As I said in the video, it would be nice to toss the current tax code in the trash and replace it with something that collects revenue is a less-damaging and less-corrupt fashion.
Not because one is theoretically better than the other, but because of two political reasons.
As noted in the above clip, I’m very worried about giving untrustworthy politicians a new source of tax revenue without unambiguously and permanently getting rid of the income tax (so that we don’t repeat the European mistake of giving politicians a way of expanding government).
I also worry that a Fair Tax is vulnerable to demagoguery since lawmakers will get hit with election-year ads stating they want a big 30 percent tax on everything people buy (while overlooking that our paychecks will be much bigger once income taxes and payroll taxes are abolished).
And there’s plenty of less-friendly opposition. In an article for the Bulwark, Jim Swift pours cold water on the idea.
…nobody has ever taken the Fair Tax seriously. Not in the years after the Tea Party wave… Not in 2011, when Texas Gov. Rick Perry briefly campaigned in support of the Fair Tax, only to quietly walk back his support and switch to a flat tax proposal.Not in 2017, when the Republican-controlled Congress passed the Tax Cuts and Jobs Act. …Do moderate House Republicans really want to be forced to vote on the Fair Tax? …In light of all this, why promise a vote on such a loser? Going straight to the floor poses risks, given the slim GOP majority. It’s a lose-lose situation: Vote yes, and the House Republican Conference looks frivolous, to say nothing of the messaging gift they would give Democratic speechwriters in 2024 (“Republicans want to instate a 30-plus percent federal sales tax!”). Vote no, and invite primaries by far-right candidates who will accuse you of siding with Democrats when given a chance to abolish the IRS. …It’s possible that McCarthy agreed to a floor vote expecting moderates to break ranks and the bill to fail by a spectacular margin. That would drive a stake through the heart of the Fair Tax. …What’s likelier is that McCarthy knew this was a promise he could break. He never said anything about when he would bring the bill to the floor.
While I do worry about the political blowback against a Fair Tax, I hope Speaker McCarthy keeps his promise and there is a floor vote.
Not because I’m deluded about something good getting through the Senate or surviving a sure-veto from Biden.
But if tax reform becomes a big issue this year, that may set the stage for a bigger debate in 2024 and maybe one of my fantasies will come true and we’ll get something good in 2025.
P.S. Here’s another video from the archives, in which I discuss the flat tax and national sales tax.
P.P.S. Speaking of archives, here are my brief thoughts from 2011 about the various proposals for tax reform.
P.P.P.S. And click here, here, here, or here if you want to peruse my arguments for the flat tax.
But maybe it is time to think about going on offense.
In a column for the New York Sun, John Childs makes the case for replacing the current mess with the national sales tax.
There is a better way — replace the entire income tax monstrosity with a national consumption tax, i.e. a national sales tax. Let Walmart and Amazon be the tax collectors. Odds are they will be vastly more efficient than the IRS, which at this point can’t even return the phone calls of bewildered taxpayers. All retailers already perform sales tax collection services for state governments. So it is hardly a leap of faith to ask them to do it for the Feds. …This would be bad news for tax lawyers and accountants. As some of the brightest minds in the country now devote themselves to crafting fiendishly clever tax avoidance schemes, though, imagine what an unexpected dividend would flow from redirecting all of that creativity to productive activities.
I agree that a national sales tax would be much better than the current system.
But always with the very big caveat that I mentioned in the video, which is that any sort of direct consumption tax (sales tax, Fair Tax, value-added tax) has to be a total replacement for the income tax.
However, that’s just one must-have requirement. Since politicians are untrustworthy, we also should not allow a direct consumption tax until and unless the 16th Amendment is repealed and replaced with a new amendment that unambiguously prohibits any future Congress from reinstating an income tax.
The bad news is that I don’t think either of these requirements will be met. And this is why I am more focused on supporting the flat tax.
After all, the worst thing that happens with a flat tax is that future politicians reinstate the current system.
