Categorized | Tax, Trade

Why Dems should love a “fair tax”


The presumably Democratic economist, Laurence J. Kotlikoff, has a
new look at the Fair Tax.  I fully plagiarized the op-ed title he
used for my blog entry - "Why Democrats should love the Fair Tax."  Don’t tell Hillary Clinton. 

Fair Tax is one of several ways to do a border adjustable tax that
would be quite good to level the playing field in trade.  The
Coalition for a Prosperous America has identified the VAT-tariff
issue as a predominant problem in trade.  Most of the debate on
the tax focuses upon domestic tax policy issues, which does not
necessarily drive the CPA position.

The full op-ed is reproduced
below the fold (hit "read more").  Yes, yes Mr. Boston Globe
lawyer, this full reproduction may be a copyright violation over and
above "fair use", but if you want me to take it down, send me an email.


Why Democrats should love the FairTax
By Laurence Kotlikoff  |  February 24, 2008

SUPPOSE A presidential candidate proposed taxing wealth and using the
proceeds to reduce taxes on workers and provide a rebate large enough
to cover taxes paid by poor workers. Such a candidate would be hailed
by the left and reviled by the right.

Thus, it’s remarkable that so many Democrats, with the exception of
presidential candidate Mike Gravel, oppose the FairTax and so many
Republicans, particularly presidential candidate Mike Huckabee, support
it. In fact, the FairTax, which replaces all federal taxes with a
federal retail sales tax and provides a rebate, represents a way to tax
wealth, reduce taxes on wages, and disproportionately redistribute
money to the poor.

A sales tax effectively taxes wealth?

It does. When we buy goods and services in a sales tax world, part of
the payment goes to sales taxes. So we end up with fewer real goods and

Take Mr. Megabucks, who is sitting on $65 million and wants to buy a
jet like Oprah Winfrey’s - a 10-passenger, $50 million Global Express
XRS. Under the FairTax, the jet costs him an extra $15 million because
of the 30 percent sales tax. Mr. Megabucks gets the jet, but the extra
$15 million, which he had budgeted for Beluga caviar, Dom Pérignon, and
other flight snacks, goes to Uncle Sam.

Now $15 million is 23 percent of $65 million - so the FairTax cost Mr.
Megabucks 23 percent of his wealth. Precisely the same outcome would
arise were Uncle Sam to directly tax Mr. Megabuck’s $65 million in
wealth at a 23 percent rate, leaving him with $50 million to buy the
jet at the original price.

What if Mr. Megabucks sits and counts his money? With a direct wealth
tax Mr. Megabucks pays $15 million immediately and is left with $50
million in purchasing power. Under the FairTax, Mr. Megabuck is in the
same boat. Retail prices rise by 30 percent and Mr. Megabucks finds
that his $65 million can only buy $50 million in real goods and
services; Mr. Megabucks has the same number of dollars, but 23 percent
less purchasing power.

This equivalence is no coincidence; taxing consumption is
mathematically identical to taxing the resources used to buy
consumption - current wealth holdings plus wages as they are earned.
The beauty of the FairTax is that taxing wealth at a 23 percent rate
generates enough revenue to reduce workers’ marginal tax brackets to 23
percent. This is dramatically lower than the 30 percent to 45 percent
marginal tax bracket confronting most workers under our combined income
and payroll taxes.

The FairTax sales tax rate isn’t graduated; everyone’s resources get
taxed at the same 23 percent effective rate. What makes the FairTax
progressive is its rebate. The rebate is a trivial share of the
resources of the rich, but 23 percent of the resources of the poor.
Since our current tax system is regressive, adopting the FairTax would
achieve progressivity.

Our tax system is regressive because none of the corpus - the principal
- of the wealth of the rich, including our more than 400 billionaires,
is subjected to taxation. Instead they pay taxes only on the income
earned on their wealth. But this income comes primarily as capital
gains, which are taxed at only 15 percent. Furthermore, capital gains
taxes are levied only when wealth holders realize their gains - when
they sell their appreciated assets.

But the superrich don’t need to sell their gains. If they need cash
they can borrow using their appreciated assets as collateral. When they
die, they can hand their heirs their appreciated assets with a step-up
in basis, which wipes out prior capital gains. With the right estate
planning, they can also avoid most estate and gift taxes. Unlike most
of us, what the superwealthy and just plain wealthy pay in taxes is a
matter of choice - their choice. When Warren Buffet says his tax rate
is much lower than his secretary’s, he’s got it right.

So why do so many Democrats think the FairTax is regressive? Because
they consider taxes relative to annual income rather than resources,
and the former is a terrible proxy for the later. Bill Gates’s income
this year may be zero given what’s happening to stocks. If so, a man
with over $47 billion in resources will be classified, based on income,
as no better off than the homeless. And since Gates’s consumption is
based on his resources, not his current income, the ratio of this
"poor" person’s FairTax payments to his income would be sky high.
Measuring taxes relative to income will thus suggest regressivity with
respect to consumption taxation where none exists.

Our economy needs a simple, transparent, and progressive tax system.
The FairTax is the answer. Democrats should give it another look and a
fair chance.

Laurence J. Kotlikoff, a professor of economics at Boston
University, is an economic adviser to Mike Gravel and a consultant to 


2 Responses to “Why Dems should love a “fair tax””

  1. Vicky Davis says:

    Excuse me Professor Kotlikoff, but you are spreading misinformation about the ‘Fair Tax’.

    First of all, it has nothing to do with VAT taxes. The ‘Fair Tax’ is a sales tax similar - if not identical to Canada’s Goods and Services Tax (GST).

    Giving you the benefit of the doubt that you are unaware of the real facts about the Fair Tax, you should be aware that the people promoting the Fair Tax are the most dishonest people I’ve ever seen in public life in my lifetime.

    The rate is NOT 23%. It is 23% INCLUSIVE - meaning that the rate is really 30% - and even that is not the true percentage because the people who did the calculations for neutrality were dishonest in the calculation - so the number would be more like 50% conservatively - and that doesn’t include the state and local taxes that would be on top.

    Here is a commentary I wrote after I listened to the House Budget Committee hearing in which three different taxing options were discussed - but it was mostly about the ‘Fair Tax’.

    I recorded the hearing - audio links at the bottom. And of course, the hearing is in the Congressional Record. You should read it - and study it before write positive commentaries about it. In terms of public policy - I put the ‘Fair Tax’ in the ‘Pure, Unadulterated Evil’ category.

  2. Vicky Davis says:

    Sorry Stumo, I should have addressed the comment to you. The Fair Tax is not a VAT.


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