The "Fair-Tax" Fraud

The “I-heart-Huckabee” folks have indeed taken heart in recent weeks, with their hero’s recent rise in the polls. It seems as if Huckabee now has a realistic chance of becoming the nominee of the party. Part of this is due to the failure of the “major” candidates to catch on with the Republican base. Another part must be due to revelations about Rudy’s love affairs and doubts about Romney’s religion. But a big part has to do with Huckabee’s support of the so-called “Fair Tax.” has organized in Iowa in behalf of Huckabee, and their message has great appeal: repealing the “unfair” income tax and replacing it with a “fair” tax. Now, who can object to replacing the unfair with the fair? It certainly is a winning message. The problem is, it wins only as long as people do not understand the tax. The fair tax propaganda is a network of lies, and lies that are easily exposed. The fair tax people have had a free run up until now, because little public attention has been paid to their proposal. But once this becomes a major issue, a spotlight will be turned on this, one that will send the roaches scurrying for cover. And there are lots of bugs in this proposal. I outline just a few of the major problems.

The Name

The fair tax is not a tax on fairs, or even a tax on affairs (which would at least be interesting, especially for Rudy Guilliani), but a national sales tax. When people give you a “marketing name” for something, rather than a simple descriptive name, you know they are trying to put a sales job on you.

The Tax Rate

The fair tax folk advertise this as a 23% tax; the actual tax is 30%. They get the 23% rate by stating the “tax-inclusive” price. For example, under this proposal, an item that costs $100 would have a $30 tax on it, for a total price of $130. Since 30/130=0.23, they state the rate at 23%. But most people would regard it as a 30% rate, because that’s what it is. Why this rather obvious fraud in stating the rate? Because their own polling data shows that support for the proposal drops dramatically as the rate goes over 23%. As people understand the true tax rate, support for the tax will evaporate.

Everything is Taxed

People are familiar with sales taxes already, but not with a sales tax that covers every single purchase: food, medicine, doctor’s, home sales, car sales, interest on credit card payments—everything. Just think about buying a house, say a $200,000 home, and paying a $60,000 sales tax on it. Do you think that might impact the market somewhat? Or think about needing a medical procedure that costs $10,000 only to get a bill for $13,000. Who is going to pay the extra $3,000? If the patient, he may not be able to afford the operation; if the insurance company, rates will skyrocket. You can apply this to each and every market affected by this tax.

Revenue Neutral?

The 30% rate is supposed to be revenue-neutral. However, The President’s Tax Advisory Council—and every other neutral observer—disagrees. They calculate the revenue neutral rate at 34%, while the Brookings Institute calculates it at 39%. Part of the problem is that the fair tax people do not allow for the possibility of cheating. But a more likely result is that fraud will be massive. With such a high rate—whether 30% or 39%—the incentives to cheat will be irresistible. From people selling from the back of their cars, to off-shore web sites, the average citizen will be given a lot of help in avoiding the tax.

Further, to include the revenue neutral calculation, they include government purchases. Therefore, a tank costing $1 million will now cost $1.3 million. But this means that government budgets must rise by an equivalent amount. So either we increase, for example, the military purchases budget by 30% (in which case, the proposal is no longer “neutral”) or we purchase 30% fewer items (in which case, the proposal is no longer “neutral.”)


For people who must convert all of their income into consumption, there is no difference between an income tax and and a universal sales tax—100% of the income is taxed either way. In other words, for people who must spend all of their income to get by, this is equivalent to a 30% income tax—with no deductions—far in excess of what most people now pay. People with excess income avoid the tax by saving rather than purchasing. But people with high incomes already save; those at the top simply cannot convert all of their income to purchasing. That saved portion of their incomes will simply be tax free. Sales taxes are inherently regressive, falling more heavily on those who must spend all of their incomes.

The fair tax people address this problem by proposing to give a “pre-bate” to everybody. The prebate is a monthly check given to each citizen to cover the cost of the tax up to the poverty level. The cost of this prebate will be somewhere between $485 billion and $600 billion, not counting fraud, which will be massive. Can you imagine the market in phony birth certificates? But even this ploy will not make the tax progressive. The false assumption is made that all income is converted to purchase, but it is not. The very rich spend a much lower percentage of their incomes. The real effect is a tax cut for the rich, and a tax increase for everybody else. Indeed, the fair tax people promise the mathematically impossible: they promise lower taxes for everybody and revenue neutrality. At best, they can deliver one or the other, but not both, and possible neither. If you lower the taxes for one, you must raise them for another, or abandon the claim of neutrality. That's simple math.