But the worst thing that happens with a national sales tax is that future politicians have a new source of revenue to fuel bigger government (sort of what happened in Europe when value-added taxes financed a major expansion in the burden of government spending).
P.S. The same principles apply at the state level. Policymakers should use consumption taxes to help finance the repeal of income taxes.
P.P.S. A Fair Tax (or any form of national sales tax) will reduce the underground economy, but not by a greater amount than the flat tax.
When pushing for tax reform, I normally cite the flat tax, but there are many roads that lead to Rome. I’ve also pointed out that other tax reform plans have similar attributes. Here’s what I wrote, for instance, when comparing the flat tax and national sales tax.
In simple terms, a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point. …the two plans are different sides of the same coin. The only difference is that the flat tax takes of slice of your income as you earn it and the sales tax takes a slice of your income as you spend it. But neither plan has anydouble taxation of income that is saved and invested. And neither plan has loopholes to lure people into making economically irrational decisions.
And even though I’m so hostile to the value-added tax that I almost foam at the mouth, I’ve even acknowledged that it would be a good system if you could somehow permanently eliminate all taxes on income.
…like theflat taxand national sales tax, it’s a single-rate system with nodouble taxationof income that is saved and invested
Some folks think my ecumenical attitude about tax reform is misguided. They argue, from a political perspective, that we won’t make progress unless we unify behind one plan.
That’s probably true at some point in the future, but I would argue that we first need discussion and debate about the principles of tax reform.
And that’s why I’m happy to see that the Heritage Foundation has published a new paper, authored by David Burton, that explains why the major tax reform plans are economically interchangeable.
The four leading conservative tax reform plans are the Hall–Rabushka flat tax, the new flat tax, a national sales tax, and a business transfer tax. Each is a consumption tax with an equivalent tax base. Except for secondary design choices and the choice of which taxes to replace, each would apply the same tax rate to raise a given amount of tax revenue. They would also have the same economic effects. The choice among them, therefore, rests on non-economic grounds.
Perhaps the most important part of that excerpt is where David asserts that all of the big tax reform proposals are consumption taxes.
This point deserves some elaboration. Here’s some of what I wrote on this same issue.
For all intents and purposes, a “consumption tax” is any system that avoids the mistake of double-taxing income that is saved and invested. Both thenational sales taxand thevalue-added tax, for instance, are examples of consumption-based tax systems. But the flat tax also is a consumption tax. It isn’t collected at the cash register like a sales tax, but it has the same “tax base.”
Another way of saying the same thing it to point out that a “consumption tax” is simply a system where income is taxed only one time.
And that’s also true of the subtraction-method VAT, which David refers to as a BTT, along with the “new flat tax,” which is similar to the traditional flat tax except for the method used to prevent double taxation.
In his paper, David has some flowcharts to illustrate the similarities of the various tax reform plans.
Here’s the one for a national sales tax.
And here’s the one for the flat tax.
Let’s close by reminding ourselves about what’s wrong with the current system. Here’s a video produced by Professor Murray Sabrin at Ramapo College in New Jersey. I make a few appearances, beginning about 10-1/2 minutes into the film.
*The best fiscal policy reform would be dramatically shrinking the size of the federal government so that a far greater share of labor and capital in our economy could be allocated by market forces rather than by politicians and bureaucrats. Ideally, the federal government could be reduced to the limited “night watchman” functions envisioned by the Founding Fathers, in which case there would be no need for any broad-based tax.
P.S. Switching to another topic, regular readers know that I enjoy mocking politicians.
Well, I think if there was a “Politician of the Year” contest, we would have a winner. His name is Joe Morrissey. Here are some details from a Richmond newspaper.
Del. Joseph D. Morrissey, D-Henrico, preserved his legislative career for now but could find his license to practice law again in trouble after a dramatic plea Friday regarding his relationship with a 17-year-old office assistant. …Morrissey was being housed Friday night in Henrico Jail East in New Kent County, where he will be allowed to engage in a work-release program and maintain his legislative and legal duties, one of his lawyers said.
