For economy of time and benefit of all gentle readers, we quote our email, with modifications to fit the rigid style requirements of our blog:
[We] think that the "fair tax" is a bad idea because it does nothing that its proponents claim. For example, FT proponents say that drug dealers and prostitutes don't pay income taxes on their earnings, but with the FT they'll pay the FT on their purchases. True enough. But under the FT, drug users and johns won't pay the FT on their drug and prostitution purchases. There's no gain there.
The FT will also distort certain areas of the economy. With the FT, there's a huge incentive not to buy a house to live in, since you'll have to pay a whopping tax on it that you won't recover when you sell the house (example: Bob buys a house for $100k and with tax pays $123k for it; three years later he moves and sells for $110k, the buyer paying $135.3k for the house, leaving Bob with a theoretical capital gain of 10% but a cash loss of $23k). Also with the FT, businesses that don't buy stuff will pay nearly no tax at all. Investment bankers are an example.
Worse, the FT offers no improvement on the complexity of the tax code. With income tax, the question is what constitutes income and at what rate particular kinds of income (again defined per the code) will be taxed. With the FT, the question will be what constitutes a sale and at what rate particular kinds of sales will be
taxed.
All high sales taxes encourage the growth of black markets, of course. The FT will certainly do that. Tijuana, Mexico will become a very big retail site if this ever happens.
What puzzles [us] about Huckabee's support for the FT is that all this seems to be so obvious. [We] don't see why he doesn't get it. [We] have to assume that he's simply trying to tap into the hostility that people have for income taxes. But this will be no better.
Let's add a few points to these, while we're at it:
- What we illustrate above with houses would also be true with cars. Currently a new car depreciates significantly as soon as it is bought. The FT will add 30% depreciation right off the bat. All new car buyers who purchase with a loan and without trade-in or cash worth 40% or more of the purchase price will find themselves "upside down." We expect that consumers, if they can afford a new car at all, will demand replacement-value insurance policy just about all the time, the higher premiums for which will suck more productive money out of the economy.
- FT proponents are misstating the rate at which the tax will stand. You'll hear that it's a 23% tax, but that's really 23% of the cost to the consumer with the tax added. If the percentage is calculated as a percent of the pre-tax cost, like state sales taxes are, it's 30% as currently proposed.
- The FT will be inherently regressive, i.e. taxing people at the bottom more than the top than is true currently. FT proponents talk about providing a "prebate," a check that Uncle Sugar sends to lower-income taxpayers at the beginning of the year to subsidize their payment of the tax through the year. However, one should keep in mind that the bottom 50% of American taxpayers pay only 3% of total federal individual income taxes, and there's no way that the prebate can be big enough to cushion the blow for them. The less well off always spend more of their income than the more well off, and the FT allows now difference in rates for different incomes apart from the token "prebate."
- If there is significant tax reform to be made, it's in the corporate tax rate. Our Republic taxes for-profit corporations at 35%, significantly higher than the rate of industrialized economies, like Wonderful Ireland, that have faster growth, stronger employment and higher tax revenues with lower corporate tax rates.
For more on this subject, check out Bruce Bartlett in WSJ from August. Nothing has changed since then.
4 comments:
I can think of more than just the FT that is troubling about Huckabee. Yesterday I watched him address a group of constituents and say that 'we need to change the constitution to be in line with the Word of God.' Now, I'm a believer, but that just scares the junk out of me! I've never seen a good instance of mixing church and state when it comes to big government.
Yikes! I knew the fair tax was anything but, but I didn't realize it would apply to real estate. (Most sales taxes don't that I know of.)
What I don't get is why it has to be so high. Canada's GST is nothing like that. The whole proposal is a sure-fire way to tank the economy.
Of course, even if Huck wins (and he won't), congress would never pass such a tax. It's not that they are so smart. Just that their lobbyists won't let them.
The bit about businesses that don't buy much is true, but I'm not sure that's a bad thing. As it is businesses can't spend cash on anything other than expenses for the business, or as dividends to stockholders. Any corporate taxes are essentially taking away from payouts in the form of investing in the business itself or to investers.
I would assume we want businesses to grow, and so by withholding a tax on businesses you free up more money for that purpose (which includes wages that would then be fair taxed), and of course payouts to stock holders would be considered income, which would of course be fair taxed when spent on whatever it is eventually spent on.
The other points are fair, and would seem to indicate some form of flat tax would be the way to go.
I once heard Walter E. Williams say that if the top rate were 4% (as it once was), no one would care if the income tax were flat, progressive, regressive or whatever.
I think he has a point.
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