The Huckabee Bureaucracy

Perhaps nothing government does causes more resentment than the income tax; it is the visible sign of government intrusion into our economic lives. There are many reasons for this resentment, most of them legitimate. When the tax first began, it affected, at most, the upper 2% of the population, and was, therefore, a wealth tax. But over the years, it became largely a tax on (and an attack on) labor. Why labor is something that should be taxed—that is to say, discouraged—is a bit mysterious. But each payday, the worker sees his pay stub filled with deductions to his hard-earned wages. And he suspects, correctly as it turns out, that the rich do not pay anywhere near the same proportion of their disposable income in taxes. Therefore the primary emotion is one of basic unfairness.

It is therefore not surprising that a scheme, no matter how hare-brained, that is labeled a fairtax would hold some initial appeal. The prospect of closing down the hated bureaucracy of the IRS can only fill one with glee; I certainly look forward to that happy day. That appeal will wear thin, I believe, when the new tax replaces the pay-day resentment of deductions with the everyday resentment of a 30% tax each and every time the worker buys something. The “FairTax” folk promise him—today—that his wages will rise by roughly the same amount. However, their assumptions are dubious at best; since there is no precedent for such a massive intervention in the market, no one can say what the effect on wages or prices will be, and hence no one can say what the effect on the market will be. The plain truth of the matter is that the 30% national sales tax represents the largest single government intervention into the free market since the Russian Revolution. And like all such interventions it will require a bureaucracy to administer it. And the bigger the intervention, the bigger the bureaucracy; and since the Huckabee tax is the biggest of interventions, it will require that the Huckabee Bureaucracy be the mother of all bureaucracies. Moreover, the Huckabee bureaucracy will be primarily a police force, just like the IRS, because the system he envisions will be prone to fraud on a massive scale, and will therefore require a massive police force.

The sources of massive fraud in the administration of the National Sales Tax are three. The first concerns the fact that it sets up the largest welfare program ever (the so-called prebate), a program that will require the issuance of a national identity card. How else will they know to whom and where to mail all those monthly checks? Since each identity card entitles it's bearer to “free” money from the government (you and me) in the amount of about $200/month, many people will want more than one. Why not a dozen or so? Why not two dozen? Identity theft is already big business, as is the business of “manufacturing” identities. But with a $2,300/year “prebate” with each phony and stolen identity, there will be millions upon millions of them. The Huckabee National Identity Bureau will have its hands full trying to root out the false ID's. I can't imagine them being able to do that without broad and extensive police powers, and even then the mafia is likely to stay well ahead of the Huckabee Identity Police.

But as bad as the identity fraud will be, there is a bigger source of fraud in the fact that the National Sales Tax sets up a two-tiered pricing system. The same items will be taxed or untaxed depending on who the buyer is. If a businessman or woman is buying the item for ostensibly business purposes, then there is no tax. So, since I am a businessman, when I buy my car, I pay no tax. You, buying the same model car at the same time, will pay 30% more for it. Now the resentment really begins. However, how is the sales clerk to know which one of us is really a businessman? In the bad old days of the IRS, the businessman was the one who filed a schedule C and paid taxes on the profits. But now there is no such thing as the IRS (hooray!), so there will have to be a way to distinguish between the business and non-business buyers. This will require that each businessman get a certificate from the Huckabee Business Certification Bureau. But an immediate problem arises: how do you define a business? There is a sense in which a firm or person is currently defined as a business by paying business taxes. But under the National Sales Tax, it will be the opposite: a businessman is the one who doesn't pay the taxes. Hence, everybody will want to be a businessperson, at least when they are shopping. We can reasonably expect there to be millions and millions of applications for the business certificate. And since one doesn't have to show a profit, or indeed, show anything, there will be lots of people who are businessman only when they shop. Since this alone is enough to wreck the entire revenue system, there will have to be established the Huckabee Business Auditing Bureau to ensure that the businesses are legitimate. Even though this bureau will collect no taxes, it will have, in every other respect, the same task in relation to business as does the dreaded IRS.

