Monday, June 4, 2007

Unspinning the FairTax















FactCheck.org looks at the FairTax
Everybody pays more in taxes... except people over 200,000 dollars. Okay that and poor people...
at
Labels:

4 comments:

growson said...
This comment has been removed by a blog administrator.
June 4, 2007 at 8:16 PM
Jim Nichols said...

The FairTax has been proven to be revenue neutral at an inclusive rate of 23%.

That is just untrue. It hasn't been "proven" in any sense of the word.

June 5, 2007 at 4:23 AM
growson said...

It has been thoroughly calculated through empirical economic work and data at 23%.

"Taxing Sales Under the FairTax: What Rate Works?"

June 5, 2007 at 12:21 PM
Anonymous said...

The Official FairTax.orgsm Response to FactCheck.org article, “Unspinning the FairTax”

The following are excerpts in summary form of the Fairtax.org’s official response to the factcheck.org article, “Unspinning the FairTax.” You can find the complete version here:
FairTax.org Response with letter to FactCheck.org

Introductory Remarks

Recently, we noted that FactCheck.org – a site apparently devoted to “objective” analysis – had taken a very biased tone against the FairTax and was propagating false and misleading statements. We shared with FactCheck.org our view that tax reform, like so many other national public policy issues, must be resolved in the crucible of public opinion based on accuracy. And because of the impartial reporting for which FactCheck.org is supposed to be devoted, we expressed to them grave concern that false and misleading facts appeared on their site in “Unspinning the FairTax” posted on May 31, 2007. We did so in the hope they might correct the misstatements and ensure that future reporting is more accurate.



The ability of the American people to properly analyze candidates and the policy they support is only as good as the accuracy in the analysis and reporting. And that, in a nutshell, is the very important mutual goal we share.



Unfortunately, we were successful only in part. Despite our telephone discussion with Joe Miller of FactCheck.org, FactCheck.org refused to correct blatant errors; for example, insisting that presentation of a chart on distribution that purported to be the FairTax but actually was an entirely different tax plan was acceptable. We pointed out to FactCheck.org that the FairTax taxes all consumption above the poverty line equally at 23 percent. We explained why the FairTax was more progressive and was revenue neutral. We also detailed that under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow. According to measures that capture real-world economic effects, the gains disproportionately go to low- and middle-income groups. Americans For Fair Taxation regards such an outcome as fair, just, and equitable.



We will continue to work to ensure accurate reporting on behalf of Americans For Fair Taxation. In the meanwhile, we want our supporters to understand the nature of FactCheck.org’s mistakes and biased effort.



(A) The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax.



This sentence is false and misleading. The FairTax is a 23 percent tax as measured by the same basis we measure all of the federal taxes it replaces.

Since the FairTax is a replacement for income and payroll taxes, and they are both measured, reported, and quoted on a tax-inclusive basis, it is appropriate to use the 23 percent tax-inclusive rate when referencing the rate. To do otherwise as FactCheck.org seeks would actually be misleading. In other words, apples should be compared to apples, not to oranges, and the tax-inclusive rate of the income and payroll taxes today should be compared to the tax-inclusive rate of the FairTax tomorrow.



To quote the tax panel’s final report, “Although tax-exclusive and tax-inclusive rates are both valid ways of thinking about tax rates, the easiest way to compare the retail sales tax rate to the state sales taxes paid by most Americans is to consider the tax-exclusive rate. On the other hand, it is appropriate to compare the retail sales tax rate with current income tax rates by utilizing the tax-inclusive rate” (page 208). We don’t disagree. That is why we refer to the rate in the appropriate tax-inclusive manner.



(B) And it is revenue-neutral only through an accounting trick.



This sentence is false.

If the FairTax were to exempt government from tax and if federal spending were held constant, then the purchasing power and size of the federal government as a share of the economy would be dramatically increased. Further, not taxing government consumption would artificially make government consumption appear cheaper and promote increased consumption via government. So, though a wash, there would be negative economic consequences if the FairTax did not continue the practice of taxing government consumption. This is not an accounting “trick” any more than it is an accounting trick to tax government workers and the income of government goods and services providers today.



(C) [The FairTax] will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.



This sentence is false. And FactCheck.org's own document shows their statement to be false.

FactCheck.org’s statement is based on a U.S. Treasury Department analysis (Figure 9.4 of which is shown) of a plan which is not the FairTax. The chart and the Treasury study depict an alternative retail sales tax plan invented by the Treasury Department that had a different tax base than the FairTax. In fact, the chart depicts a “plan” that does not repeal payroll taxes, which are 41 percent of personal income taxes, and leaves out more than $771 billion in regressive taxes that fall mostly on the poor and middle-income wage earners. Although the chart label refers only to federal income taxes paid, this point is not made in the discussion of the results, thus almost begging for the reader to wrongly infer that the distributional picture portrays the FairTax.



Since the payroll tax is regressive and is the largest tax paid by lower- and middle-income Americans, ignoring the fact that the FairTax repeals payroll taxes is tantamount to ignoring what the FairTax is when analyzing the FairTax.



A recent study by Dr. Laurence Kotlikoff, that does analyze the distribution of the FairTax, was conveniently ignored by FactCheck.org, although brought to their attention. That study finds that the FairTax lowers remaining average lifetime tax rates, thereby enhancing overall progressivity. This occurs because the reduction in rates is proportionately much greater at the low end of the earnings distribution than at the high end.



(D) It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.



This sentence incorrectly assumes that economic growth will be distributed unfairly. The FairTax is called “fair” because it disproportionately benefits the poor and middle class and the economic studies support this statement.

The FairTax entirely untaxes the poor and reduces the tax burden on the near poor substantially. The FairTax taxes all consumption above the poverty line equally at 23 percent. The FairTax is progressive, and by two out of three commonly used measures of progressivity is more progressive than the current system. Finally, and most importantly, under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow.



[C]onsumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:

(E) Interest on credit cards, mortgages and car loans



This sentence is misleading. The FairTax does tax the loan service charges or fees charged by the lending institution to the borrower. If the lending institution does not separately state these charges, but rather rolls them into the interest rate for the loan, then a portion of the interest is really hidden services charges. The FairTax taxes only that small portion of interest. A more noteworthy effect of the FairTax on interest, which dwarfs the above, is that the FairTax will bring down interest rates by about 25 percent.



(F) The result is that many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax-inclusive.



When 85 percent of the public understands a relatively complex tax issue, then it would seem that FairTax is (1) not being misleading and (2) doing a pretty good job of explaining the issue. We would bet that those same people do not know that the current income, payroll, capital gains, alternative minimum, and estate taxes are also expressed as tax inclusive, which is the whole reason for making the honest comparison in the first place.

June 13, 2007 at 5:04 PM

Post a Comment

Subscribe to: Post Comments (Atom)