Top critical review
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Good argument for reforming the tax code, but plenty of critiques left unanswered
on July 22, 2011
Since I consider myself more or less an economic moderate who accepts the fundamental proposition that our tax system is fundamentally flawed and needs reform, I figured this "well reviewed" book was worth a look. Rather then give just an overall review, I decided to give an analytical breakdown with direct quoting of the text more or less chronologically.
On xxi on the introduction, the book makes a key point that the Fair Tax proposal is "revenue neutral", claiming that the Fair Tax would simply be a more efficient mechanism for collecting X revenue. Fair enough. But then the book proceeds, on page 18, to wax philosophic of the halcyon days of generations past, when taxes were much lower. It fails to acknowledge that the government provides a lot more services than it did when "the parents of today's baby boomers" worked. So yes, taxes will naturally be lower when not paying for Medicaid/Medicare, veteran's health care, affirmative action programs, great society anti-poverty programs, a military industrial complex developed despite Eisenhower's warnings back in the 1950's, etc. I think criticizing any of these programs is fair game, but mentioning such points strays from the original "revenue neutral' point expressed earlier. Pages 23-25 and 61-65 focus on spending criticisms, many of which are valid, of how tax money is wasted (though implying all welfare recipients buy brand new cars on page 23 is a bit "disingenuous", a term of which the authors seem to be fond). However, I bought this book to learn more about the equity and efficiency inherent in a national sales tax, so the anti-spending rants aren't relevant to this stated purpose (and some sections, such as the nostalgic reminiscences of when "our troops were on the side of the Lord", are completely irrelevant to the supposed point of the book - the authors seem keen on periodically slipping in their own socially conservative values which I don't appreciate in a book I thought was about economic policy). Yes, on page 96 the authors reaffirm they are just focusing on tax reform, not spending reform, but many of the anecdotes shared in the book contradict this message.
On page xxiv, the fair tax suggests that education should be taxed as an investment instead of consumption, which I find to be a sound idea. The only minor quibble is the inevitable lobbying sessions that will take place as various leisure training programs try to fight to earn that label and thus receive tax exempt status.
The book argues that the income tax serves as a disincentive to work, as oft explained by the Laffer Curve. Of course, this assumes workers' demand for a certain level of income is elastic - if a worker's need/preference for $50,000 worth of disposable income is inelastic, that worker arguably may even work HARDER with higher taxes, in order to achieve that income threshold. The same argument of elasticity could be applied to the Sarkozy plan praised on page 52; his plan makes sense because the hours worked after 35 hours are elastic, since working above 35 hours for most people is optional and thus they respond to "price" changes (by which I mean changes in income taxes.) But to apply that same logic to someone's first hour of work fails the elasticity test - since everyone (who does not live off government handouts or inherited wealth) must work at least one hour a week, reducing taxes on one's first hour of work would not have any negative impact on productivity. Furthermore, the authors fail to note other benefits that come with a progressive income tax, such as the fact that it serves as an automatic stabilizer which helps lessen the inflationary effects of economic expansion as well as helps to cushion the blow for all people when the economy contracts (and if you are unfamiliar with such terms as "elasticity" and "automatic stabilizers", I recommend taking Econ 101 before taking the authors at their word on their economic claims and blindly joining this movement, or any other.) The book also loves to repeatedly compare a progressive income tax to the Communist Manifesto, failing to recognize that a progressive income tax not only characterizes nearly all of the most developed countries, but that most economists support it. Even Adam Smith, the "father of capitalism", said " It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." Furthermore, on page 29, the book implies that people who make more money work harder; this is only a possible and partial explanation, the kind of explanation someone like Sean Hannity would like you to wholeheartedly embrace. The big disparity in income is not one's work ethic and man hours clocked at work, but rather the rarity of one's skill set. I know several people who work in IT that make close to six figure salary while only working about 20 hours a week. But nonetheless, I think a case can be made for significantly lowering income taxes (and offsetting them with a national sales tax), especially the payroll tax.
However, on xxv, the book also states the estate tax should be eliminated. I don't see any justification for this. It seems to rather rely on the emotional language of `being taxed at death' (p207) rather than rationally explain the societal benefit of such a repeal as it does with its analysis on its national sales tax. With the exception of a small group of less wealthy farmers (who can be exempt with a reasonably high income threshold), the repeal of the estate tax does only serves to concentrate wealth in a perpetual aristocracy. I have no problem with a hard worker, a risk taking entrepreneur, or someone exceptionally athletic or creative making and keeping millions of dollars, but a society can not advance if a notable percentage of people have millions of dollars handed to them just because they were lucky enough to be born exiting birth canal A instead of birth canal B. An estate tax helps prevent this in addition to providing additional revenue from those who have not earned the income themselves, and I did not find the book in any way explained how such a tax is harmful to the United States overall (only to those "interest groups" of the exceptionally wealthy, and I understand the FairTax to be opposed to the influence of interest groups.) In fact, the book itself, on page 45 and elsewhere, argues that a key principle of the fairtax is that is "taxes wealth instead of wages" - as the estate tax also targets wealth instead of wages, I would presume a FairTax supporter should also be supportive of it as well.
On xxvi, I did not notice any mention of property taxes. Are the authors in favor of eliminating, reducing, stabilizing, etc. property taxes? This is not a criticism; I was just hoping this question could be answered.
