The FairTax Crowd Answers Jerry Bowyer

originally published at RealClearMarkets.com, January 11, 2008

In a piece published on January 9th for Townhall, economics writer Jerry Bowyer posed some common questions about the FairTax. The FairTax would replace personal income taxes, payroll taxes, capital gains taxes, corporate income taxes, and the death tax with a national retail sales tax. The FairTax has become a prominent subject for discussion as Mike Huckabee, its leading advocate among the presidential candidates, has risen to the top of the national polls.

In politics, as in life, “context” (which could also be called, “basic point of view” or “the framing of the issue”) trumps “content” (in this case, the specific factual questions asked). However, let me first address the “content” of Mr. Bowyer’s questions.

Q. Why do you think that a sales tax is less prone to corruption and complexity than an income tax?

A. There are three major reasons that the FairTax would be less problematic than an income tax:

1. It applies to actual transactions where money changes hands, rather than “income”, which is a concept so abstract as to be almost ethereal. Most of the 60,000-page U.S. tax code deals with the definition of “income”.
2. There would be only about 20 million entities that would need to file FairTax returns, compared with 140 million who must file income tax returns now.
3. At the proposed 23% (inclusive) rate, the FairTax rate is much lower than the current 35% top tax rates on personal and corporate income. The lower the rate, the less incentive for avoidance, evasion, and special pleading.

Q. Are sales taxes, where they are currently in operation, simple and free from special interest lobbying?

A. Nothing in the manifested universe is perfect, but sales taxes are, in practice, simpler and less prone to special interest lobbying than income taxes. Right now, the huge Washington lobbying industry on K Street gets half of its revenue from lobbying the income tax code.

Q. Does it apply to non-profits?

A. The FairTax applies to retail sales of new goods and services. If a non-profit sells new goods and services, it will collect the FairTax on them. However, in general, charity involves giving things away, not selling them. Also, the FairTax would eliminate the payroll taxes that non-profits pay under current law.

Q. Are used goods, non-taxable?

A. Yes—the FairTax applies only to sales of new goods and services. However, the nation as a whole obviously cannot replace newly-produced goods with used goods. If I sell you my car, I don’t have it anymore. All of the new parts and labor that would go into “rehabilitation” and “refurbishment” of used items would be subject to the FairTax. This having been said, the FairTax would shift U.S. GDP from current consumption toward investment and exports. Most economists would applaud such a move.

Q. What about the transition period?

A. People respond to incentives, and there would be an incentive to delay income and accelerate spending ahead of the FairTax effective date. This could well result in a short-term increase in debt. However, debt will be easier to repay under the FairTax because people will have more take-home pay. This aside, America has been around for 232 years. There are many things that could be done to ease the transition, and it makes no sense to avoid a change with huge long-term benefits because of one-year transition effects.

Q. Isn’t it true that the rate is not really 23% but 30% at least, because it’s tax-inclusive?

A. Yes and no. Both the FairTax and the income tax can be stated as either an “inclusive” or an “exclusive” rate. For an “apples to apples” comparison with the rates of our existing tax system, the 23% “inclusive” FairTax rate is the correct number to use.

Q. How do we determine the interest portion of mortgage payment?

A. Interest above the rate on 10-year Treasury bonds is subject to the FairTax. This will prevent suppliers from discounting prices and making it up with high interest rates on financing. The 10-year Treasury rate is a market-determined interest rate that is not targeted by the Federal Reserve.

Having addressed the “content” of Mr. Bowyer’s questions, I would like to turn to the more fundamental issue of “context”.

A “contextual” question that shapes a person’s entire experience of life is, “Is the glass of life half empty, or is the glass of life half full?” Think about the people you know and you will see that this is true.

The analogous political question is, “Is the glass of America half empty, or is the glass of America half full?” The FairTax is an expansive, optimistic, “half full” concept. It has a natural appeal to people for whom the glass of life, and the glass of America, is half full. The FairTax speaks to “possibility” rather than “fear”.

I do not know Mr. Bowyer personally, so all I can say is that his questions about the FairTax struck me as coming from a “half empty” point of view. This was not surprising to me. Most “elite opinion”, including virtually the entire Mainstream Media, has embraced the “the glass of America is half empty” point of view and has dedicated itself to proving this position right.

The FairTax is about America’s future. When it comes to matters pertaining to the future, facts and logic cannot bridge the gulf between hope and fear, the chasm between “half empty” and “half full”. All we can do is to pose the question to the American people and let them decide.


Louis R. Woodhill, an engineer and software entrepreneur, is on the Leadership Council of the Club for Growth. He can be reached at smia1948@hotmail.com.

 

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