Wednesday, January 19, 2011

2 Authentic Problems with the Fair Tax

RealClearPolitics - Video - Neal Boortz Explains The Fair Tax
Judging from the Eric Bolling video, I think its fair to say that Neil Boortz has not thought through the issue of a wartime need for government funds and how to handle it.  To be fair though, all tax reform has that same issue to think through.

Obviously most criticism of the Fair Tax is unfair. I'm totally on the side of my tax reform brethren, like Boortz, on all the unfair stuff that is lobbed at them from the protectors of big government.

But at some point there has to be some thought that goes into the post-tax-reform period. Yes it would be permanently pro-growth but then so would the Laffer-Moore Flat tax.

I would respectfully argue that there are two authentic problems with the Fair Tax when compared with a low [13%] flat tax:

#1 When compared with the flat tax it is less amenable to the ups and downs of the business cycle. The fair tax would be great in times of strong and good growth, but it would be unfair to retailers during slumps. (Even granting that there would be less recession after strong tax reform kicks in.) Obviously there were recessions in the 1800's when there were no income taxes.

#2 When compared with a flat tax the Fair Tax is a regressive tax on the middle class. This is a huge deal! The middle class would be stuck with the bill for our government. Unfairly so.

If you compared an average rich person to an average middle class person you would find that by far the rich person spends a smaller part of his total income than the average middle class person, who generally has to struggle not to spend all of it. This would mean that the average middle class person will bear the weight of the government more than the average rich person when you look at it from a fraction of yearly income standpoint. And it would be even worse from a wealth standpoint, since the rich spend an even smaller percent of their wealth. In the bigger sense you could look at the yearly total of government tax receipts. The middle class would bear the burden in this snapshot too.

Conversely, whenever we have flattened the tax rates the rich have significantly increased their share of that final total of government tax receipts.  And it's because they have freed up their money and taken risks with it and profited from their risks so that a low tax on their increased income brings in more revenue than in our current punish the rich system.  I'm glad that the Fair Tax is not a punish success tax system.

But I would respectfully say that the regressiveness of the Fair Tax, even though it would shield the poor from this problem, would be a huge problem politically.  The middle class would not be shielded. And why is that "fair"? This problem would be true even with all its pro-growth realities coming to bear, while the flat tax would have the political virtue of  yearly pools of tax revenue being permanently weighted toward the upper incomes.  Why is that "unfair"?  Actually to me the flat tax is more authentically fair than the fair tax.

To raise taxes in a national emergency, and this might be one solution for Boortz and the Fair Tax as well, would be to go into the kind of wartime debt we took on during WWII. That is certainly preferable to losing a serious war.