So he’s going to jail, but will still be a state lawmaker as part of a work-release program. Gee, his constituents must be proud.
By the way, you may be wondering about the “relationship” that the 57-year old Morrissey had with the 17-year old. Here are some of the details.
…the special prosecutor in the case told reporters that the now-18-year-old former associate of Morrissey is pregnant, “perhaps” with Morrissey’s child….Morrissey said he entered the plea to preserve his legislative duties, spare the alleged victim the difficulties of trial and to maintain his care of a 2-year-old child that he had out of wedlock.
So one illegitimate kid already and maybe another on the way. What a model citizen.
As Richmond’s prosecutor in 1991, Morrissey punched a rival attorney in the face and wound up in jail. Two years later, he was indicted on a bribery charge for reducing charges in a rape case in exchange for a $25,000 payment to the victim. The charges were dropped, but his law license was suspended. He again had his law license suspended in 1998 and was put in jail for 90 days for improperly speaking to reporters during a drug case. He got into another fight in 1999 and was sentenced to 300 hours of community service. He tried to fake the number of hours he served, and was given another 90 days in jail, before finally being disbarred. He then practiced law overseas in Ireland and Australia before authorities discovered he had been disbarred, and he came back to Virginia, where he was elected to the General Assembly in 2007.
With a resume like that, no wonder he got elected. No need for on-the-job training!
P.P.S. I don’t know if I should admit this, but I dated a girl back in the 1990s that used to date Morrissey. I don’t know if that says something about her or something about me. But maybe after the PotL casts me aside, I should try to connect with one of Bill Clinton’s former paramours?
I’m a long-time proponent of the flat tax for three simple reasons.
1. It replaces the discriminatory “progressive” tax with a single tax rate at the lowest possible level, thus reducing the tax penalty on productive behavior.
2. It gets rid of all forms of double taxation, such as the death tax and capital gains tax, meaning economic activity is never taxed more than one time.
3. Other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.
Some people say that these are also three reasons to favor a national sales tax.
My response is that they’re correct. In simple terms, a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point.
If you want more details, I often explain the two plans are different sides of the same coin. The only difference is that the flat tax takes of slice of your income as you earn it and the sales tax takes a slice of your income as you spend it. But neither plan has any double taxation of income that is saved and invested. And neither plan has loopholes to lure people into making economically irrational decisions.
So even though I’m mostly known for being an advocate of the flat tax, I have no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.
With this bit of background, you can understand why it caught my attention that an economics professor at the University of Georgia (Go Dawgs!) wrote a column for Forbes with the provocative title of “I Will Support The Fair Tax When Its Backers Tell The Truth”.
Professor Dorfman writes that “such a consumption tax has much to recommend it from an economic point of view” but then warns that he “cannot support the Fair Tax as long as its backers continue to make implausible claims for their proposed reform.”
So what are the implausible claims? Let’s check them out and see if his friendly criticism is warranted.
He first expresses skepticism about the claim that take-home pay will rise to the level of gross pay under a Fair Tax, particularly given the assertion that prices won’t rise.
…the odds are that your gross pay will shrink over time under the Fair Tax. …employers can offer workers lower pay because of the lower cost of living (same prices, but higher take home pay). Because workers evaluate pay offers based on the purchasing power of that pay, the same competitive forces that will lower prices after the removal of business taxes, will lead to lower pay for employees in the long run as the labor market adjusts.
I suspect Professor Dorfman’s critique is correct, but I don’t think it matters. Workers understandably care first and foremost about the purchasing power of their paycheck, and that won’t be negatively impacted.
The Professor than looks at whether the Fair Tax gets taxes the underground economy.
