“…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.”

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 FairTax.org 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)

His post is pure propaganda, and he has twisted around facts and figures to make the points which he wants to make, and discredit the FairTax.

The bottom line is that the FairTax has no agenda, except to make our lives easier and our economy better. Here are FairTaxCritic’s comments in italics, and my responses in bold.:

1. The Beacon Hill/Kotlikoff study was paid for by Americans for Fair Taxation (the primary group behind the FairTax), which doesn’t mean the study is wrong, but that you have to be skeptical of its conclusions.

- Kotlikoff is the top economist at Boston University and Beacon Hill is a very reputable organization. They don’t have a record of being paid off and all the research is subject to peer review. Also, a large portion of research is commissioned. So skepticism is fine but a study published in prestigious peer reviewed journal is not to be dismissed without reason. The study continually referred to is at http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf.

2. Even accepting the study as accurate, if you read it carefully you will see that for the year 2007 (the only year studied) a tax rate of 31.8% would leave the federal government with a $473 billion deficit. So, it’s not exactly sustainable. In a later paper, Beacon Hill/Kotlikoff stated that the sustainable rate would be areound 36%. (By the way, I am using tax-exclusive numbers. These are the percentages that will need to be added on top of the price the merchant charges to pay his expenses and earn a profit.)

- To start off the study states that it is calculated statically, meaning there is no economic growth being factored into people spending or government collections. As even opponents of the FairTax admit the economy will grow substantially and much research has come to the same conclusion, the concern is invalid. The study actually states that 3% of economic growth would make the FairTax revenue neutral at the flat 23% rate. To actually quote the study instead of making false claims, it says, “Those calculations ignore: 1) general equilibrium feedback (supply-side and demand-side) effects that could significantly raise the FairTax base (see, for example, Kotlikoff and Jokisch, 2005, or Tuerck et al., 2006b); 2) the possibility that tax evasion would exceed the considerable amount of evasion automatically incorporated in our calculations given our use of National Income and Product Accounts (NIPA) data, which undercount consumption expenditures due to evasion under the current tax system; and 3) the roughly $1 trillion real capital gain the federal government would secure on its outstanding nominal debt, were consumer prices to rise by the full amount of the FairTax.” The other paper he mentions was not a paper on the rate but economic impact. They studied only a part of the US economy and put together a model that had a 26% inclusive tax rate. In that paper Kotlikoff even says,” our highly stylized model is not the U.S. economy.” The 23% rate study was based on a comprehensive, state of the art model of the whole economy.

3. Even these numbers are suspect. First, they do not take tax evasion and tax avoidance into account. Second, they do not take state and local taxes into account. (State and local taxes are generally about 1/3 of federal taxes; if states get rid of their income taxes and adopt mini-FairTaxes, as they surely would if the FairTax is adopted, the state and local tax will increase the overall tax by about 1/3. So, if the Fairtax is 45% at the federal level, it will increase to around 60% when state and local taxes are added in.)

- Apparently FairTaxCritic didn’t look at large portions of the study (see above) because it starts off by saying the very high evasion numbers of today’s system are actually figured into the study. They are actually predicted to drop under the FairTax due to an 80% reduction in compliance and enforcement points. Also whole sections of the study went over state and local government taxation and how the FairTax would burden them more than the current system.

4. It does not take two people to cheat under the FairTax; it takes only one. For example, I’m a landlord. I charge you rent, plus the FairTax. I pocket the FairTax (instead of forwarding it to the government). I’m also a lawyer. When I bill you and include the FairTax, how are you going to know that I sent the tax on to the government? Also, if I buy a new car and call it a business expense (so that it is tax-free), how is the government going to prove differently. (No IRS; the burden of proof will be on state taxing authorities.) Under our current system, most income is reported twice — i.e., by our employers and by the employees; by banks and brokerage houses as well as by recipients of interest and dividends. So the vast majority of tax obligations can be easily verified. Most tax-evasion comes in instances where there is not double reporting ( i.e., privately owned businesses.) Under the FairTax, there will be no double-reporting at all. Thus, I’m afraid that tax avoidance will increase, rather than decrease under the FairTax.

- Question(s) 1, you don’t know now under sales taxes. Question 2, states collect sales taxes, even on services, very well now. Question 3, most states exempt agriculture and non-profits from sales tax now and enforce it with exemption IDs, etc. The same for FairTax.

5. By the way, you should look at William Gale’s study, the Joint Committee on Taxation’s studies, the ITEP study, and the President’s Tax Reform Commission’s study; each of which concluded the FairTax would need to be much higher than AFFT claims it to be.

- Gales study was extremely flawed and none of the others even looked at the actual FairTax. They invented their own tax plan and said it wouldn’t work. See the FairTax.org rebuttal section for specifics.