Now, each seller will have certain sales that are taxed, and others that are untaxed. There will undoubtedly be any number of dishonest businessmen who will simply lie; they will report as “untaxed” a certain percentage of transactions for which the customers actually did pay the tax, thereby increasing their margins on those sales by an instant 30%. This kind of thing happens already with sales taxes, with some business reporting lower sales than they actually had, and hence pocketing the sales taxes that they collected. However, it is somewhat rare, because both the retailer and his supplier have such extensive reporting requirements for the IRS that the fraud becomes trickier, because one serves as a check on the other. But with no reporting requirements, there is also no check. Hence, to prevent massive fraud, there will have to be extensive reporting of each and every transaction to the Huckabee Sales Auditing Bureau. They will have the immense task of auditing each and every sale to make sure that the taxes are accurately reported and paid.

But the two-tiered pricing system has another distinction, that between “new” and “used” items, since “used” items are not taxed. We pass over the fact that this guarantees the death of the new housing industry, where the tax rate is prohibitive, and go on the difficulty of this distinction generally. Is a re-manufactured toner cartridge new or used? Is a demo car new or used? Normally, buyers and sellers work these things out for themselves without the help of the Federal Government, but now the Huckabee government will have to intervene to protect its tax base. I don't even know what to call this bureau or how it will fulfill its duties; reader suggestions are welcome. But it does suggest an excellent business opportunity. Since I am a businessman, I can buy a new car tax-free. I can drive it for a week and sell it to you at a 10% markup. You will save 20%, I will make 10%, and everyone will be happy. And I will get to drive a new car each week. Since there is no reporting of business expenses, no one will know that my business is buying an awful lot of cars, more than the normal real estate agent might require in the discharge of his duties. To prevent this sort of thing, there will have to be established the Huckabee How-Many-Cars-are-You-Buying Bureau, (yes, I am running out of names for these things).

Of course, the term “used” will acquire a new meaning. Now, something like “Used Appliance Store” means one thing, but under the Huckabee administration, it will mean “30% off Appliance Store.” Such stores will claim that there stock is entirely used, and they will wear out quite a few ball-peen hammers putting dents in their “used” stock. To prevent this rather obvious fraud, there will have to be a Huckabee Product Origins Bureau.

But the simplest way around the taxes is simply not to report the sales, which will be easy since there is no messy income tax to deal with. People will buy goods in Canada and Mexico by the truckload, and sell them off the back of their truck or out of their trunks or living rooms. Drugs, appliances, jewelry—any sufficiently high value item will have an underground and non-taxed market. To deal with this, there will have to be a Huckabee Market Police.

I could go on, and many of you I'm sure will report other problems require other bureaus. The plain truth is that when you intervene in the market to this extent, the police powers of the state expand at the same rate or greater. The Huckabee National Sales Tax is anti-person, anti-family, and anti-business. People, even the most honest person, will be forced to cheat just to make ends meet. The plan encourages criminality and proliferates bureaucracies. The only beneficiaries will be the rich who spend only a small portion of their incomes on consumption, and hence escape most taxes. And the Mafia of course; they will rejoice at the new "business" opportunities. The rest of us will be forced to protect our incomes and families in other ways. Those who cheered to see the IRS closed down, will weep when they see the expansion of government power beyond their worst nightmares.

P.S. If you know someone in Iowa, pass this on.


Anonymous,  Tuesday, December 11, 2007 at 1:56:00 AM CST  

John, your piece attests to your lack of business-owner experience. Outlined below are your unproductive misrepresentations and conclusions about the FairTax:

1) Your piece started out with what appeared to be a thoughtful, balanced, approach until - before you even introduced the FairTax - you framed it as "hare-brained."

2) Stating that the FairTax is 30% sales tax without mentioning

a) the offset of reduced prices (due to untaxing business income and payrolls), which will mitigate any such price increase, increasingly, over time.

b) prebates, which will be a monthly payment reimbursing new retail expenditures up to the poverty level for the month, in advance, to citizen families (based on family size, e.g., ~$200/mo for 1, ~$500/mo for family of 4). So, payment of the tax will not begin until after the poverty-level is reached for the month. (No resentment there; only fairness because legal citizens will receive it, visitors to the U.S., and illegals will not.)