Dubious Assumptions

Throughout their proposals, the fair tax people advance rosy scenarios about the effects of the tax on wages, interest rates, productivity, etc. However, all of these scenarios are based on dubious assumptions that have weak theoretical foundations and no empirical base at all. Yet, without these assumptions, the whole thing is a dangerous experiment that could bankrupt the country (even more so than it already is). Such radical plans ought to have a better base. This plan has nothing behind it but wishful thinking.

Comparing the Plans

I have merely scratched the surface of the problems with a national sales tax. To look at it in more detail, you can examine their plan at To see an excellent critique of the plan, check out the Fact Check site. Also, Bruce Bartlett has an excellent analysis at the Wall Street Journal site.

The Democrats Rejoice

The Democrats are holding their fire, hoping against hope that the Republicans will be dumb enough to propose a 30% tax on home purchases, new cars, medicine, and everything else. Those of them who pray are praying, “Please God, let the Republicans nominate a National Sales Tax candidate.” Even the Democratic Party—famous for blowing easy elections—couldn't possible lose under such conditions. The party looks forward to a summer and fall where each time a citizen purchases something, anything, he gets to contemplate the effect of a 30% (39%?) sales tax on that item. The present system, with all of its obvious faults and flaws, will seem to him to be a bargain. Every time a mother buys milk and bread for her family, every time someone checks in with their doctor for a checkup, and every time a family thinks about buying a home, they will have occassion to think about the National Sales Tax. Every checkout counter will be an advertisement for the Democratic candidate, no matter who (or how bad) that candidate happens to be.

As for Huckabee, he is certainly a sincere and genial man, one that people could easily take to heart. I do not think that he is capable of consciously participating in a fraud. But his performance to date leads me to believe that he is simply incapable of evaluating policy proposals on a practical basis. He is, if I may put it this way, a kind of Republican Jimmy Carter—and I mean that as a compliment. Jimmy made such a poor president, but an excellent ex-president. Like Jimmy, he means well, but, also like Jimmy, he has difficulty weighing the pros and cons of things.

My suggestion to the Republican Party is that they simply designate Huckabee as “Honorary ex-President” and get on with the business of finding someone a little bit better at evaluating policy proposals.


B. Y. Clark Wednesday, December 5, 2007 at 2:53:00 PM CST  

I'm glad to see people are discussing this issue. Living in the Atlanta area I hear Neal Boortz drivel about the Fair Tax quite frequently. The more light that gets shown on this plan the more people realize it is a very bad idea.

Ian Thursday, December 6, 2007 at 2:17:00 AM CST  

Let's set your incomplete, and misrepresentative record straight:

Prices after FairTax would look similar to prices before FairTax - not 30% higher. This is because FairTax removes the cost of business income and payroll taxes currently embedded in prices. Economist Dale Jorgensen, Harvard University, was commissioned to find out what portion of prices were represented by costs for complying with the federal tax code. The figure he came up with, on average, was 22% at the retail level - essentially, a hidden consumption tax," on top of income tax and FICA.

The FairTax rate on new items would be 29.9% on prices - declining 20% to 30% - or 23% of the tax-inclusive price tag (comparable to how income tax is figured, i.e., parts of a total dollar earned). Eliminating income and payroll taxes on business, as FairTax does, reduces the cost of doing business and attracts competition to the market space - driving out excess profit.

In order to make FairTax a progressive consumption tax (such as that called for, recently, by Warren Buffett), a citizen family is simply sent a monthly consumption [tax] allowance, called a "prebate." This prebate is intended to reimburse taxes on necessities without need for record-keeping or reporting. Moreover, the direct payment bypasses the creation of a tax code specifying exempted products and services around which a lobbyist industry could grow. The amount is variable, based on family size, and is equal to the FairTax rate on poverty-level spending, as defined by the Dept. of Commerce. At present, a family of one would receive ~$200/month, a family of four, ~$500/month. Thus, the effective FairTax rate, paid by citizens, will never equal the full 23%. Of course, U.S. visitors (legal, and illegal) will pay the full FairTax when they purchase anything new, at retail (used goods do not carry the tax). Under FairTax, working families will have their whole paychecks (minus any state or local income tax withholding) plus their monthly family prebate.

