More on the Fair Tax
In a comment, Phillip Hinson brought up some very interesting points arguing in favor of the Fair Tax. I think he is on the wrong path, but they are quite respectable arguments, and I thought I would answer them.
He was writing in response to a post of mine where I argued:
To me the Fair tax is at best a waste of time or at worst a dangerous method of growing the size of government. I see few benefits to it; most people simply do not care how much they are paying in tax! It creates a new form of taxation to add to the income tax. I donâ€™t think the income tax will ever go away. It may, at best be repealed for a decade or so, then will be brought back at the next fiscal crisis.
In the end, it is a frivolous exercise. The damage done by taxation is based on the amount taxed. How the tax is collected is far less important. Thus, while the Fair Tax does not prevent reducing spending at all, nor does it promote it. Thus every ounce of political capital and energy spent on adopting it is, in my mind, wasted.
We spend several hundered billion $$ per year in wasted compliance costs. Using a recent and conservative estimate of $265 billion/year, that is substantially more over a 10 year planning horizon than the last round of hotly contested Bush tax cuts. Are you saying that relieving that burden from American taxpayers is trivial?
I do not think compliance costs are trivial in and of themselves. I am starting my own business and compliance costs are my biggest single expense. However, in general the compliance costs are dwarfed by the actual cost of the taxes themselves. The compliance costs are a drain on the economy. As bad as they are, though, the amount taxed represents a far more destructive drain.
Phillip went on to say,
Also, we have a system which provides a competitive advantage in an increasingly global marketplace to foreign producers over and above our own domestic producers. Are you saying that you support, as a matter of public policy, the US providing an advantage to foreign producers?
I am also opposed to the US government giving any business an “advantage” over its competition. In this case, however, the solution to the problems caused by shooting ourselves in the foot are not to be fixed by shooting our neighbors in the foot too.
Phillip then stated,
Social Security and Medicare are headed for a financial disaster if we do not address the demographic dilemma which we are in. Of course, this problem never would have existed if those two programs had been set up on an actuarial sound basis to begin with. However, there is nothing that can be done about that now. The FairTax is the only proposal which I am aware of which addresses just this actuarial and demographic dilemma by replacing the revenue base of payroll taxes with a broader based tax on the entire economy.
This brings up an obvious question. If the programs are so screwed up, why bother saving them?
Social Security and Medicare are disasters precisely because they encourage waste, discourage production and as a result leave our society poorer in the aggregate. A program that is designed to help the government expand the resources it can commandeer to keep these disasters going isn’t a solution. It’ll just make the destruction wrought by those programs more extensive.
Furthermore, the current system facilitates and enables our legislators by allowing them to divide and conquer, passing out preferential tax treatment to friends while punishing enemies. By hiding much of the true cost from those bearing that cost, it reduces the public outrage which would otherwise occur.
This is one area where I strongly disagree with the Fair tax proponents about the immunity of their system to manipulation. The Fair Tax also treats different types of transactions differently; “new” goods for private consumption are taxed, everything else is not. I expect that politicians would get very creative about how they classify which transactions are taxable and which are not. Additionally, I would be very surprised if a uniform rate was kept in place. Just as food and clothing are taxed at different rates, or even sugar was taxed differently depending on whether it is imported dissolved in a solution or not, I think that within a few years a huge political movement would be put in place to tax “luxury” goods and “necessities” at different rates, despite the “prebate”.
Phillip then began to wrap up his argument with this,
We will never get to Constitutionally limited government under a continuation of the current system (which is probably why the Founders had the wisdom not to allow this type of system). We may not get there with the FairTax, but we certainly have a far better chance of it.
I agree with his first statement, and disagree with his second. Again, I think it is subject to the same forces of public choice gaming that any other form of taxation is prone to. People will not look at their receipts and scream “that’s outrageous”. They already see their tax-bill when they fill out their income tax forms. I think the vast majority of people simply do not care and that there is no way to get them to care. That, combined with the dangers that we will be saddled with a hybrid system combining both the income tax and the consumption tax makes the Fair Tax a very bad idea in my mind.
Again, I think the supporters of the Fair Tax are sincerely trying to make the United States a better place. I understand their arguments and respect them. I just think that they have misread the electorate and are underestimating the ability of politicians to exploit new ways of extorting the productive members of society.