…let’s tackle the claim that the Fair tax will do a better job of collecting taxes on criminals, the underground economy, and those who underreport their income. The idea is that people may hide some of their income or that drug dealers and others in the underground economy do not report their income, but that everyone spends money so the Fair Tax will tax everyone. Unfortunately, this claim is not true… Retailers are just as capable of underreporting revenue and not sending in the corresponding Fair Tax as people are of underreporting their income. …The incentive to avoid such consumption taxes will only increase when the rate is four or five times what it is now. If you don’t believe consumption taxes suffer from collection problems, go ask Greece.
And he looks specifically at taxing criminal activity.
Another reason that the Fair Tax will not capture extra revenue from illegal activities is that it only switches which side of the transaction is missed by the tax system. Currently, while drug dealers may not report their income, the people who buy drugs are paying with after-tax income. Under the Fair Tax, the drug dealers will pay tax when they spend their drug profits. However, unless the drug dealer sends in the Fair Tax on their sales, the drug buyers will now avoid tax on their purchases. Under either tax system, one side of the underground transactions will be paying taxes and one will not.
I think Professor Dorfman is correct, particularly in his explanation that drug dealers and other criminals will not collect sales tax when they peddle their illicit goods.
And he’s also correct when he says that the Fair Tax won’t collect all taxes on legal products.
But that doesn’t mean the Fair Tax is somehow flawed. Indeed, it’s quite likely that the underground economy will shrink under a national sales tax since the incentive to evade tax (on legal products) is a function of the tax rate. So if we replace the punitive high-rate internal revenue code with a low-rate Fair Tax, there will be a higher level of compliance.
But not zero evasion, so Fair Tax supporters exaggerate if they make that claim.
The next point of contention is whether the IRS can be repealed under a Fair Tax.
…some agency needs to collect all the sales taxes, ensure retailers are sending in the full amount, and handle all the mechanics of the prebate. The prebate requires this federal agency to know everyone’s family size and have a bank account or other method of sending out the prebate each month. So while individuals will have less interaction with the federal tax agency, there will still be some. For retail businesses, their interactions with federal tax officials will be at least as much as now, if not more.
The Professor is right, though this may be a matter of semantics. Fair Tax people acknowledge there will be a tax collector (the legislation creates an incentive for states to be in charge of collecting the tax), but they say that the tax authority under their system will be completely different than the abusive IRS we have today.
Last but not least is the controversy over whether everyone benefits under a Fair Tax.
…while Fair Tax proponents often act like nobody loses under the Fair Tax that is simply not possible. If the Fair Tax is implemented in a revenue neutral manner (collecting the same amount of total revenue as all the taxes it replaces), and some people win then other people must lose. Poor people pay roughly no tax either way, so the Fair tax would be neutral for them. The very rich will assumedly pay less since they spend a lower percentage of their income and spend more overseas. Thus, the suspicion is that the middle class will be paying more. One other group pretty sure to pay more is the elderly. The elderly have paid income tax while earning income, and under the Fair Tax would suddenly pay high consumption taxes right when their income drops and their spending increases. In the long run, this is not a problem, but early in a Fair Tax regime, the elderly definitely are losers.
Once again, Professor Dorfman is making a good point (and others have made the same point about the flat tax).
My response, for what it’s worth, is that supporters of both the flat tax and national sales tax should not be bound by revenue neutrality. Especially if the revenue-estimating system is rigged to produce bad numbers. Instead, they should set the rate sufficiently low that the overwhelming majority of taxpayers are net winners.
And in the long run, everyone can be a net winner if the economy grows faster.
And that, as Professor Dorfman agrees, is the main reason for tax reform.
The Fair Tax really has much to recommend it. It is simpler than the current system. It causes fewer distortions in the daily economic decisions that people make. The main distortion it does introduce is positive: to encourage saving and discourage consumption which would make the country wealthier in the long run.
Though I would quibble with the wording of this last excerpt. I don’t think the Fair Tax creates a pro-savings distortion. Instead, it removes an anti-savings bias. Just like the flat tax.
Now let me add a friendly criticism that Professor Dorfman didn’t address.
