Public policy smackdown!

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Policy analysts have come out swinging on the topics of the Fair Tax (national sales tax) and public-private toll roads. The language goes beyond dry analysis. Here's Bruce Bartlett in the Wall Street Journal on the Fair Tax:

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. 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.

Holy Guilt by Association, Batman! The rest of the piece raises some reasonable questions about the numbers that Fair Tax advocates have been using and the problem with taxing some sales that aren't currently taxed (e.g., new home sales) and collecting sales taxes where there currently isn't a state sales tax (e.g. Delaware). I think, though, that he's off-base regarding the sales tax rebate included in the plan. Bartlett writes:

Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income.

Aside from the incredible complexity and intrusiveness of tracking every American's monthly income--and creating a de facto national welfare program--the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.

It's my understanding that the rebate would be uniform and universal, effectively exempting the first X dollars of spending from this national sales tax. It still would require a federal taxing authority to determine who is entitled to the rebate, and I suppose it would vary by number of people in a household.

This seems a bit of a juvenile rhetorical overreach, too:

Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.

Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

If the Fair Tax takes hold at the federal level, presumably voters will want to encourage it at the state level too.

I have my own doubts about the advantages of the Fair Tax -- there will still be wrangling about what is and isn't a taxable sale, what constitutes a valid business expense, and the distinction between wholesale and retail -- but I don't think Mr. Bartlett is being entirely fair.

The other rhetorical smackdown comes from Stephen Malanga in City Journal against opponents of public-private partnerships for the construction of roads and other infrastructure:

If the deals can overcome resistance from anti-privatization groups and from politicians who benefit from keeping a stranglehold on government assets, they could help make up for decades of underinvestment in infrastructure—and thereby renew America’s landscape....

The extraordinary breadth and scope of these deals places America on the verge of a financing revolution—that is, if it isn’t snuffed out by powerful politicians and anti-privatization advocates, who’re trying to turn a practical solution for governors and mayors into a partisan issue. There’s no reason that Democrats shouldn’t get behind privatization, as they did recently in big projects in Chicago and Virginia. Nevertheless, Democratic congressman Peter DeFazio of Oregon, head of the powerful House Subcommittee on Highways, Transit, and Pipelines, accused the Republican Daniels of selling the Indiana Toll Road to make “an ideological point” about downsizing government....

Malanga seems oblivious to the concerns about public-private partnerships coming from conservative Republicans over foreign control of public assets, public entities "leasing" their power of eminent domain to private companies, the lack of competitive bidding when selecting a private partner, and the bizarre non-compete clauses insisted upon by the private "partners."

These two articles seem to be more about marginalizing a threatening alternative perspective than engaging in dialogue with otherwise like-minded people who disagree on these issues.

MORE: In the comments, Tyson Wynn notes that Fair Tax advocate Neal Boortz rebutted Bartlett's column on his radio show earlier this week. You can read what he had to say in Boortz's "Nealz Nuze" archives for August 26 and August 27.

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Policy analysts have come out swinging on the topics of the Fair Tax (national sales tax) and public-private toll roads. The language goes beyond dry analysis. Here's Bruce Bartlett in the Wall Street Journal on the Fair Tax: For those who never heard ... Read More

3 Comments

Tyson Wynn said:

Michael,

Neal Boortz responded to Mr. Bartlett's article earlier this week.

In part, his response stated (pardon the pasting):

"This assertion – that the FairTax was developed by the Church of Scientology – is flat-out false. I suspect that Bartlett allowed someone else to do his research for him on this issue; someone with an agenda. Perhaps he blindly accepted some information from a Washington insider, perhaps a K Street denizen who fears the loss of power and income should the FairTax become law.

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."

As for the notion that new home sales are not taxed, they are. The costs of current taxes are embedded in everything we buy. After the Fair Tax is law, housing costs should remain relatively level because the costs of goods to build the house will have been reduced by the amount of the embedded tax then increased by the rate of the Fair Tax, which is designed to be about a wash.

As far as I remember from the book, the prebate is sent to every head of household and it is uniform, but I may need to dig the book back out and make sure.

Ian said:

Apparently, this type of misinformation is a long-standing tradition by Mr. Bartlett.

Witness:

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”

FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

( Source )

Dan Paden said:

I am glad that Mr. Wynn provided the information; he is right, Mr. Boortz kindly--well, as kindly as Mr. Boortz ever does anything--pretty much fricasseed Mr. Bartlett's ill-informed commentary.

Mr. Boortz and Congressman Linder are busily working on another book, to be titled "The Fair Tax: Answering the Critics." In the meantime, those with questions about it are advised to read The Fair Tax Book and to visit Fairtax.org.

It's important to remember that Fair Tax proponents are not trying to sell you a perfect tax system. No such animal exists, has ever existed, or will ever exist. But as far as I can tell, the Fair Tax would work far better than anything else on the table, and, as Mr. Boortz frequently notes, would represent the biggest transfer of power away from government and back to the people since the Revolution. That is reason enough to look into it.

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This page contains a single entry by Michael Bates published on August 30, 2007 5:27 PM.

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