The FairTax: A Big Tax Increase?

According to The Politico, the so-called FairTax is an issue in the special election to replace the late John Murtha in Pennsylvania. The Republican candidate Tim Burns apparently said some nice words about the idea before taking them back, and Democrat Mark Critz ran an ad saying that the FairTax would constitute a tax increase, a charge that the FairTax people have called a lie.

I was unable to find either the Critz or FairTax ads so I am not clear on the precise details of the charges. But it certainly is reasonable to say that the FairTax would constitute a substantial tax increase in the current environment. That is because the proposal has always had a 23 percent tax rate. Yet during the time this proposal has been kicking around federal revenues as a share of GDP have ranged from a high of 20.6 percent in 2000 to 14.8 percent in 2009. As Stan correctly pointed out yesterday, by every measure federal taxes are at their lowest level as a share of income or the economy in 60 years. And no matter how much the tea party people deny it and rant about overtaxation that is a fact.

If the FairTax people were honest about wanting to replace federal taxes in a revenue neutral manner, they should have reduced their proposed rate by at least five percentage points over the last 10 years. Since they haven't and because they said 23 percent was revenue neutral back in 2000, it's reasonable to assume that replacing all federal taxes with a 23 percent sales tax today would have to constitute a tax increase equal to almost six percent of GDP. This is simple math.

As I have explained on more occasions than I care to recall, the FairTax is a totally crackpot idea. The fact that its supporters always claim that the same rate will equal current federal revenues no matter what federal revenues are is actually among their lesser deceptions. For more details see here.

Note: comments on this site are monitored and anything abusive will be deleted.

The "23%" claim is based on the idea that if you charge $1.30 for a $1.00 item, only 23% of what you pay (3/13) is tax.

It's a 30% tax rate, and pretending otherwise is disingenuous at best.

Just look who's pushing it. Boortz and Linder. Nuff said.

If you keep $1 of $1.30 income they only call it a 23% tax. Obama is increasing the top tax rate to over 70% of after-tax income. The fair tax (or VAT) should be compared to income taxes on the same basis.

Income taxes on work, savings, and investment are taxes on labor, financing, and capital that are passed on to consumers. The tax incidence of Fair/VAT may be different but the tax burden is mostly the same.

 

That was pretty abusive. I love it.

Lolwut? No offense but you seriously need to source your assertions and make a wee bit more sense.

I really don't have time to explain basic economics to every person who posts here. There is a fundamental difference between a tax on income and one on consumption and a marginal rate that affects a tiny percentage of taxpayers and a flat rate system that affects everyone. 

Is that if the government were to change no laws from today, Federal taxes as a percent of GDP (a more relevant measure than as a percent of PI) would be at the highest level ever seen by the end of the decade.

So get over the taxes are too low nonsense. Using tax rates as a percent of PI measured during the largest recession since the great depression is hardly a convincing statistic on which to base that argument.

As to the initial question. 23% would be a higher rate for most people, inclusive of all Federal taxes they pay today and would represent a massive shifting of the burden to lower income taxpayers relative to today. You can debate whether this is good or bad but whether 23% is higher or lower depends quite a lot on your starting point.

But I reiterate, comparing takes of GDP during a recession to those during a speculative asset bubble (1999) is silly. Why not compare the CBO current law baseline to the historical averages and wow, it's at the higher end of the range so taxes will be high by historical standards unless Obama and the Dem Congress lower them. But I'm sure if they do so, Bruce and others will find a way to blame Bush for it.

But the effective tax rate of the top quintile of wage earners exceeded 23% in 2006 (the last year for which data was available from the CBO). So 23% would be less for probably 20ish percent of taxpayers. That's a bit more than a tiny percent and both are average tax rates or the equivalent.

I totally disagree with the fair tax. The correct maximum tax rate for the US is, as it always has been, the same as it was in 1955, the year everyone is so nostalgic about as being the acme of the US. That's 91%.

'Nuff said

I live in Pittsburgh, the center of the PA-12 media market, so I've been seeing all the special election advertising. The Youtube link below is the only one that I have seen reference the Fairtax argument and it is from the DCCC. It has been in fairly heavy rotation until at least yesterday morning.

http://www.youtube.com/watch?v=E7FI7Z7wkE4

 I suspect that the DCCC underestimates the the impact of the FairTax by taking the 23% rate at face value. Calculated the same way state sales taxes are calculated the rate is actually 30%.

Whether the FairTax is a crackpot idea or not, the "simple math" of taking the hypothetical 23 percent tax rate times GDP to determine if the FairTax would reduce or increase taxes generally is, well, far too simple.

Not that I have the time to explain simple math to everyone who posts here, but according to a study of the Fair Tax Proposal published in Tax Notes, the FairTax would cover approximately 86 percent of the goods and services comprising GDP. Therefore, the equivalent percentage of GDP is only 19.78% (.86 x 23).

http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf

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