Advocates of the Fair Tax correctly say that their proposal shouldn’t be implemented until and unless the income tax is fully repealed. But as I explain in this video, that may be an impossible undertaking.
P.S. Actually, what I really want is avery small federal government, which presumably could be financed without any broad-based tax. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed, so why concede that politicians today should have either a flat tax or Fair Tax? But that’s an issue for another day.
But perhaps I’m being needlessly gloomy. New polling data from Reason-Rupe show that there’s very strong support for reform. At least if you favor a flat tax.
This doesn’t mean we can expect genuine tax reform tomorrow or the next day.
President Obama is viscerally committed to class-warfare tax policy, for instance, and special interest groups would vigorously resist if there was a real possibility (they would say threat) of scrapping the current tax code.
But it does suggest that tax reform – at least in the form of a flat tax – could happen if there was real leadership in Washington.
And one of the best arguments for reform is that the internal revenue code is an unfair mess.
Consider how rich people are treated by the tax code. The system is so complicated that we can’t tell whether they’re paying too much (because of high rates and pervasive double taxation) or paying too little (because of special preferences and tax shelters).
Regardless, we do know that they can afford lots of lobbyists, lawyers, and accountants. So even though they are far more likely to be audited, they have ample ability to defend themselves.
But the real lesson, as I explain in this CNBC interview, is that the right kind of tax reform would lead to a simple system that treats everyone fairly.
But I wish there had been more time in the interview so I could have pointed out that IRS data reveal that you get a lot more revenue from the rich when tax rates are more reasonable.
And I also wish I had seen the Reason-Rupe poll so I could have bragged that there was strong support for a flat tax.
Unfortunately, I wouldn’t have been able to make the same claim about the national sales tax. I haven’t seen any recent public opinion data on the Fair Tax or other similar plans, but a poll from last year failed to find majority support for such a proposal.
But the polls do suggest (as do anecdotes from the campaign trail) that a flat tax is a more politically viable option for reformers.
The moral of the story is that it makes more sense to push for the flat tax. After all, if I have an easy route and a hard route to get to the same destination, why make life more difficult?
Though the ultimate libertarian fantasy is shrinking government back to what the Founding Fathers had in mind. Then we wouldn’t need any broad-based tax of any kind.
My modest contribution was to present “The Case for the Flat Tax,” and I was matched up – at least indirectly, since there were several hours between our presentations – against former Congressman John Linder, who gave “The Case for the Fair Tax.”
Elimination of all loopholes (other than mechanisms to protect the poor from tax) to promote efficiency and reduce corruption.
Dramatically downsize and neuter the IRS by replacing 72,000 pages of complexity with simple post-card sized tax forms.
For all intents and purposes the flat tax and sales tax are different sides of the same coin. The only real difference is the collection point. The flat tax takes a bite of your income as it is earned and the sales tax takes a bite of your income as it is spent.
That being said, I do have a couple of qualms about the Fair Tax and other national sales tax plans.
First, I don’t trust politicians. I can envision the crowd in Washington adopting a national sales tax (or VAT) while promising to phase out the income tax over a couple of years. But I’m afraid they’ll discover some “temporary” emergency reason to keep the income tax, followed by another “short-term” excuse. And when the dust settles, we’ll be stuck with both an income tax and a sales tax.
To be sure, there are downside risks to the flat tax. It’s quite possible, after all, that we could get a flat tax and then degenerate back to something resembling the current system (though that’s still better than being France!).
On dozens of occasions over the past 15-plus years, I’ve had to explain to reporters that why anti-sales tax demagoguery is wrong.
So I hope it’s clear that I’m not opposed to the concept. Heck, I’ve testified before Congress about the benefits of a national sales tax and I’ve debated on C-Span about how the national sales tax is far better than the current system.
Actually, what I want is a very small federal government, which presumably could be financed without any broad-based tax, but that’s an issue for another day.
Returning to the issue of tax reform, there’s no significant economic difference between the flat tax and the sales tax. What we’re really debating is how to replace the squalid internal revenue code with something worthy of a great nation.