6. If you think that people will not legally avoid paying a 50%-80% tax (or, even a 30% rate) by shifting their purchases to used cars (instead of new cars), existing homes (instead of new homes) and foreign travel (rather than domestic travel), then I’m afraid you don’t know much about human behavior. Of course they will seek to minimize their tax obligations (just as they do now) and that tax avoidance is NOT factored into the Beacon Hill/Kotlikoff study. The other studies I mentioned assume a modest amount of tax avoidance and tax evasion, like around 10% or so (which is much less than under our current system) but acknowledge that actual tax avoidance and evasion will probably be much higher.

- Again, the rate is 23% inclusive (or 30% exclusive) and the huge non compliance of our current system was factored into the rate study as it clearly states. Research is being wrapped up right now that shows the FairTax has lower evasion than the current system. People will still buy new things for the same reasons they do now except under the FairTax they do it with their paycheck free of federal withholding and with less expensive goods due to no embedded taxes.

7. Yes, SOME rich folks will still buy new BMW’s ect., but they still consume a much lower portion of their incomes than do the middle class, so the middle class will bear the brunt of the tax.

- If the FairTax didn’t have the prebate or repeal regressive payroll taxes the statements might be true. The middle class will not bear the brunt as research has shown (http://www.fairtax.org/PDF/Comparing%20AverageandMarginalTaxRates-110206.pdf) The FairTax doesn’t shift tax burdens and doesn’t have special loopholes for expensive accountants.

8. If you think the embedded taxes will be removed from the cost of building a new home (or anything else), you should re-read the Beacon Hill/Kotlikoff study who explicitly state that prices will NOT drop by the so-called embedded taxes, and, instead, will rise by the amount of the tax. (By the way, they think this is a good thing.) Alternatively, check with Dale Jorgenson, the Harvard economist that AFFT and Boortz tout as having “proved” the embedded taxes will disappear. He’s OPPOSES the FairTax (something they won’t tell you), agrees with Gale about the required tax rate ( i.e., 50%-60%) and points out that the only way for the embedded taxes to disappear from the price of goods is if all our our salaries are immediately lowered by the amounts we currently pay in taxes.

- Price wars for market share will not stop because FairTaxCritic says they will. The study did not factor price drops, true, and so far he’s twisted everything he’s cited in the research. In the third paragraph it says, “Focusing on real rather than nominal neutrality has the decided advantage that one can determine the revenue-neutral FairTax tax rate without having to pin down what happens to the price level.” Dr. Jorgenson said embedded taxes were X, he didn’t say all costs would come out in price. Neither does Americans for FairTaxation. The FairTax.org FAQs and the Ask the Expert section clearly state that. I have not heard that the Dr. opposes the FairTax. Linking to something where he says he does would help the believability of that statement.

9. Illegals, tourists and criminals already pay taxes when they buy things. (that’s what the so-called “embedded taxes” are.) For example, when a drug dealer buys a new Cadillac, the Cadillac dealer, salesperson and manufacturer all pay income taxes associated with that sale. Under the FairTax, the Cadillac dealer will collect the tax from the drug dealer and remit it to the government. So, the result is the same. The transaction will create tax revenue to the government. (When the drug dealer sales his drugs, he’s not going to pay income tax on the sale, nor will he collect the FairTax from his customers. So that transaction will not yield any tax revenue.)

-This is looking at the issue too simplistically. When money goes ‚Äòunderground’ (both wages and purchases) the FairTax taxes it much more quickly than the current system due to it being a cash register collected tax, not a reporting based tax. Also, these folks are paying some embedded but not the other federal taxes we pay so the FairTax evens the playing field.

While I appreciate and encourage healthy debate on the FairTax, I deplore misinformation and propaganda.

If you’d like to consider comparable “sales tax” rates, calculate what people’s income tax rate would be, externalized.
Read AFFT’s rebuttal of the Tax Panel:
“The panel failed the American people in the two most fundamental tasks: 1) They failed to define true criteria by which reform should be evaluated; and 2) They failed to grade tax reform plans against those criteria.

“Instead of the fundamental reforms the panel was charged with developing, they recommended changes that further complicate an already overly complex and impenetrable tax system, that is also too expensive to operate and an unfair burden to taxpayers. This panel failed to address:
• The estimated $265 billion in current tax compliance costs
• The routine lobbyist/legislative manipulations of the tax code that ill-serve the national interests
• The embedded corporate income and payroll tax costs that are hidden from the consuming public
‚Ä¢ The truly dramatic advantages of switching to a transparent and simple national retail consumption tax, as detailed by HR 25, the FairTax.”

More here: Gale Rebuttal
Perhaps you’d also find it interesting to also listen to Kotlikoff’s opinion of Gale’s work?

Kotlikoff Tax Foundation Podcast
Why does it seem that the media (meaning either those with a liberal agenda of “big gov’t,” or those who want “no gov’t”!) want to “sanctify” Gale’s work – the basis for the calculations of which has never been suitably forwarded to Kotlikoff?
. . . like the tax commission was comprised, and presided over, by other than POLITICIANS who derive their presently tyrannical power over the lives of American families thru confiscation of the fruits of their labor, using the tax code to socially-engineer society (and creating dependent constituencies) thru the granting of tax favors.
There is no rational defense for continuing a tax on income in light of the research that Americans for Fair Taxation have championed.

