On FairTax

One member asked why I was opposed to FairTax. I responded as follows.

First, let's define what we're talking about. The word "fair" causes a lot of trouble, because people mean different things when they say it. Everyone wants "fairness", but the fact that it means different things to different people makes discussing things in those terms inherently problematic. We have to start by defining what exactly we're talking about, or we're going to argue in circles. Typically, "fair" means "treating everyone equally", but even if we go with that, it's not that simple.

What's fair, when it comes to taxation? Everyone paying for the services they use? Everyone paying a flat dollar amount? Everyone paying a flat percentage of their income? A flat percentage of the utility gained from their income? A flat percentage of their outlays? Everyone being left with the same dollar amount? All these things can be called "fair", because in one way or another every one of them treats everyone the same. But I know you'll agree with me when I say that things like "leave everyone with a flat dollar amount" is totally unacceptable, even though it clearly meets our definition of "fair". So what is fair can not be the only criterion for choosing a tax system; there has to be something more.

"Taxes are the price we pay for civilization," said Oliver Wendell Holmes. I'm not sure I'd go that far, but they're certainly the price we pay for government. But what is the purpose of government? At its most basic level, the purpose of government is to defend the people. (Not protect, but defend.) A government's fundamental goal is to prevent its people from coming to harm from external sources, be they criminals, enemy nations, terrorists, natural disasters, or the government itself.

But taxation is by its nature damaging! We accept the damage caused by taxation, because we recognize that the defense gained from government is, or at least can be, greater than the cost. So the question should not be, "How can the government tax that is most fair?" The question instead should be, "How can the government tax that does the least damage?"

Which leads to my #1 priority: a balanced budget. Deficit spending does far more damage than progressive income taxes. I will not support any action which worsens the deficit, and replacing the national income tax with a 23% sales tax as FairTax proposes is simply not budget neutral. Wikipedia has a description of several analyses here. One consistent element of all those charts and graphs is that under FairTax the tax burden is lower for everyone, every segment of society. That sounds great on its own, but all other things being equal, that's simply not possible without also decreasing overall tax revenues. When you're running the insane deficits the federal government is now, the last thing you do is slash your income.

Now, the consequences of what I just said are obvious. Most candidates would dance around that, but I won't. The people of this district deserve someone who is forthright, so I'm going to come out and say it: I'm against tax cuts. We're spending hundreds of billions of dollars each year in interest payments on the debt, to make up for the spinelessness of politicans past and present. They placed, and continue to place, being popular over being responsible stewards of the peoples' money, and because of that we've sent two trillion dollars in interest to foreign investers in the last two decades. No more. Until we have a budget surplus, cutting tax revenue is unforgivably irresponsible, and I just won't do it.

So the most important answer to your quesiton is that to replace the income tax with FairTax now, on top of the last decade of Washington's wanton fiscal irresponsibility, would make the deficit worse, not better. I can't get behind that.

Now, there are also other issues. One is that under FairTax, each family in the country would receive a monthly "prebate", a check for what that family would pay in taxes up to the poverty line. Frankly, I'm surprised that so many conservatives are in favor of an idea that has us all receiving a government check every month to cover our basic survival needs. I'm far more interested in practical solutions than in ideology, but that idea makes even me squirm.

Further, I honestly believe that if individuals are to be taxed (which is something I'd prefer to avoid all together, naturally), some form of progressive income tax is the least damaging system I've seen so far. Yes, taxing higher income brackets more does have the effect of a reduced incentive to make more money, and a reduced ability to invest. That cumulative effect on the economy is certainly notable. But that effect must be compared against the negative effects of any proposed replacement system. I have to support the tax system that I believe does the least damage, and taking more from those who might have used that money to invest, in exchange for taking less from those who use that money for survival and education, meets that criterion in my estimation.

The FairTax is a tax cut for all, but isn't revenue neutral compared to the national income tax. I haven't seen a national sales tax proposal that was revenue neutral that didn't result in people in lower income brackets having significantly less money at the end of the day. If I'm wrong, and if someone has a proposal that meets both of these criteria, I'd be happy to consider it, but FairTax as it stands would be bad for all of us.

More questions resulted in this post:

Well, first, I want to say that I 100% agree that the first step is to cut spending to whatever level it properly should be at (that level being, of course, a matter for legitimate debate), then adjust taxation however necessary to make for a balanced budget from that point. Once that's done, I strongly believe that any new spending program, social, military, anything, needs to be supported by its own specific taxes. This would create a far more direct connection between government revenues and outlays, making deficits much easier to control. But we shouldn't consider cutting tax revenues at all until we have a definite, in-hand budget surplus.

Now, as for the revenue neutrality of FairTax, I should have linked to this article before. Many studies have been done, and the idea that a 23% inclusive/30% exclusive sales tax would be revenue neutral is only supported by some of them. I'll readily admit that I simply don't have the background to judge these analysis in anything resembling an authoritative fashion. But you can see it's absolutely not a clear-cut issue.

(As an aside, state income taxes are presented as an exclusive value, so 30% is the more informative and useful number. You end up paying 30% more than the pre-tax cost.)

Given that the experts disagree, I have to judge this from a perspective of risk. If FairTax would be everything some people claim it would, if the economy really expanded as quickly as they predict, it would be great, no doubt about that. But what if they're wrong? I think we all know from real world experience that nothing is ever as great as it sounds. We're all living with the consequences of the housing market betting the proverbial farm on the future expansion of the economy. So you have to ask, what then? What if FairTax doesn't turn out to be revenue neutral at 30%?

We all know what happens next. If we replace the income tax with FairTax and it's not revenue neutral, then the first year, the government runs a deficit. Exactly how big that deficit is is, once again, a matter for the analysts, but we're probably talking on the order of hundreds of billions of dollars. After that, the 30% tax rate would be increased to make up for the lost tax revenue. The end result is both increased debt and a tax increase on people making five-figure incomes.

So yes, the most optimistic predictions are that FairTax would be great for everyone. But the most optimistic predictions are almost never the correct ones. And almost anything but the most optimistic predictions result in situations I can't support. FairTax is fantastic until the first thing goes wrong, and there's a saying associated with a famous engineer: "If everything seems to be going perfectly, you've obviously overlooked something."

On another matter, the FairTax prebate system as presently designed is (I'm not going to pad this) absolutely inane. Putting aside my earlier issues about how the concept effectively makes us all dependent on a check from the government for our survival needs, there are fundamental flaws in the execution as well. The US government may define a national average poverty level, but it's just that: an average. What it takes a family of four to survive in Nashville is far less than what it would take for that same family to survive in New York. It makes no sense at all to send them both the same prebate up to the poverty level, because poverty means different things in different parts of the country! As a matter of fact, it's not fair at all!

We need to throw out the federal tax code, yes, but we need to replace it with something we can rely on. The FairTax has too many question marks, and throwing the entire weight of the federal budget onto an untested system would be irresponsible.

Now, all that having been said, I'd love to see experiments to eliminate these question marks. Predictions are great to have, but I want real-world data before making sweeping changes. I would like to see an experimental, dollar-for-dollar replacement of some relatively small sets of federal taxes with a national sales tax, so we can actually observe the effects instead of having to rely on predictions by disagreeing sets of experts. If the sales tax works as well as predicted, great, we can phase in replacement of other taxes, though preferably without the flawed and broken prebate system. If it doesn't work, we'll know it wasn't the right path to go down, and we can try something else.

The FairTax proposal as it stands is a massive risk without justification. If you don't know whether something new will work, you shouldn't throw everything into it. But you don't run away from it either. You test it, and then you make decisions based on the results.