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FAIR TAX KERFUFFLE

August 27, 2007

Former Treasury official Bruce Bartlett outlined his case against the "FairTax" national sales tax plan in the Wall Street Journal this weekend (free link). He hammers on the fundamental bait-and-switch of the FairTax:

In reality, the FairTax rate is not 23%. [FairTAx supporters] Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other sales tax is calculated, with the tax on top of the price, yields a rate of 30%. (This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

He also makes a surprising assertion of the origins of the FairTax:

It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.

Neal Boortz, talk show host and author of "The FairTax Book," is unhappy with the Scientology assertion:

What Bartlett did was very simple, and astonishingly careless. He mistook a group called Citizens for an Alternative Tax System (CATS) for the people who developed the FairTax.

Now CATS did have a plan for a national retail sales tax, but it was in no way connected with Americans for Fair Taxation (AFFT) and the FairTax. I was familiar with the CATS program. I had them on my radio repeatedly. As I've told you, I've been interested in this idea of replacing the income tax with the sales tax for some time.

The CATS idea was simply to do away with income taxes and replace them with a 17% sales tax. Payroll taxes would stay with you, as would many other federal tax levies. As you can see, this is substantially different from the program offered by the FairTax.

Mr. Boortz also says the rate is really 23%, basically because... he says so, in large highlighted print:

The 23 percent FairTax is not added to the price of everything you buy ... it is already included in the price of everything you will buy, just as the embedded taxes are included today. You remove one, you add the other.

That's just marketing. If an item costs $1 without a sales tax, and $1.30 with the tax, most people would call that a 30% tax. That's how sales taxes are conventionally measured.

Whether you call it 23% or 30%, the FairTax is far higher than any sales tax ever successfully imposed. As most states would be forced to give up their income taxes if the federal tax goes away, the effective combined federal and state rate would probably exceed 40%, even under the FairTaxers projections (Bartlett and others say the rate would have to be even higher). It just wouldn't work; the high rate would trigger massive evasion and loophole carving.

The Tax Guru and the TaxProf have more.

I detail my objections to the FairTax here.

UPDATE: More at Captain's Quarters.

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