3) I think that you'll find that the largest - in terms of impact - single government intervention into the free market was the enactment of the Federal Reserve Act, whose activities caused the Great Depression (see the closing paragraph, Bernanke's tribute to Friedman) and - together with uncontested Congressional spending - now threaten the value of our currency. Or, try on the naked shorting fiasco, in progress that threatens our markets! No, my friend, quite the contrary: The FairTax represents a major step in the putting straight of our economy by the putting straight of our tax system and removing layers of invisibility. FairTax destroys the tax code which is the source of major political and economic mischief. It detaches manipulative, coercive and expensive social engineering from the domain of the taxing function, ends the punishment of productivity, and aligns the taxing function with economic growth.

4) Prebates can piggy-back the Social Security system. Incidence of fraud would be expected to expand at a rate commensurate with existing fraud of the Social Security system. Get the numbers on income tax non-compliance and get back to us.

5) Tax exemption will be handled by the states, as they are presently. Yes, enforcement will occur at the state level, and, yes, it will take a portion of the $11 bil now allocated to theIRS. Resentment doesn't stem from not taxing business, it stems from taxing business which increases prices to consumers of the business's product or service.

6) If you're a business, you're a collector of taxes and will have to file Sales and Use Tax Return for your state. You'll be unable to sustain the fraud if you're not collecting taxes on products or services. Attempts to defraud your state by purchasing tax-free without commensurate sales to justify such purchases will be met with the requisite penalties and interest. (However, under FairTax, the families of those who are employed will no longer be placed at risk of government intrusion into their family finances.) And, the state will do it more efficiently than the federal government will. Keep in mind that 80% of sales will be via large, "big box," businesses that will generally not be inclined to participate with a buyer in a fraud. These are companies owned by shareholders, and whose fortunes could quickly dissipate (not unlike when "cooked books," are divulged).

7) The FairTax will have no corner on lying. FairTax requires two to lie. The current system permits easier evasion by simply "not reporting" income that is otherwise not reported by the source.

8) Generally, audit sampling will occur, not auditing each and every sale (unless the sample shows clear and pervasive pattern of deception).

9) Yes, used items will have already been taxed, once. Obvious attempts to subvert the intent of the law shall be met with a tax bill, plus penalty.

10) The problems you're discussing (e.g., buying from outside state boundaries, and re-selling within the state) are already being dealt with in most of these United States where Sales and Use Tax Returns are filed. They are not the overwhelming, immense "unknown quantity" you're attempting to illustrate. And, your childish attempt to imply bureaucracies ad infinitum is ridiculous.

11) Your "police state," is what the current system moves toward - and it directly involves confiscation of monies from every able-bodied person and businesses, whereas the FairTax keeps enforcement pointed toward business - those who wish to take on the risk-reward to create jobs for those able-bodied persons. Enforcement of business tax collection by the state, under the FairTax, works for the citizen by protecting their legally-operating employer from being undercut by illegal operators. Thus, the FairTax is pro-person, pro-family, and pro-[legal]business. Your final conclusions are entirely wrong-headed due to your pre-conceived, determined bias against a change of the status quo, which you are, apparently, well-acclimated to.

John, why not spend your time on something productive, like studying the FairTax with an eye toward becoming part of the solution (i.e., freeing yourself from the ipso facto government tyranny of the income tax code).

Anonymous,  Tuesday, December 11, 2007 at 11:18:00 AM CST  

It would be better for people like you, John, who obviously do not have much of a training in economics to avoid the field altogether.

Ian did a great job of dissecting many of your arguments - I personally didn't know where to start. Your "conclusions" and thought processes show an incredibly shallow familiarity with basic economic principles.

