I Guess I Shouldn't Be Surprised, But....

I was listening to the radio yesterday and heard that a state representative was trying to convince Michigan to adopt "FairTax", the simplistic and unworkable concept of replacing all sources of state revenue with a sales tax on goods and services. This will take a constitutional amendment so, yes, they're working on a petition drive. Let's hope for Michigan's sake that, if the drive succeeds, the state's voters don't turn out to be as starry-eyed and foolish as the proponents of this "reform".

One of the leading proponents, Representative Fulton Sheen (R-Plainwell), promises, essentially, that this will be a break-even for Michigan - raise the sales tax to 9.5% on all services and new goods, and that will make up for eliminating property taxes, state income taxes, state business taxes, etc. (It isn't clear whether this is a standard "FairTax" sleight of hand, with a 9.5% tax actually translating into something more like 11%, or if, like FairTax, it will also require the government to pay taxes in order to disguise If joined with the "dream" of a federal FairTax, government spending would have to go up by about 40% to pay the "tax bill" (the government presently being tax-exempt), and the sales tax on any goods or services you buy will be about 40%. (New homes are taxed, "used" homes are not. So that $250,000.00 newly constructed home will cost you $350,000.00. That's certain to inspire a revival of the construction industry.)

Let's look at the promises made by the "petition drive":

The MI FairTax:
* Makes sure everyone pays their fair share
* Allows you to keep your entire pay check free of state taxes
* Un-taxes the poor with a rebate on the necessities of life
* Stimulates investment, economic growth and job creation

The MI FairTax is Simple:
* NO Tax Filings
* NO Loopholes
* NO Hidden Taxes

Hm. So the poor will receive a FairTax rebate simply by asking for it - no tax return necessary, and thus no verification of qualification. Purchasing your goods and services out-of-state and thus tax-free? Apparently you don't have to file a return so that the state can collect "Use Tax". And everybody who qualifies (perhaps just by asking) will receive a monthly "welfare check" from the state.

No tax loopholes? (Other than the big, obvious one of buying out-of-state?) Well, I'm promised that "all business-to-business transactions would be exempt" from the tax. So I start a small furniture showroom, buy my household furnishings for the showroom, then sell them to myself a few months down the line as demo units. That should lower my tax bill. No, wait - better. I'll declare that I am a journalist performing product testing, and thus everything in my house is owned by my business. I'll blog about wear-and-tear and product quality, and suddenly everything I buy is tax-free. Since I won't be filing a tax return, the government will have a hard time detecting my actions, let alone challenging them in court.

In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

The WSJ and I appear to be on the same page on this issue....

FairTax - The Fine Print

I have long been of the opinion that the "FairTax" proposal is so insipid that it should be an automatic disqualifier for any Presidential candidate who endorses it. My reaction was initially premised on the publicly touted aspects of "FairTax" - look what happens when you read the fine print.... (PDF). (ht: Ilya Somin.)

Bad Logic and... Lies by Omission?

Not that I would expect more from Tom DeLay, but shouldn't I have a right to expect more?

Our current tax system has been written by and for special interests and is, by design, dizzyingly complicated. It kills jobs, and it simply does not efficiently accomplish the tasks for which it is designed.

The American people are ready for this debate. They are ready for a debate about a flat tax that would gut the Internal Revenue Service and allow almost every American to file his or her tax return on a simple form the size of a postcard.

DeLay isn't a stupid man. He is fully aware that the issues of tax fairness and tax simplification are entirely separate - that you can have an unfair, simple tax code, and a complex but fair tax code. While he is correct that much of the complexity in the present tax code comes from catering to special interests, he is being intentionally deceptive in failing to mention that "flat tax" proposals are backed primarily by wealthy special interests seeking to lower their tax burden.

They are ready, I believe, to learn more about replacing the income-based tax system altogether with a national sales tax, as in the FairTax proposal I have co-sponsored in the House. This plan would allow Americans to choose, based on their spending decisions, how much tax they would pay every year.

Are you sufficiently deluded to believe that the average American could "choose" to avoid paying sales tax? People living paycheck-to-paycheck can suddenly curb their spending in order to "choose" to avoid taxes? If there were an honest bone in DeLay's body, he would devote at least a sentence fragment to the fact that replacing income taxes with national sales taxes would inure almost exclusively to the benefit of the wealthy, and would be exceptionally regressive. (And where is the evidence that in nations which presently employ national sales taxes and "value added taxes" that "planning and budgeting [is] easier for families and businesses"? In which of those nations is economic growth outstripping that of the United States?

Meanwhile, reforming the individual tax system would also provide a long-overdue opportunity to drain the corporate welfare, special-interest morass of our current corporate tax structure.

It would? Please, Tom - tell us how. Oh, I see... out of space.

If a flat tax is so fair, so cheap and easy to administer, and provides massive cost savings and so many efficiencies, why aren't any of the wealthy advocates of a "flat tax" for wage earners (including, of course, Tom DeLay) advocating a "flat tax" for corporate profits?

What's To Like?

