I’ve written many times before about the So Called Fair Tax and the characteristic dishonesty of its proponents, not so much here but elsewhere. Nonetheless, I was amazed and dismayed by the sheer mendacity of Boston University professor Laurence Kotlikoff in his Why Democrats should love the FairTax in today’s Boston Globe. I guess we all have a lot to learn about tax policy from someone whose salary comes out of tax-exempt dollars even as he is employed by a for-profit institution and engages in partisan political activity. He starts by repeating the common deception that the SCFT is 23% and not 30%.
Take Mr. Megabucks, who is sitting on $65 million and wants to buy a jet like Oprah Winfrey’s – a 10-passenger, $50 million Global Express XRS. Under the FairTax, the jet costs him an extra $15 million because of the 30 percent sales tax. Mr. Megabucks gets the jet, but the extra $15 million, which he had budgeted for Beluga caviar, Dom Pérignon, and other flight snacks, goes to Uncle Sam.
Now $15 million is 23 percent of $65 million – so the FairTax cost Mr. Megabucks 23 percent of his wealth. Precisely the same outcome would arise were Uncle Sam to directly tax Mr. Megabuck’s $65 million in wealth at a 23 percent rate, leaving him with $50 million to buy the jet at the original price.
Um, no. You don’t get to change the figure by comparing it to a different kind of tax. In any honest discussion of sales, consumption, or value-added taxes, adding 30% to the untaxed amount is a 30% tax. In fact it’s even worse than that. As others have pointed out, the tax rate necessary for the SCFT to be revenue-neutral might actually be as high as 44%. But wait, you say, why should it be revenue-neutral? Surely we should address spending as well? Surely we should, but that’s a separate issue. The only fair way to compare tax plans or tax policies is by considering their revenue-neutral forms. Proposing a tax plan that’s not revenue neutral without identifying what government functions would be eliminated to make it comparable with alternatives is just another form of deception.
This equivalence is no coincidence; taxing consumption is mathematically identical to taxing the resources used to buy consumption – current wealth holdings plus wages as they are earned.
No, because timing matters. Taxing income at the time it is earned is not mathematically identical to taxing consumption at a later time. Ask any real accountant, financial planner, or economist.
The beauty of the FairTax is that taxing wealth at a 23 percent rate generates enough revenue to reduce workers’ marginal tax brackets to 23 percent. This is dramatically lower than the 30 percent to 45 percent marginal tax bracket confronting most workers under our combined income and payroll taxes.
Is a 23% uniform rate really lower than a 30-45% marginal rate? The answer depends on how the brackets are defined, how the income or expenditure is distributed, etc. To claim without qualification that the mis-stated SCFT rate is lower is, again, deceptive.
Our tax system is regressive because none of the corpus – the principal – of the wealth of the rich, including our more than 400 billionaires, is subjected to taxation. Instead they pay taxes only on the income earned on their wealth. But this income comes primarily as capital gains, which are taxed at only 15 percent. Furthermore, capital gains taxes are levied only when wealth holders realize their gains – when they sell their appreciated assets.
Hey, if the SCFT is so good because it approximates a tax on wealth, how about . . . ummm . . . actually taxing wealth? It’s called a property tax, or in some cases an estate or inheritance tax. A true tax on wealth would not exempt the latter, nor would it exempt wealth held by non-persons, but I’m getting ahead of myself.
What’s even more telling than what Kotlikoff says is what he avoids saying, which is that a salient feature of the SCFT is that it eliminates tax on corporations. This is usually justified by claiming that taxes on corporations are passed on to consumers anyway, which is simply not true. A corporation’s costs are sometimes passed on to employees or suppliers or society in general, such as when they cut corners on employee safety or pollution abatement and society gets stuck with the consequences. Similarly, not all of a corporation’s profits go to investors. Some goes to executives, and some is retained by the company to finance growth. Both costs and profits might also be shipped overseas, either for real or as a tax dodge. (BTW, some people object to mentioning corporations because the majority of corporations are small businesses, but the majority of dollars flowing through corporations does so through big ones and counting for tax purposes is by dollar. In this context, “corporation” effectively means those large enterprises that hire armies of tax accountants and lawyers.) Eliminating taxes on corporations means shrinking the tax base, and shrinking the base means increasing the rate to achieve the aforementioned revenue neutrality.
So let’s strip away all of the BS, expressing the SCFT simply and honestly. If you offered the American people the opportunity to get rid of income and payroll taxes, in return for paying 40% more for everything they buy, while rich inheritors and big corporations paid nothing, do you think they’d go for it? Would people who panic over the prospect of double-digit annual inflation embrace 40% instantaneous inflation, even when it’s couched in soothing “tax relief” terms? Not likely. Any attempt to change that by misrepresenting the rate, failing to mention changes in bases and distributions, or pretending that the government will pay itself tax on its own internal transfers to make the numbers look better, is just an attempt to deceive. Democrats aren’t against the SCFT because they don’t understand it; they’re against it because they do understand it. Unlike their Republican brethren, they’d rather propose something that actually works than something that just panders to people’s hatred of the income tax as it exists today.
Just in case anyone is not already convinced of the SCFT’s flaws, try reading DeLong’s or Bartlett’s even more thorough demolitions. If you’re looking for a genuinely reasonable alternative, try the Competitive Tax, which is basically a 10-14% VAT, plus a 25% tax on corporate income and personal income over $100K. It’s also simple, it’s really fair, and its advocates don’t rely on misrepresentation to sell it.