Anonymous,  Tuesday, December 11, 2007 at 12:08:00 PM CST  

Alright, here's how I see this after reading the debate on this blog for the last couple of days. Ian, you are making entirely too many assumptions on the goodness of human nature. The reason I say this is because it seems to me that you don't see the massive fraud that can occur with this system. I will agree with you in saying that there are a lot of problems with our current tax code and entirely too many loopholes contained in said tax code (many of which benefit the rich), so there should be a solution, and fairtax would be a good solution in a perfect society, where there is no corruption (and unfortunately until we reach the kingdom of Heaven that won't happen.)
This isn't to say that I completely agree with the writer of this post either. With this post my problem seems to be that you think that bureaucracy is a monolithic institution which strives at inefficiency and corruption. The only problem with that theory is that it ignores all the bureaucratic successes that you see in your daily life (like getting your mail delivered everyday). As I said earlier, everything has its shortcomings, nothing is perfect, but for what we've got for bureaucracy in America it is not doing a terrible job, it could be a lot worse. You are correct in saying that we would need a new bureaucratic agency to deal with the issues that will come up with fairtax, but there does need to be some change in the system. (and also according to distributist theory wouldn't you like something different than our current income tax system which favors the wealthy?) I've read your posts ragging on this topic for your last three posts and while you show flaws I don't hear any better ideas coming from this post. If we are looking for a more distributive system than should we not then try to work toward a system that taxes people based on their use rather than a flat percentage of income. To those who use more, more should be required, is this not how a good tax system should work.
I like the discussion but I just wanted to point out where I see that both of your arguments could improve. Don't assume that the human condition will match your statistical data (mainly applies to Ian), and don't assume that a bureaucracy cannot handle a large task (because there are plenty of instances where it can.)

Grace and peace,

Hartmeister Tuesday, December 11, 2007 at 12:08:00 PM CST  

An unmentioned problem will be when an administration comes in who wants to tinker with the tax creating a pseudo-progressive tax by creating additional taxes or removing the exemption on used taxes on "luxury goods". I can certainly see certain luxury goods (jewelry and yacht for instance)as being vilified.

I think that the appeal of this tax not only comes from feelings about the IRS but unstated feelings about fairness of foreign companies who pay virtually no taxes in the US yet are able to sell substantial amounts of goods in the US. Tariffs which used to offset this difference have been reduced or eliminated by free trade agreements. However, sales taxes are quite legal and are a way to offset this problem unless somehow importers could somehow sales used goods in the US without paying a tax.

John Médaille Tuesday, December 11, 2007 at 12:58:00 PM CST  

Ian, it is good to see you actually responding to comments, rather then just posting Huckabee propaganda. And since you have bothered to make the effort, I will respond to each point.

1.“Hare-brained” is an accurate description. “Tax-break for the wealthy” would be a better description.
2.30% is the rate.
a)Your “reduced prices” assumes, naively, the “cost of production” (COP) theory of prices, namely that prices respond automatically to changes in costs. I know of no economist who accepts this theory. I have asked before, but could you tell me by how much the Arabs are going to lower the price of oil because we have a consumption tax? The price of oil is not related to the COP, and this is true of commodities in general.

b)Yes, there is a prebate, the largest welfare program in the history of the United States and possibly in the history of the world. And with the expansion of the welfare system comes an expansion in the power and size of the gov't. Further, you “give” the rebate only by raising taxes (where else could it come from). And finally, I don't see where the cost of this program is accounted for in your estimates of “revenue neutrality.” Could you direct me to the relevant place.

3.Yes, the Federal Reserve Bank is a massive intervention in the market, depending on one's view of money and the relationship to sovereignty. But since the National Sales Tax doesn't do away with the FRB, what's your point?

4.Getting false SS numbers happens today, but there is no particular financial incentive to do this. Under the prebate, each phony number is worth $2,300+ to its holder. Now there is a big incentive to get yourself a dozen or two numbers. And the IRS estimates non-compliance at 15%. Your plan has not a penny in it for fraud. Do you think there will be no fraud?

5.The States are simply not set-up for a universal, two-tiered sales tax on such a scale. And saying the “states will do it” doesn't solve the problem, it merely moves it. The same intrusive bureaucracy will be required.

6.Again, this just moves the problem, it doesn't solve it. You close down the Federal IRS only by relying on 50 state IRSs. Further, this sinks your claim of removing compliance costs; businesses will have the same reporting requirements they do now, which further sinks your COP savings theory.

