Posted by Ilya Somin: Problems with the Fair Tax Proposal: http://volokh.com/archives/archive_2007_12_23-2007_12_29.shtml#1198966908
Economist Bruce Bartlett has recently published [1]an excellent article debunking the "Fair Tax," a proposal to replace the federal income tax with a 23% sales tax that has been endorsed by Republican presidential candidate Mike Huckabee and a few other conservatives. As Bartlett explains, some prominent Fair Tax supporters falsely claim that it is what he calls a "double free lunch." Against both empirical evidence and basic economic theory, they claim that people will get to keep all the money they would now pay as income tax without experiencing any increase in the prices of goods and services they purchase (even though the latter would now have a hefty new sales tax attached to them). In addition to Bartlett's many well-taken objections, there is another serious problem with the Fair Tax and other schemes to replace income taxation with sales taxes: it makes the true cost of government less visible to voters. For all its flaws, the income tax system at least gives taxpayers a fairly clear indication of what their total income tax liability is: every April you have to calculate it, or hire an accountant to do it for you. In a sales tax system, by contrast, you don't really know how much money you're paying the federal government in all. To be sure, you can calculate the amount by keeping close track of all your purchases and then multiplying by 0.23 at the end of the year (assuming the proposed Fair Tax rate of 23% is the one enacted). However, given that [2]most voters are "rationally ignorant" and have little incentive to keep close tabs on government policy, it's unlikely that many will do so. Moreover, as Bartlett explains, Fair Tax supporters intend to supplement their basic proposal with a complex system of rebates that would make the total tax burden even more difficult to calculate. The net result of the Fair Tax would be to make the true cost of government less visible to voters. That, I would argue, has been one of the effects of the somewhat similar value added tax (VAT) by which many European countries raise a large part of their revenue. I'm not suggesting that this effect is Huckabee's objective or that of other Fair Tax supporters. The libertarian in me is a bit suspicious of Huckabee's motives, given [3]his simultaneous support for high levels of government spending and "nanny state" regulation. However, I don't doubt that there are many people who support the Fair Tax in good faith, and perhaps Huckabee is one of them. Whatever their motives, however, the potential harm caused by the enactment of the Fair Tax is likely to exceed any benefits. References 1. http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf 2. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=916963 3. http://volokh.com/posts/1197597323.shtml _______________________________________________ Volokh mailing list [email protected] http://lists.powerblogs.com/cgi-bin/mailman/listinfo/volokh