Additionally, citizens will no longer have to spend the average 50 hours per year preparing their federal tax returns. They will tend to use credit less, and they'll save more. Saving more will make it easier to purchase a home, at a lower interest rate and monthly payment. (Thus, mortgage deductions will no longer be applicable, because income will no longer be the basis for taxation.)

But is the FairTax fairer? To provide substantive answers, Prof.'s Kotlikoff and Rapson (10/06) have concluded,

"...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."

Further, per Jokischa and Kotlikoff (circa 2006? ),

"...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."

The current income-based tax system is also more expensive to run, because of the manner in which the tax code is gamed by politicians and lobbyists. Politicians realize great power, and attract constituencies for support, by granting tax favors (i.e., credits, deductions, exemptions) through lobbyists. Fully, fifty-three percent (that's 53%!) of Washington lobbyists are there because of the tax code! The tax code is continually changing, making it more complex and more difficult to understand. And, the salaries and costs of tax lawyers and lobbyists end up in the prices of the products and services we buy. Additionally, the time and money required to keep records, file returns, report for audits, retain accounting and legal help, pay IRS penalties and interest, is time and money lost for other productive, or recreational, activities. Depriving us of the use of withheld wages increases our expenses through zero-interest withholding, inflation, return preparation time, and interest paid on credit cards and loans that would not have been necessary without withholding. Summed up, the cost of tax compliance, nationally, has been estimated to range anywhere from $265 billion to twice that amount, depending on the extent to which tax-avoidance consultation is sought and utilized. These expenses constitute a substantial hidden tax which is incomprehensible to the average working American. And the FairTax gets rid of all of it for most Americans, and most of it for business owners.

It is our belief that government should serve We, the People, with a fair tax system that will not enable politicians to pit poor against rich (creating barriers to achieve wealth, adding tax penalty to the sacrifices made for personal success). Nor do we want politicians to continue using business as a tool to hide taxes from consumers, often villifying business, which discourages entrepreneuship, personal achievement, economic growth. Liberty and happiness depends on restoring the fruits of labor to those who produce them. We believe that the tax function should align with economic growth, not against it, that government should be paid for in the same manner as working Americans - when, and because, something is sold.

As things stand at present, Americans labor under nothing less than tax slavery, having our wages confiscated every working hour, as reflected in our paychecks every two weeks.

Many of us have joined in order to build a national movement to free ourselves, our family pocketbooks, and our businesses from confiscation of income, and punishment of productivity. And this we say to our federal representatives, "Either scrap the code and enact the FairTax, or we intend on replacing you with someone who will."

(Permission is granted to reproduce in whole or part. - Ian)

Anonymous,  Thursday, December 6, 2007 at 1:58:00 PM CST  

If we only consider privacy issues, the FairTax makes a lot of sense. Liberals in general are all up in arms because the government is doing surveillance on terrorist activity yet they don’t think twice to give the government all personal financial information voluntarily. Is not the government’s business to know how much money I make.

On the issue of enforcement, the FairTax is a lot easier to enforce. It is a lot easier to audit and monitor a few million businesses than millions of individual citizens.

I think that the FairTax makes a lot of sense and I'd support Huckabee just for having the courage to go against the Washington tax lobbyist. My only concern is if they don't repeal the constitutional amendment we may end up like Europe with both, the Income Tax and the consumption tax. The politicians would love that.

Weaver,  Friday, December 7, 2007 at 12:58:00 PM CST  

The fairtax would increase the burden on the middle class wouldn't it? Because the lower class would be boosted by pre-bates and the upper class would be taxed less.

"Throughout their proposals, the fair tax people advance rosy scenarios about the effects of the tax on wages, interest rates, productivity, etc." The more wealthy, who would retain more money, would invest more. However, such investments might be in foreign states.

Eventually the wealthy would want to spend their money, however I wonder if they wouldn't just travel to a foreign state to spend it fairtax free.

Huckabee is at least a trade protectionist.

By the way, Tancredo is also a supporter of the Fair Tax.


I just got your book in the mail by the way.

Liteon Friday, December 7, 2007 at 1:20:00 PM CST  

I could not agree with you more - thks

Ian Friday, December 7, 2007 at 2:18:00 PM CST  


Did you read my post above?? Regressivity is not an issue with FairTax. It's less regressive than the current income tax!

(Why else would the rich/super-rich not be supporting the candidates - Gravel (D), Huckabee (R) - who support it? Gravel lays it out eloquently.

Weaver,  Friday, December 7, 2007 at 5:37:00 PM CST  

I'm interested in the middle class, not the lower class so much. Not only is the lower class paid a prebate for, well, doing nothing, but the middle class receives the same prebate despite being hit by a higher tax load.