7.If you concede that cheating will occur, then you must also admit that the plan is not “revenue-neutral,” since you have made no allowance for fraud.

8.For audit sampling to occur, the gov't must set up a framework for accounting that all businesses must comply with. In other words, you still have an IRS, which is what you were trying to eliminate.

9.But how do you know they were taxed once when you buy it? Now you are changing the game from “used” items to “previously taxed” items. Well and good, but then everyone needs to keep some proof of tax for everything they buy and might sell. But, whats to prevent simply printing up your own “proof” to present to the buyers? The temptation to fraud will be overwhelming when it nets a 30% price advantage.

10.Exactly! The problem occurs under the current (and comparatively limited) sales tax system, yet you have made no accounting for fraud in your estimates of “neutrality”; that is the point. Further, what do you think? Will the incentives to fraud not increase when you raise the tax by 30% and extend it to a universe of goods and services? Do you think people will not respond to the incentives?

John Médaille Tuesday, December 11, 2007 at 1:00:00 PM CST  

Anonymous says It would be better for people like you, John, who obviously do not have much of a training in economics to avoid the field altogether.

Let's see: I have a well-reviewed book on the subject and teach it at the University level. So how many books do you have?

John Médaille Tuesday, December 11, 2007 at 1:05:00 PM CST  

Aftiz says With this post my problem seems to be that you think that bureaucracy is a monolithic institution which strives at inefficiency and corruption. The only problem with that theory is that it ignores all the bureaucratic successes that you see in your daily life (like getting your mail delivered everyday).

I am not pre-judging whether the bureaucracy will be successful or no, I am merely pointing out that it will be necessary in the face of massive fraud. The claim of reducing bureaucracy with a National Sales Tax simply fails.

Anonymous,  Tuesday, December 11, 2007 at 2:43:00 PM CST  

The definition of as business is an entity that has income. I believe the IRS definition is a business has to make a profit at least once every three years in order to qualify. Regardless, you are very much correct that a "FairTax" introduces its own regulatory issues.

During the summer, I like to run out to a farm that sells vegetables out of their garage. The only regulatory burden they have that I'm aware is they have to have their scales certified, hardly an unreasonable burden. Under the FairTax, the accounting burden would be heavy. Or even take a farmer's market. Even the State doesn't try to collect sales tax there. It is really just a needless friction placed on transactions.

You may have seen my piece at Vox-Nova linking to your first in this series. I'm glad you are calling the euphemistic prebate what actually is: a welfare check. Like you, I don't see how it can be seen any other way. As far as taxes go, the "FairTax" seems about as bad of policy as one can get. The only point I will depart from you is that I think a vote for Huckabee would still be okay given the odds of implementing this are extremely low.

Anonymous,  Tuesday, December 11, 2007 at 8:23:00 PM CST  

To afitz211...

Any "goodness" of human nature is dealt a severe blow - especially, at small-business start-up when earnestly trying to comprehend everything that is required to both comply with the tax code, employ others, and make a profit. By comparison, simply submitting a Sales and Tax Use Return is child's play. It would be reasonable to conclude that more people will be encouraged to start their own business in the face of less government pressure upon business income.

Next, fraud will always occur. Under the current system "legalized fraud" occurs against the American consumer by hiding business tax compliance costs in prices while providing tax write-offs to business, taxing only profits on business "after expenses" while taxing consumers on the non-profit "trade" value of their wages (again, Russo does a good job of telling this story - its worth the watch).

As for "pay more, if use more," FairTax simply uses consumption - the least damaging measure (IMHO). The "human condition" you speak about is the pursuit of pleasure and happiness. FairTax captures more of that at the conspicuous consumption end of the spectrum, and is thereby progressive.

To David...

The FairTax is less-easily manipulable than the current system. Good point on how the current system penalizes American goods.

To John...

Using your reference numbers,

1) The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of Commerce poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.'s Kotlikoff and Rapson (10/06) 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 (2005) ...

"...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."