When I take on an idiotorial, it is not necessarily to suggest that the author is an idiot, nor that the author is necessarily wrong. It's more of a reaction to the really bad reasoning, or blatant factual error, presented within the editorial itself. For example, I think David Brooks has the capacity to write a well-reasoned column - it's not always clear to me whether his tendency to do otherwise results from laziness or from his ideological blinkers. With George Will, save for the period that the mention of Bill Clinton would leave him frothing at the mouth, there is no such ambiguity - my firm impression is that he knows the facts, understands the issues, and will betray both the facts and a fair understanding in order to advance an ideology. Case in point, yesterday's editorial on taxation.Which of these positions does George Will actually believe?

• A "23 percent national sales tax on personal consumption ... would not only sensitize consumers to the cost of government with every purchase, it would destroy K Street." The first claim is a matter of opinion - I did not sense that consumers have responded as described to state sales taxes, or to the substantial taxes on cigarettes, liquor, and gasoline, but perhaps a national sales tax would somehow trigger the national consciousness. But destroy K Street? C'mon. I'll concede that taxes play a big role in lobbying, but big business will unquestionably continue to lobby for other purposes, including for new or expanded subsidies and protectionist trade barriers, even if all corporate taxes are eliminated as part of this "reform".


• "And his bill untaxes the poor by including an advance monthly rebate for every household equal to the sales tax on consumption of essential goods and services, as calculated by the government, up to the annually adjusted poverty level." Hm. So the bill "untaxes corporations" by eliminating corporate taxes. It "untaxes the rich" by removing any taxes from their wealth and inheritance. It "untaxes the poor" by giving them a tax credit. So who, dare I ask, is Will expecting to pick up the tax burden those other groups leave behind?


• "Corporations do not pay payroll and income taxes and compliance costs; they collect them from consumers through prices." If "payroll taxes" are viewed as a tax on corporations, shouldn't we regard all taxes on wages as a form of corporate income tax? Isn't it fair to assert, under such a model, that unless you're self-employed you don't pay a cent in taxes, as your "income" and "payroll" taxes are really part of your employer's overhead? And with all due respect to Will's notion that corporations consider taxes along with all other expenses of doing business when setting prices or forming policy, does he truly think that the impact of a federal sales tax will be overlooked in the nation's boardrooms? And by recognizing that corporations consider their tax burdens in such acts as setting prices, does Will sincerely believe that free market principles are best served by taking that calculus out of the hands of the market and replacing it with a "one size fits all" national sales tax?


• Will continues, "Linder says the director of the Congressional Budget Office told him it costs individuals and businesses about $500 billion to remit $2 trillion to Washington. And studies show that it costs the average small business $724 to collect and remit $100." I'm not sure what those statistics mean - perhaps intentionally, Will doesn't provide enough context. But if Will is asserting that the collection of a new, national sales tax will reduce the tax burden on small businesses, he has no clue what he is talking about - this represents a very burdensome type of tax to be collected at the cash register, and imposes an entirely new burden on service providers. (As for the overall cost of tax compliance, in 2002 the Heritage Foundation asserted that the cost of compliance with the Tax Code was about $194 billion each year. Is Will seriously claiming that under Bush's watch that number has almost tripled?)


• "With no taxes on capital and labor, multinationals would, Linder thinks, stampede to locate here, which would be an incentive for other nations to emulate America." Um... Lindner himself details this proposal as tax on goods and services. How do you tax services without taxing labor?


• "Linder had better repeal the 16th Amendment, to make sure the income tax stays gone"... But George, why would anybody try to bring back an income tax when this utopia you describe, with businesses clamoring to set up shop in the United States, lobbyists gone from Washington, trillions of dollars sheltered in overseas accounts pouring into our nation's banks, and "freedom [unleashed] around the globe", will result from this tax proposal? Or is your real concern that, if you don't foreclose an income tax, the middle class will insist upon relief when the true burdens of such a tax policy become manifest?

Will's piece also suffers from deliberate omission. For example, he overlooks the impact that would result where services, presently provided without tax, jump in cost by 28%. He overlooks the fact that, while Lindner proposes that the 28% rate would be "revenue neutral", even accepting that claim you would also have to assume that there will be no tax avoidance under the new scheme. Which is unlikely, given how many cash transactions go unreported under the current system.

Here's an idea for a shelter: Create a seller's club - sort of an "Amway on steroids" - which sells pretty much everything, including electronics, furniture, household products, tools, and dry goods. Members would operate from their own homes, and would purchase "demo items" from the club. Guests in their homes could view the items, and if they chose could order them through the club member. Of course, this end customer would pay taxes, but the "demo items" themselves would be tax-free. (And if the would-be customer instead joins the club, and sets up his or her own tax-free home demo, the member gets a commission.) Does it sound like a plan?

And what of the history of the "luxury tax"? Recall the 1990 tax on luxury yachts, a mere 10% tax, which devastated the domestic yacht industry (a tax that, I would venture, Will opposed)? We are to assume that there will be no similar impact from a 28% tax on high end items? That the rich won't find other ways to buy their yachts, without paying a high sales tax? Sure, George. Sure.