

Study: http://snipurl.com/kotftmacromicro

Now, go tell a friend. (And, thanks David, back atcha.)

dpb Says:
August 29th, 2007 at 8:02 am

JLP, the FairTax is a flat tax. It just taxes consumption rather than income. A flat tax is not regressive but the FairTax is because of the prebate which untaxes every American on necessities therefore the effective tax rate on the poor is 0% where as the rich are paying 22.99%.

Have you taken the plege? TheFairTaxPledge.com

JANET TYLER Says:
March 23rd, 2009 at 3:35 pm

A FAIR TAX, I RATHER THINK THIS SHOULD BE CALLED AN ENSLAVEMENT TAX. THE RICH WOULD LOVE TO PAY THE SAME TAX THE LESS RICH PERSON PAYS. HOW FAIR IS THAT. YOUR RENT WOULD BE TAXED. IF YOU HAD A HOSPITAL BILL OF 100,000 DOLLARS, YOUR COPAY WOULD BE 23,000 DOLLARS. SOUND FAIR TO YOU? IN ORDER TO PAY THIS EVER INCREASING FAIR TAX, YOU WOULD HAVE TO WORK 2, 3 AND 4 JOBS JUST TO PAY YOUR TAXES, FORGET NECESSITYS. MAYBE YOU DON’T MIND WORKING YOURSELF INTO THE GROUND FOR YOUR GOVERNMENT. GO FOR IT.

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WSJ Editorial: Fair Tax, Flawed Tax