On page 2, it mentions famous people like Sean Hannity who are behind the proposal. Word of advice: if you trying to broaden your appeal of your tax proposal on its merits, probably best to avoid mentioning such polarizing and ideologically driven figures. For the FairTax to ever become a reality, it would require the support of liberals, moderates, and conservatives alike, and thus it is only relevant to mention supporters who have valuable economic insight, such as Milton Friedman. And when it discusses "some very serious people have begun exploring (the Fairtax") on page 12, it probably doesn't matter that no names are actually mentioned or even footnoted, because this "appeal to authority" is a logical fallacy to begin with and doesn't emphasize the merits of the fairtax proposal directly.
On page 14, when it says a "fair tax" should treat everyone equally, is it addressing excise taxes? Taxes on things such as alcohol and cigarettes should be higher (granted, a normative statement) because they engender negative externalities; since their consumption makes society worse (air pollution for cigarettes, higher correlation with criminal activity for alcohol, higher health care costs for both, etc.), it is FAIR to tax these products more than, say, buying a book, to attempt to reduce their overall consumption. Though I suspect that since the fairTax authors believe the tax code should not be used "to do more than simply raise money for the government" (page 93), I suppose we'll "have to agree to disagree."
On page 16, the book claims revenues to Social Security and Medicare would double under its proposal, but does not provide any references or footnotes documenting research that would support these claims. Failure to provide such documentation makes such claims as useful as similar claims made in books by Michael Moore.
On page 21, a footnote discusses federal spending over decades. But if figures are not adjusted for inflation, the stats are much less useful. It's like concluding that Americans are better students now than in 1790, because back then there were only thousands of high school graduates while in 2011 there are millions.
On page 26, the authors tie in a national sales tax with the idea of "dollar votes"; in other words, that a FairTax would enable people to influence policy by choosing what to buy. This is only partly true - if you don't like the way money is spent, you can opt to purchase less to send the message you're not happy with government policies. But all this can do is influence HOW MUCH revenue the government receives, not HOW it chooses to allocate its funds.
I found pages 30-38 to raise valid points and worth reading. I would only add that companies are not only looking for the lowest tax rates; other variables such as low crime, good infrastructure, and an educated local workforce are often important as well (and these, of course, often require taxes in order to create - though admittedly sometimes the private sector may deliver on these quasi-public goods). It should be noted, though, that many of the countries who have been praised in the book for lowering their income and/or corporate taxes (pages 49-50) are currently in a state of financial ruin, most notably Ireland.
Pages 55 - 58 raises good points about the "prebate" incentive for immigrants to want to be legal, and the money that can be gained from foreigners paying sales tax. Minor points: there's no evidence that becoming a "predominant tax haven" will automatically make the US a key tourism destination, nor is this connection explained. And it should be noted that, just as Americans are exempt from paying much of the VAT when they spend more than a certain amount of money during their trip, the same would also apply to foreigners, so the windfall gain from tourism would likely not be as high as optimistically anticipated.
Pages 87 - 108 is a good explanation of the group's goals, amusing obstacles encountered, and some very specific interest groups' reasons for supporting the current tax code, but in my opinion the targets were too specific; I would have preferred the authors address in detail more generalized critiques.
Pages 109 - 128 contain a relevant discussion on how taxes are levied. The idea that a supermajority vote is needed before Congress can exclude or exempt any service from the Fair Tax, as suggested on page 127, is a very good idea; I hope the threshold is set very high, like 90% or so. Furthermore, pages 129-130 has a very persuasive chart suggesting how consumption patterns are more stable than income patterns, though at some point I would like to see an updated chart reflecting the recent financial crisis, which may have altered this.
Pages 134- 141 has a fair discussion as to why Internet products should be taxed as well as to why the government itself should be taxed.
On page 145, the book argues that post-implementation of the fairTax, "American workers would have more purchasing power in the domestic marketplace." This is only partially true - the truth is workers would have more purchasing power in the WORLD marketplace. I have worked with many Venezuelans who make frequent trips to buy things in Miami to avoid the 30% inflation in Venezuela. Similarly, with more purchasing power, there is no guarantee Americans will spend this increased income proportionally in the United States. Vacations abroad may become more popular (especially since as a foreigner you are often exempt from paying the VAT levied by other countries) and people may opt to buy more goods at home, people living within a few hours drive of Mexico and Canada might make more border runs to buy goods (certainly not a majority of the country, but a factor nonetheless). Of course, to prevent people from buying above their importation limit, customs agents will have to become more active in searching through Americans' purchases when they return home - which would of course entail higher costs and need for more taxes to off-set that bureaucratic cost.
Another point is that individualized retirement and health savings accounts, advocated by many conservatives and economists alike, would not be easy for the government to arrange if medicare and social security taxes were abolished; this, of course, is a whole other topic too long to address here.
Pages 193 - 208, like much of the intro and the preface, is mostly cheerleading - feel good reading if you're a supporter. I gained nothing by reading it.
In short, I found this book often lacking in providing ample research footnotes to support its claims. The book makes a strong case of the need to reform our current tax code, as "investments should be made based on growth and earnings potential, not on gaming the tax code." (page 90). Though the FairTax idea might have potential, but this book intended "to answer its critics" has only served to make me more of one; I went from someone with no set opinion on the matter and even quite open to the proposal, but finds that if this is the "authority" on a national sales tax, I am quite far from being convinced. If a Fairtax supporter is reading this, I would be happy if you could recommend a book/author/economist advocating its principles which addresses most of the aforementioned criticisms and has more specific documentation for its mathematical claims. I could still potentially be on board "the movement" if some key changes were made to the current bill and/or supporters can rationally (and preferably politely) address these concerns.