Thus, from the above, we can see that citizens will never pay the full FairTax rate. For example, if the median household income for 2006 was $48,201, and the average household size is comprised of 3 persons. We'll average the prebate between $329 (single adult, 2 children) and $458 (married couple, 1 child), or $393.50/mo. If this family spent their entire $48,201, 23% FairTax ($48,201x23%) would equal $11,086. However, the prebate returns $3,948 reducing the tax paid to $7,138, or 14.8%.

a) Prices respond to competition. If a competitor can produce a product for less, it can price it for less.

b) Welfare payments are income-qualified, prebates aren't as all citizen households receive them. Thus, to characterize them as welfare is to connote them as something undesirable. I don't know about you, but I sure prefer receiving tax rebates every month (that I can invest at interest), than having the government confiscate wages, depriving me of their use and holding them at zero interest. The prebate constitutes roughly a 5% add-on to the FairTax rate, if my memory serves me correctly.

3. Ask John what his point was in bringing the melodramtic "Russian Revolution" reference into the discussion.

4. Huh? No financial incentive to get stolen SSN's today?

5. Easy for states with sales tax to adapt. Better reread my point 11) above regarding how FairTax is pro-family.

6. Additionally, with 90% less points of collection, enforcement resources will be more efficiently utilized. And, finally, 50 state agencies will serve to stimulate innovation and efficiency in tax collection and enforcement, rather than a gargantuan, lumbering agency. Absurd as to your statement, "businesses will have the same reporting requirements they do now."

7. The government builds-in uncollected taxes into tax rates (everyone pays more for those who evade). The FairTax is revenue neutral.

8. TheIRS is not required to conduct sample analysis.

9. Used = previously taxed (after pre-FairTax quantities sold). Receipts are required to show the price portion that is FairTax.

10. I don't get this pre-occupation with fraud?! You're going to have it with any system, only less of it with FairTax. The current system encourages speculative tax sheltering which, oftimes, is designed using the vagueness or unintended interpretations of tax code as a guide. The FairTax will have no such complex tax code to serve as a guide, nor will it encourage fraud. Consumers tend to be less sophisticated than corporations, tax lawyers, lobbyists, and politicians. And any such fraud will thereby be easier to see.

To M.Z.Forrest...

As explained in my 1b) answer to John, above, characterizing the prebate as welfare is incorrect. Huckabee's got my vote!

John Médaille Tuesday, December 11, 2007 at 10:21:00 PM CST  

Ian asks, I don't get this pre-occupation with fraud?! And then answers his own question, You're going to have it with any system... Exactly. And the amount of fraud increases with the incentives to fraud. With a 6% sales tax you have one level of incentives; with a 36% combined sales tax, you have 6 times the incentive to fraud, and likely more than 6 times the amount of fraud (the relationship between an increase in incentive and the increase in the amount of fraud is likely to be greater than linear.) And since you agree that there will be fraud, you cannot fail to agree that the 30% rate is too low for revenue neutrality, far too low. Therefore, you must increase the rate, which increases the fraud premium, which increases the rate, etc. It's a vicious cycle.

But with the increase in fraud comes something else: an increase in the police powers of the state to combat the fraud; All those Huckabee Bureaucracies that I mentioned. You say that the states are set up to do this. They are not. No state has anything approaching the size, scale, and complexity of this National Sales Tax. This is indeed the Starship Enterprise Tax, going where no sales tax has gone before. And even pushing the task onto the states, no state has the police infrastructure to handle the vast amount of fraud that such a vast tax will engender. No state deals with a two-tiered pricing system requiring such extensive record-keeping to distinguish the tiers and latter track them. You “abolish” the IRS only by pushing its functions onto 50 state governments that simply have no apparatus to handle this.

You predict an automatic reduction in price levels, claiming that a decrease in costs always leads to a decrease in price. This is not true generally. There are a few markets (very few) for highly-elastic, infinitely reproducible (or infinitely substitutionable) commodities which, in conditions of perfect competition operating in a perfectly free market, will see prices driven back to costs. But this is the exception rather than the rule in our particular economy. I have asked three times, and you have not answered, “Will the Arabs lower the cost of oil because we have a consumption tax? Will Hugo Chavez?” And if the energy component of the economy will not decline, how can you predict the large overall declines that you have, seeing that energy is fairly basic to all production? And these same conditions are true in market after market.