And if there are two paths to the same destination and one involves crossing an alligator-infested swamp and the other requires a stroll through a meadow filled with kittens and butterflies, I know which one I’m going to choose. Okay, a slight exaggeration, but I think you get my point.
The bad part, as I explain here, is that Cain would let politicians impose a national sales tax at the same time as an income tax.
And the ugly part is that he also would let them impose a value-added tax as well, as I discuss here.
I pontificate on all these issues in the latest Coffee and Markets podcast, which you can listen to by clicking here.
In closing, I will admit that it’s been very frustrating to deal with Cain’s plan. Supporters of Cain accuse me of being too critical and opponents of Cain accuse me of being too nice.
Normally, I don’t like being in the middle of the road, but that seems to be the only logical place to be since 9-9-9 has some really good features and some really bad features.
I’m very enthusiastic – but also a little worried – about Herman Cain’s tax plan.
So when I got the opportunity to write a short column for the New York Times, I explained that his proposal was very good tax policy, in large part because it is based on the same principles as the flat tax.
The flat tax is desirable for a wide range of reasons, including simplicity, fairness and transparency. It also would end the widespread and corrupt process of inserting loopholes and preferences in the code in exchange for campaign cash and political support. But public finance economists generally like the flat tax for different reasons, most notably the pro-growth impact… For the same reasons, people should like Herman Cain’s 9-9-9 tax plan. …It is based on the idea that the tax rate should not penalize people for being productive, and even an ardent supply-side sympathizer like me can’t complain too much about a 9 percent rate. Another key principle is the repeal of most forms of double taxation… Cain also takes a chainsaw to the underbrush of credits, deductions, shelters, loopholes, exemptions, and other distortions in the tax code.
But I then expressed my concern that the 9-9-9 plan might morph into something we don’t want.
This doesn’t mean Cain’s tax plan is perfect. The biggest concern, at least from many on the right, is that he would allow the crowd in Washington to simultaneously impose a flat tax, a national sales tax and (apparently) a form of value-added tax. This might not be a problem if there was some way of guaranteeing that none of the rates could ever climb above 9 percent. Unfortunately, the European experience (especially with VATs) does not leave much room for optimism. Sooner or later, politicians who want bigger government can’t resist pushing tax rates higher. And when the dust settles, you become Greece. Which is why Cain should not have reinvented the wheel. If he wants a low rate, no double taxation and no loopholes, the flat tax has all the upsides and none of the downsides of the 9-9-9 plan.
My basic message is that 9-9-9 should be turned into a postcard because the flat tax is a safer way of achieving the same goals.
The worst thing that can happen with a flat tax, after all, is that politicians begin to re-install loopholes and re-impose discriminatory rates and we wind up with something that looks like the current system.
I became a big admirer of Herman Cain back in the 1990s when he was a member of the National Commission on Economic Growth and Tax Reform (aka, the Kemp Commission).
I worked as a staffer for the Commission and was able to observe Mr. Cain in action over a period of several months. Suffice to say I like what I saw. Unlike many people in DC, he is not an empty suit.
That doesn’t means he’s perfect, as illustrated by his support for the TARP bailout, but he’s definitely on the right side of the dividing line between those who want freedom and those who want statism.
And his victory in the Florida straw poll is bringing lots of deserved attention to his campaign, leading several people to ask what I think about his economic agenda.
1. His short-run plan, which he calls the “Immediate Boost,” is to slash personal and corporate tax rates to 25 percent and eliminate the capital gains tax.
2. His intermediate plan, which he calls the “Enhanced Plan,” eliminates the death tax and the payroll tax. But the most important part is the 9-9-9 plan, which is a 9 percent tax rate on personal income, a 9 percent tax rate on corporate income, and a 9 percent national sales tax.
3. His long-run agenda, which he calls the “Fair Tax,” is to eliminate all personal and corporate income taxes and adopt a national sales tax.
