Friday, August 28, 2009

The Fair Tax - the "Single payer" of tax reform?

Here's a meme that occured to me in reading this on Patterico on the fate of ObamaCare (or KennedyCare or TrojanHorseSinglePayerCare). The healthcare reform agenda of Obama is caught in a vice of multiple conflicting problems. It seems too much to bite off at one time. However, when you look at possible half-measures to get you there in slices, none of them are palatable. They will break the current system worse without providing the relief of a coherent alternative. Patterico shows a post mortem from the 1994 healthcare debate that makes 2009 sound like Deja Vu:

From the beginning, the proposals in the center had failed to generate any public excitement. Economists and conservative intellectuals may like the individual mandate in the Chafee plan and the cap on tax benefits that both the Chafee and Cooper plans originally included, but no one has built public support for these measures.

Obama is left with his choice to go 'all in' on the Public Option. Any compromise will be pecked to death and won't really work. As Michael Steele put it: "Up or down baby."

What does this have to do with the Fair Tax? The Fair Tax is a huge, huge leap from an income tax to a different tax system. Too big a leap to do in one jump. Can you make small incremental steps then? Only in the direction of tax simplification and tax reduction, but NOT in the direction of adding a VAT/sales tax while keeping the income tax. People are gung ho about the Fair Tax because they want to get rid of the IRS; a half-measure that adds a VAT and keeps the IRS would get you a "Huh?" response from Fair Tax supporters.

WE get caught in 'local minima' of policies ... like our being saddled with Social Security, about as modern and convenient as a 1939 Packard. Can we change it? Too many interests lock us into the status quo. When it comes to preventing Obama from messing up too much, the status quo is our friend, but someday the same dynamic will thwart conservative reforms as well.


Dutchman3 said...

Re: the Fairtax, I couldn't agree with you more. AFFT tried to do too much, too quickly, imho. If we really want to get rid of the hated IRS, how about a simplified plan I call Fairtax-Lite?

Fairtax-Lite is a revenue neutral12% national sales tax with no exemptions, no inventory tax credits, no "prebate, but retains the EITC to protect the poor, does not tax government spending, retains the payroll contributions and the gift/estate taxes, and phases in over five years.

Congress is institutionally conservative, and much prefers evolution to revolutions such as the Fairtax. Fairtax-Lite might have a better chance of Congressional consideration?

Anonymous said...

Dutchman: Yes, something along those lines might work. I have something I call "The 15% solution" that has similar thoughts.

my point about the dangers of the half-measures is that they keep the hated IRS. My solution in the "15% solution"? Abolish the income tax entirely for all but the rich - and make it a flat tax (of only 15%-20%) for that top 20%. This has the benefit of lower tax rates *and* making the income tax more progressive at the same time. Then a lower sales tax rate, starting with imports, can be put in place, and structure it so that lower payroll taxes make up for the sales tax burden.

I would be curious to know what you do about the income tax in the system.

Dutchman3 said...


Perhaps I didn't make it clear that Fairtax-Lite replaces the income tax entirely for both businesses and individuals? The 12% revenue neutral rate was calculated using 2007 individual and business federal income tax revenue data, which amounted to $1.391 trillion. The rate was also adjusted to pay for the $59 billion EITC credits I proposed.

I like your thinking on the issues, but would caution against trying to do too much initially. Let's just replace the income tax over five to ten years, and if successful, move on to other tax simplification ideas. I fully support a national sales tax, but don't agree that the Fairtax scheme as described in HR25 is the way to go!

Best regards,