But now I must reverse myself: your plan will lower the cost of oil. It will do so by wrecking the economy and thereby reducing the demand for oil. Very effective, no doubt, but a rough way to teach Hugo Chavez a lesson.

Further, you get to revenue neutrality only by taxing state purchases, which will raise the cost of state government by $300 billion, which will raise state and local taxes. In other words, your “revenue neutral” plan includes a tax increase passed off to the states and local governments. However, it won't work; it's unconstitutional for one government to tax another, and this is a well-established principle of constitutional law. Therefore, you will have to raise the rate by enough to cover another $300 billion, which increases the incentives for fraud, etc. Do you see now why the “pre-occupation” with fraud? Is it getting through yet?

But in truth, no one can possibly know the real effects of such massive tinkering with the price system and the tax system. The law of unintended consequences states that the intended effects will be dwarfed by the unintended effects. And these effects are simply not calculable, since no one since Vladimir Lenin has attempted to interfere with markets to this degree.

Mr. Forrest of the excellent Vox Nova Blog ( says that one can still vote for Huckabee since this scheme will never be implemented. This is true. However, two points are in order. One, it is a test of his analytical skills, one that, alas, he fails. Two, it will be a godsend to the Democrats, and not just at the top of the ticket. Imagine this whole argument in the mouth of Hilary or Obama. Do you think that Huckabee will be better at it than Ian, or any more persuasive? And each Republican will be faced with the choice of defending this indefensible scheme or of running away from its own ticket. Huckabee has publicly attributed his success to divine intervention. He may be right; certainly the Democrats are praying for him.

Anonymous,  Wednesday, December 12, 2007 at 9:55:00 AM CST  

b) Welfare payments are income-qualified, prebates aren't as all citizen households receive them. Thus, to characterize them as welfare is to connote them as something undesirable. I don't know about you, but I sure prefer receiving tax rebates every month (that I can invest at interest), than having the government confiscate wages, depriving me of their use and holding them at zero interest. The prebate constitutes roughly a 5% add-on to the FairTax rate, if my memory serves me correctly.

Welfare isn't isn't undesirable per se. Not all welfare is income qualified, whatever that is supposed to mean, e.g. are we speaking of a qualified benefit or a qualified beneficiary? This also happens to ignore the history. The plan borrows from the reverse income tax offered by Milton Friedman that was supposed to be given in leau of all welfare programs. Once it was realized the plan was going to be in addition to present welfare schemes, Friedman dropped his support.

Ben Thursday, December 13, 2007 at 11:00:00 AM CST  

Here is a nice quote from a NY Time editorial today:

"Worse, the lack of serious tax debate opens the door to off-the-wall ideas, like the Republican candidate Mike Huckabee’s proposal to replace the income tax with a hefty national sales tax. “It will be like waving a magic wand releasing us from pain and unfairness,” he said in New Hampshire recently."

Anonymous,  Sunday, December 16, 2007 at 9:41:00 PM CST  

Clark, I read the article, but saw nothing of substance to back up the (unknown) author's assertion. Anyone familiar with the FairTax can immediately spot someone who is not familiar with it.

Most skeptics do not understand the prebate, why it makes the FairTax progressive, what happens when embedded taxes disappear, what the impact would be once the underground economy is taxed, the impact of trillions of dollars in tax sheltered off-shore accounts when they are repatriated... the list is long.

Anonymous,  Monday, December 17, 2007 at 12:12:00 AM CST  

To B Y Clark,

One cannot presumptuously label an idea as "off-the-wall" without elaboration, on one hand, while at the same time indicting it for lack of "serious consideration."