This all sounds great, but let me do a bit of nit-picking. I want to focus on part 2, particularly the 9-9-9 plan.
It’s fine in theory. Heck, it’s great in theory. It means low tax rates on productive behavior. It means no double taxation of saving and investment. And it means no corrupt and inefficient loopholes.
What’s not to love about a plan that achieves all these principles?
I have faith that Herman Cain’s heart is in the right place, but years of experience in Washington have taught me to always assume politicians will grab more power and more money at every possible opportunity.
This is why I made this video, explaining why a national sales tax is only acceptable if the Constitution is amended to permanently bar any form of income taxation.
Let me put it more bluntly. A national sales tax – such as a Fair Tax or a VAT – would be a less destructive way of raising revenue than the current tax system.
But any form of national sales tax, if imposed on top of the income tax, would be a disaster. The experience of Europe shows that national sales tax are a money machine for big government.
But since many Supreme Court Justices seem oblivious to the Constitution, we would actually need to replace the 16th Amendment with a new amendment that is completely unambiguous about banning any tax on income in perpetuity.
In other words, the income tax needs to be sealed in a lead vault, buried under 10 feet of concrete, and then covered by a foot of salt so nothing can ever grow back to haunt the American people.
Once these things happen, then we can adopt a national sales tax. See, I can be open-minded and reasonable.
If you go to the IRS website, there are about one thousand forms (and accompanying material such as instruction documents) that you can download.
Fortunately, most of us only have to worry about a small fraction of what’s on that list, but it’s still a nightmare – and one that gets worse every year because politicians have an endless appetite for manipulating our lives and auctioning off new loopholes for campaign cash.
Just a quick caveat for my friends who prefer the national sales tax. Yes, that system also would be a vast improvement. But since the Fair Tax or something like that would require a constitutional amendment to ensure that politicians couldn’t impose both a sales tax and income tax, that’s more of a long-term project.
This was an opportunity for some narcissistic reminiscing, beginning with my first appearance in 1990 (which I shared with a friend, who laughed at my “Justin Bieber haircut”).
I spoke at the Tea Party Patriots convention earlier today. Great people, great crowd.
My job was to debate on the side of the flat tax over the fair tax. Several people asked for more information, and I promised to put this video on the blog. Long-time readers probably will have seen it before, but it’s always good to be reminded why we need tax reform – and also reminded why we can’t trust politicians with a new source of revenue.
In the past 15 years, I’ve debated in favor of a national sales tax, testified before Congress on the merits of a national sales tax, gone on TV to advocate for the national sales tax, and spoken with dozens of reporters to explain why the national sales tax is a good idea. Even though I prefer the flat tax, I’ve been an ardent defender of sales tax proposals such as the FAIR tax because it would be a great idea to replace the current system with any low-rate system that gets rid of the tax bias against saving and investment. I even narrated this video explaining that a national sales tax and flat tax are different sides of the same coin – and therefore either tax reform proposal would significantly improve prosperity and competitiveness.
I will continue to defend the FAIR tax and other national sales tax proposals that replace the income tax, but I wonder whether this is a losing battle. Every election cycle, candidates that endorse (or even say nice things about) the FAIR tax wind up getting attacked and put on the defensive. Their opponents are being dishonest, and their TV ads are grossly misleading, but they are using this approach because the anti-FAIR tax message is politically effective. Many pro-tax reform candidates have lost elections in favorable states and districts, largely because their opponents were able to successfully demagogue against a national sales tax.
The Wall Street Journal reaches the same conclusion, opining this morning about the false – but effective – campaign against candidates who support a national sales tax.