A look at Gale’s “A Note on the Required Tax Rate in a National Retail Sales Tax: Preliminary Estimates for 2005-2014 The Brookings Institution, August 12, 2004

In another audio interview (I’ve lost track of), Kotlikoff states that Gale’s people did NOT fulfill his request to submit their complete basis for calculations. Curiously, one cannot find Gale’s 1999 paper – to which Gale refers – at the link on the Brookings Institute’s site.

When one “digs deeper” (contrary to the “hole digging” recommended in previous posts) one can begin to see the inverse relationship between the health of the American economy, and the rise of the debt-driven society (credit cards anyone? don’t you just love Chase’s new “I wanna be free” credit-card-hawking ad campaign? truly Orwellian).

Deprive American families of their earnings, make them have to jump thru “Return filing” hoops to get their own money back, include penalties and MORE INTEREST (on top of the “opportunity cost” of NOT being paid interest on their withheld funds) and what have you got?? Write the tax code so that brokers need not report to the government the “cost” of a citizen’s stock transaction, merely the ENTIRE GAIN, paving the way for the governments “collection SERVICE” (to serve themselves by) send(ing) out notices dunning disorganized, late filers for the whole amount as taxable – putting them to MORE work jumping through exhausting hoops? And the volume of abuse is untolled. Sheer madness.

As Ian stated, you need to read exactly what Kotlikoff said, and he never suggested a higher rate for the FairTax than what is stated.

The misunderstanding either comes from a misqote of the Federal Commission on Tax Reform, or a misunderstanding of inclusive vs. exclusive tax rates.

Research has shown that tax avoidance and tax evasion under the FairTax will be much LOWER than under the current system, not higher. It is much easier to cheat under the current system than with a consumption tax, because there are significantly less collection points under the FairTax, it takes two people to cheat under the FairTax, whereas under the current system it only takes one, and the tax base is much broader under the FairTax, making cheating much less significant.

By the way, states have been successfully managing sales tax systems for many years, with no ill effects to their economies. Two of the largest economies in the world, Texas and Florida, operate exclusively on sales tax revenues.

We already have MASSIVE tax evasion and avoidance in the country. The IRS is unable to collect HUNDREDS OF BILLIONS of dollars, and the system costs us trillions of dollars in compliance costs. No tax system is perfect, but The FairTax has been show to have significantly lower rates of cheating and avoidance.

By the way…there is a big difference between avoidance and evasion. Being able to choose between saving and spending is legal and should be encouraged. The FairTax rate has already be calculated to account for this. Tax evasion is illegal, and will decrease under the FairTax.

As for people not buying houses because of the FairTax…that is ridiculous. It has been proven that the FairTax would be a huge benefit to home ownership. Existing housing accounts for 3/4 of home sales, and proceeds from these sales are usually a prerequisite for new home sales. The FairTax makes saving for and buying existing homes much easier, which will also make buying new homes much easier.

The FairTax also removes the tax component from the cost of building a new home, so prices of new homes will fall as well.

Please refer to the following papers:

http://www.fairtax.org/PDF/TheFairTaxTreatmentOfHousing.pdf

This one is on why residential realtors support the FairTax:
http://www.fairtax.org/PDF/WhyResidentialRealtorsSupportTheFairTax.pdf

And this one is on why the FairTax beats the mortgage interest deduction:
http://www.fairtax.org/PDF/PromotingHomeOwnership.pdf

Your statement about the FairTax having a higher rate because of the prebate is true but irrelevant.

I think we all agree that the better-off in our society should pay slightly more to provide benefits for the less fortunate in our society. That is the hallmark of a good society.

Our current system take this idea to a ridiculous level, by providing tax incentives not only for the poor, but for every special interest group under the sun. It is so complictaed that those of us who are bearing the burden are hardly aware of it!!!

The FairTax provides the best of both worlds. If you compare the effective tax rates when you include the prebate, you will find that the tax rate starts at 0% or below for the poorest people, and gradually increases with an increases in earnings (since spedning increases with earnings), but never goes above 23%. This is eminnently fair and equitable.

And I don’t want to hear that the wealthy will not pay their fair share. The wealthy certainly spend a lot of money in this country, and if you don’t believe me, just come to where I live, Contra Costa County California, and I will show you endless examples of conspicuous consumption. I only have to mention the words BMW, Mercedes, Rolex, Porche, Tiffany, etc. and you will understand what I mean. Try going into an Andronico’s market sometime and see how much people are willing to spend on food….I think the wealthy will pay more than their fair share.

And so will illegal immigrants, tourists and criminals, who currently pay nothing into the tax system.