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29 of 35 people found the following review helpful
Interesting and thoughtful, though leaves a few questions unanswered
on March 4, 2010
Into the ongoing - and often dreadfully unproductive - debate on fiscal policy, Ken Hoagland offers at least as much light as heat in his slim, tautly written polemic, "The Fairtax Solution." Hoagland offers a fine explanation of the Fair Tax, even as he raises a spirited defense against many of the criticisms leveled against this proposal.
What is the Fair Tax? In brief, it would replace all income, payroll, and inheritance taxes with a consumption tax on all new goods and services which would be collected at the point of sale. All families would receive a "prebate" - which is monthly remittance meant to cover the cost of the tax paid on necessities and calculated by the size of the family, but generally in the $500-600 per month range. While the rate to which the Fair Tax must be set to achieve revenue neutrality (more on this later) is subject to debate, Hoagland unsurprisingly uses the one favored by Fair Tax advocates of 23% inclusive or 30% exclusive (more on this later as well).
In such areas as the mad complexity of our current tax system, its negative economic impact on productivity, as well as the way it invites political corruption, Hoagland offers a brief that is as spirited as it is persuasive. No thoughtful reader will be able to easily refute his thoughtful explanation of "imbedded" taxes (how taxes on businesses are converted into costs and passed onto the consumer) and who won't be given pause at the $300 billion annually spent as a "cost of tax compliance" though largely spent on tax avoidance (which even represented as 2.3% of GDP is pretty enormous). Hoagland also refutes claims of Fair Tax advocates being deceptive by calculating the tax "inclusively" instead of "exclusively" by pointing out that this is also how income taxes are calculated, including the amount paid in taxes as part of the whole (thus an item costing $77, once the tax was added, would cost $100).
While Hoagland freely admits that the Fair Tax would not be perfect - arguing that perfect shouldn't be the enemy of the good --"The Fair Tax Solution" is less successful in answering other charges offered by critics and answering questions that will be posed by sophisticated readers. One can quite reasonably ask if the 23% rate would be "revenue neutral" (raising the same amount as the current system), a question to which this work devotes far too little space. Indeed, one can reasonably wonder whether given the huge ramifications of such a shift as moving from an income tax system to one based on consumption, it is even possible to predict what the rate would need to be. Just consider the unpredictable effect a tax on all new goods would have on consumer choices and you'll get the idea. Likewise, while the Fair Tax offers a host of macroeconomic advantages, its impact on an economy in which 60% of GDP is generated by consumer demand would be powerful, disruptive, and potentially painful during the period of transition. Also absent is a credible argument about how to deal with the increase in tax avoidance and growth in the underground economy that a consumption tax collected at the point of sale would surely encourage, as many would shift to cash. If states such as New York with high sales taxes are any indication, this problem would be substantial.
I was also disappointed to find unanswered the question of how to consider the taxes paid by government purchases of good and services, which in the case of the Federal Government would amount to no net revenue and with regard to states raises serious Constitutional questions.
As with any evangelical work, "The Fair Tax Solution" also can tend towards the extreme in both its portrait of the evils of hell and the glories of heaven. Hoagland devotes considerable space to describing the problem of persistent and widening deficits but never links them persuasively to the income tax system. Given that the current income tax began in 1912 and FICA in the 1960s, but that the era of ballooning deficits began with the Reagan administration, this seems an extremely weak to entirely absent causal link. Likewise, shifting to a consumption tax is unlikely to cause a sudden bloom in civic virtue - farm state voters would still demand their soybean subsidies, senior citizens would still inveigh against any change in calculating their COLA, and the US political structure would still encourage the transfer of wealth from densely populated net tax paying states like California and New York to sparsely populated net tax gainers in the South and Midwest.
In the end, the Fair Tax is a revenue proposal and it is on this basis that it should be judged. "The Fair Tax Solution" while lacking in certain areas, still represents a substantial brief in favor of its position and marks the Fair Tax as a serious proposal which will demand consideration as the United States works to put its fiscal house in order.