It's sort of like Congress perpetuating a tax system that actually causes America to lose jobs, then threaten those businesses with sanctions when they move operations offshore seeking tax relief. Huck makes sense on this issue, and he's clear on how FairTax will improve life for American workers.

henrymns Monday, December 17, 2007 at 1:11:00 AM CST  

You need to stop regurgitating the same post every time someone questions the feasibility of the FairTax. I would also suggest getting your information from a source other than You should be more like John. He collects the facts, from unbiased or less bias sources, then makes a decision for himself. Why don't you go find a book about huge sales tax levies in other countries and how those worked out. I think you will find that unanimously they have failed. I think that also when someone poses a question to you, you should actually answer the question, rather than spouting off a 500 word piece of nonsense that doesn't even talk about the question that was raised. I am currently writing a paper about this topic. I have been to I am not convinced.
I'd like you to explain something to me. If the FairTax eliminates all of the "hidden" taxes then replaces them with the 23% levy, and gives $450 billion (on the low side) in welfare, how then does it make up for the income and estate taxes plus this new $450 billion cost that it has not yet covered?

If you study the history of taxation, you will see that originally the only tax was a sales tax. Then an income tax was levied because of the needs of our government. Things are the way they are today for a reason. It's not like someone just thought one day that an income tax would be fun to pay, rather it was necessary to fund the services our government provides for it's people.

I cannot understand why there are so people who, like you, are continually trying to get out of paying taxes. Paying taxes is a privilege. Every time I get my paycheck I am proud to see that I have helped my government build a road, or fund new research. It is through investments like these, which only come from paying taxes, that we can do as a country what would not be possible for anyone.

Anonymous,  Monday, December 17, 2007 at 1:55:00 AM CST  

Dearest henrymns,

You might feel differently about your government, if you were the employer (from the private sector who isn't tied into government contracts) issuing henrymns' paycheck.

Your comments regarding the introduction of the income tax system are naive to the extent that government will always inform the taxpayer that more funds are necessary (because, of course, more programs, welfare, etc. ad nauseum are needed without regard to effect upon the general population). This being so, the poltician's mind will never stop working to find ways in which to advance this goal (including coming up with increasing ways to hide the real cost of government).

As has been noted, there is far too much wrong with the income tax system to defend it.

Tell me you're proud of a Congress that bankrupts your country. You, sir, are the kind of compliant "pawn" that politicians love.

With regard to your specific tax mechanics question, I'll look forward to see what your research yields.

John Médaille Monday, December 17, 2007 at 10:27:00 AM CST  

Ian is keen to excoriate critics of the so-called "fair" tax, but hesitant to answer some questions about it. For example, he has yet to explain why the Arabs will lower the price of oil because we have a consumption tax. This could only be true if the tax also lowered economic activity, thereby lowering the demand for oil. That is the likely effect, but not one we would choose for ourselves. Many markets have the same characteristics as the oil market.

Ian is also shy about discussing fraud and tax evasion, even though both are likely to be massive under this system since the rewards are so high. Yet, he has not one penny figured into his 30% tax rate to account for this, and resents anybody who even brings it up.

Further the "fair" tax folk are reluctant to discuss the fact that any price reductions will come only from wage reductions (as Jorgenson admits). Yes, you will get "100%" of your wage, but it will only be 100% of your current take-home pay. Obviously, for markets where labor is the major component of price, you cannot reduce prices without reducing wages. For other markets, where labor is not a big component (e.g., oil) or where the labor is mainly off-shore, the consumption tax cannot reduce prices at all.

Ian is quite right to note that the current system has bankrupt the country, but he cannot tell us why an even more flawed system will set it right again.

I will soon be posting a three-part series on the principles of taxation, principles by which any tax scheme can be evaluated. The problem, it seems to be, is that all of these schemes seem to ignore the basic principles of taxation, and so must end-up with huge distortions to the market and a huge increase in government power. There are better ways, but one must start with some basic principles.

Anonymous,  Monday, December 17, 2007 at 10:47:00 AM CST  

I agree completely that the current system is bad, 9 million words of tax code is not something I would like to read. The problem with replacing it, at least with the FairTax, is the FairTax is an even more flawed system that relies on assumptions that cannot be proven. No one really knows how this could effect the economy, nothing like this has ever been tried before in the US.

I would like to pose a question to you, what do you do that you have so much to gain from this?

The only people who benefit from this are the impoverished and the rich. It is foolish to think that the rich will be taxed higher because they spend more. The rich can live on a much smaller percentage of their income and will therefore pay a much, much smaller percentage of their income.

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