In 16 House and three Senate races so far, Democrats have blasted GOP candidates for at one point or another voicing an interest in the FAIR tax. …FAIR tax proponents are right to say these Democratic attacks are unfair and don’t mention the tax-cutting side of the proposal, but the attacks do seem to work. Mr. Paul’s lead in Kentucky fell after the assault, and the issue has hurt GOP candidate Ken Buck in a close Colorado Senate race. In a special House election earlier this year in Pennsylvania, Democrat Mark Critz used the FAIR tax cudgel on Republican opponent Tim Burns. In a district that John McCain carried in 2008, Mr. Critz beat the Republican by eight points and is using the issue again in their rematch. This is a political reality that FAIR taxers need to face. …in theory a consumption tax like the FAIR tax is preferable to an income tax because it doesn’t punish the savings and investment that drive economic growth. If we were designing a tax code from scratch, the FAIR tax would be one consumption tax option worth debating. But…voters rightly suspect that any new sales tax scheme will merely be piled on the current code.
We won’t know until next Tuesday what is going to happen in Kentucky and Colorado, and we won’t know until then what will happen in the other campaigns where the FAIR tax is an issue. But if there are two tax reform plans that achieve the same objective, why pick the approach that faces greater political obstacles?
FAIR tax proponents presumably could defuse some of the attacks by refocusing their efforts so that repealing the income tax is the top priority. This would not require any heavy lifting since all honest proponents of a national sales tax want to get rid of the 16th Amendment and replace it with something that unambiguously prohibits any direct tax on income. So why not lead with that initiative, and have the national sales tax as a secondary proposal? This is what I propose in the video, and I think it would be much harder for demagogues to imply that a FAIR tax would mean a new tax on top of the corrupt system that already exists.
After my recent post on “bashing the IRS,” I got several emails and comments asking whether a national sales tax might be a better idea than the flat tax. I’m a big fan of proposals such as the Fair Tax. I’ve debated in favor of the national sales tax, done media interviews in favor of the national sales tax, written in favor of the national sales tax, and even defended the national sales tax in congressional testimony. As far as I’m concerned, we should junk the IRS for some type of single-rate, consumption-base (meaning no double taxation), loophole-free system. The flat tax is the most well-know approach for achieving these goals, but the national sales tax also would work. Indeed, the two plans are different sides of the same coin. A sales tax takes a piece of your income (but only one time and at one low rate) when it is spent, and a flat tax grabs a slice of your income (but only one time and at one low rate) when it is earned.
So why, then, do I devote most of my energies to a sales flat tax? The answer is that I don’t trust politicians. I fear that they will pull a bait-and-switch, and implement something like a Fair Tax but never complete the deal by getting rid of the income tax. The European experience certainly serves as a warning. Nations across Europe began implementing their version of a national sales tax (the value-added tax) in the late 1960s. Voters often were told that other taxes would be eliminated or reduced. But all the evidence shows that VATs simply led to a much higher tax burden and a much bigger burden of government.
By the way, some fans of the Fair Tax say the solution to this problem is an amendment to the Constitution. I fully agree, but then I point out that there are not even enough votes to approve a watered-down balanced budget amendment, so that seems an unlikely path to success. That being said, if we ever reach this point, and are able to repeal the 16th Amendment and replace it with something that unambiguously would stop the politicians from ever burdening America with an income tax, I will gladly offer my support and push a national sales tax
Politicians have combined the worst of two worlds, giving us a tax code that simultaneously is filled with class-warfare provisions that punish success while also containing thousands of special tax breaks that benefit the well-heeled friends of politicians.…In light of all this, why promise a vote on such a loser? Going straight to the floor poses risks, given the slim GOP majority. It’s a lose-lose situation: Vote yes, and the House Republican Conference looks frivolous, to say nothing of the messaging gift they would give Democratic speechwriters in 2024 (“Republicans want to instate a 30-plus percent federal sales tax!”). Vote no, and invite primaries by far-right candidates who will accuse you of siding with Democrats when given a chance to abolish the IRS. …It’s possible that McCarthy agreed to a floor vote expecting moderates to break ranks and the bill to fail by a spectacular margin. That would drive a stake through the heart of the Fair Tax. …What’s likelier is that McCarthy knew this was a promise he could break. He never said anything about when he would bring the bill to the floor.
International Liberty 