And Aristotle's advice comes to mind: democracies do alright until the poor realise they can vote for more wealth. Wouldn't it be easy for the poor to vote for a higher prebate? Who's to say what the "poverty level" really is?

I realise the fairtax would be more efficient, but honestly I think Ron Paul has the best solution: bring the troops and bases home, return education to the states, and eliminate the income tax altogether while working to return other expenditures to the states as well.

Trade tariffs might be nice, and I'd like other more radical changes as well but... one thing at a time ;)

Weaver,  Friday, December 7, 2007 at 5:48:00 PM CST  

Welfare isn't a good idea. I live in the South so I see first hand lots of folks who don't work.

It's good for those who do work get paid well, but such can be improved by reducing immigration and increasing tariffs. Such policies would create a greater demand for workers.

Anonymous,  Friday, December 7, 2007 at 6:54:00 PM CST  

Ron Paul is the answer not a faux conservative like Hukster---he will just increase government.

Omar Cruz Friday, December 7, 2007 at 8:59:00 PM CST  
This comment has been removed by a blog administrator.
Anonymous,  Monday, December 10, 2007 at 8:15:00 PM CST  

I'm not sure if you guys are thinking this through. The Fair Tax can't be regressive. It is a consumption tax, wealthy people consume more of everything and purchase more expensive items. I'm don't know what you class warriors are afraid of, they'll still be providing the jobs and income for the working class. A side benefit will be: the illegal immigrants will start to pay their way, everything they consume, they will be taxed on. Doesn't get any fairer than that.

Anonymous,  Tuesday, December 11, 2007 at 2:46:00 PM CST  

"The Fair Tax can't be regressive. It is a consumption tax, wealthy people consume more of everything and purchase more expensive items."

Middle class Americans generally spend their entire incomes, so the FairTax would hit them the hardest. It's ridiculous to say it's not regressive.

Many millionaires are more frugal than upper middle class Americans -- that's how they became millionaires. Have you ever read "The Millionaire Next Door"?

The super rich will just shop outside the US and avoid the tax as much as possible.

Anonymous,  Thursday, December 13, 2007 at 11:06:00 AM CST  

Ian you might want to read this article:

The 'hidden tax' stuff is basically BS. If prices stay the same after the imposition of the 'Fair' tax it will come at the cost of your income. So prices might stay the same but your salary will just end up being what your current take home pay (after taxes) is now minus the prebate amount.

The 'Fair' Tax isn't money for nothing. Sure there are potential benefits, but none of those are guarantees and much of the 'Fair' tax wonders only have a chance of happening if there is compliance equal to or less than the current system. The ease of getting around a sales tax will be much easier than getting around paying income taxes and the incentives for avoiding it will be much greater.

If this tax plan were enacted the government would either quickly treble or quadruple its current deficits or the rate would have to go over 50% (tax exclusive).

Now imagine the exceptions that would start cropping up. First home sales would get exempted, then medical expenses, then food items and all the while the taxes on everything else would have to keep going up to pay for it.

Dragos,  Thursday, December 20, 2007 at 9:10:00 AM CST  

The FairTax is just the wrong name for this tax. Much better would be The UnfairTax, because it will be more important for the poor and the middle class.
Believe me, I'm from Europe and here we had this tax for many years : it is called the VAT (Value Added Tax) and it is from 15% to 20% for almost all goods and services.
And we also have the income tax from 10% to 30%.
Do not believe them when they say the (un)FairTax will replace the Income Tax : in the end, you will have BOTH of them.

Anonymous,  Tuesday, August 12, 2008 at 4:14:00 PM CDT  

The hidden tax is not BS. Yes, theoretically you pay the same. The big difference is that the Fair Tax brings the cost of government front and center in one place so it is easy to see. Once people realize just how much of the money they earn REALLY goes to the government they will be in a better position to reign in the amount of government waste that exists.

John Médaille Tuesday, August 12, 2008 at 4:37:00 PM CDT  

Anon, Your claims are exactly the opposite of what the fair-tax people claim. The claim that prices will be the same, not higher. If prices are the same, we won't see the true cost of gov't. The whole "fair-tax" scam is a trick on ignorant and unsophisticated people who think there is a magic wand that will fix the problem.

Income Tax Return Friday, July 16, 2010 at 2:25:00 AM CDT  

The current U.S. income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly.Can you tell me that its also considered as fraud?

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