Tag Archive | "fair tax"

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

Posted in Tax, TradeComments (2)

Value Added Taxes getting publicity

A major part of our trade deficit is caused by taxes.  Every
trade agreement is a unilateral disarmament of the U.S.  We drop
our tariffs, they drop some tariffs (usually more slowly) and they
continue imposing a 17% tax on our exports to them.  Read the CPA policy on value added - or consumption - taxes for more details. 

Huckabee is proposing a national sales tax, dubbed a "Fair Tax". 
It’s getting more attention because Huckabee won Iowa.  A New York Times article today has a good discussion about who is saying what about the proposal.

positives are that we can neutralize foreign VAT tariffs by having our
own.  We can rebate it when our businesses export (just like other
countries do) and we can charge the tax when products are imported
(just like other countries do).  Then the VAT tariffs are no
longer an issue.

But taxes are a partisan issue. 
Partisanship is the kiss of death for most issues, especially in a
divided government.  Some Republicans want to use a national sales
tax as a way to cut taxes.  But the U.S. is not over-taxed in
comparison with other OECD countries.  Many Democrats believe
taxing income is inherently fair because of progressivity.  But a
national sales tax can be made just as progressive as the income tax,
I’m told.

The Times article points out other objections, which need to be addressed.

“The main weakness of the FairTax is its comprehensiveness,” said
Dale W. Jorgenson, an economist at Harvard who opposes the plan but
whose research into problems with the current system is sometimes cited
by supporters. “It tries to roll everything into one tax, which simply
can’t carry all that weight.”

I don’t know if that is true, but I’ll not mock him because I simply
don’t know.  And there is the "black market" incentive:

the rate, critics say, a steep federal retail tax, piled on top of
existing state sales taxes, would encourage widespread illegal tax
evasion, black market transactions and other forms of cheating,
creating a cycle that would require even higher tax rates.

cheating exists now, and it will always exist.  We could have a
"War on Tax Cheating" because the "War on…" is such an attractive
rallying cry for politicians.  But the real issue is the marginal
difference between the types of tax cheating. 

CPA will be doing more work on this issue during 2008.


Posted in Tax, TradeComments Off

Pres - Huckabee’s Fair Tax

The U.S. unilaterally cuts tariffs when signing trade
agreements.  Yes, the other countries say they are cutting
tariffs, but 140 of our trading partners impose a 17% VAT-tariff on our
goods exported to them.  Forever.

A value added tax is a
form of consumption tax.  Other countries can legally impose their
consumption tax on our goods sold to them.  We can’t impose our
income tax on their goods sold to us.

We should consider a
consumption tax for many reasons, including the trade deficit. 
Huckabee is proposing a consumption tax, dubbed the "Fair Tax."   Americans for Fair Taxation are the major proponents of the Fair Tax. 

The Boston Globe has a major piece
on Huckabee’s tax proposals today.  The reporter, Brian Mooney,
points out the major problems - perceived lack of progressivity and
strictly partisan support, i.e. Republicans only.  No mention of
the trade benefits of such a tax.  But the proponents also want to
repeal the 16th Amendment, the amendment allowing income tax collection.

The Coalition for a Prosperous America supports
consideration of an American VAT tax for the trade benefits. 
Progressivity needs to be, and can be, put into an American VAT. 
The 16th Amendment need not be repealed, because a VAT can exist with
an income tax or be phased in.  Bipartisan support should be
cultivated assiduously. 

Posted in PoliticsComments (1)

Sign up for daily updates

RSS EconomyInCrisis.org