Saturday, April 4, 2009

Flat Tax is not Flat; Fair Tax is not Fair

They might be improvements over the status quo, but at, Lawrence Vance still makes a number of good points in arguing that they are neither fair nor flat. (The article first appeared at and is also available as an MP3 audio download.)

Under a Flat Tax, everyone's income is taxed at the same rate (Forbes says 17 percent; Hall and Rabushka say 19 percent)....The appeal of the Flat Tax is simplicity. You can do your taxes on a postcard-sized form says Forbes. Goodbye compliance costs.

The problem with the Flat Tax is a simple one: the Flat Tax is not flat. And furthermore, no one actually pays 17 or 19 percent. In fact, taxpayers don't even pay the same percentage. The Flat Tax is actually a highly progressive tax....

The FairTax is a consumption tax. It is the most radical tax reform plan, bar none....The FairTax is a national retail sales tax of 30 percent on the final sale of all new goods and services....The appeal is obvious: no more complex tax code, no more taxes withheld from paychecks, no more 1040 forms, no more record keeping, no more compliance costs, no more IRS audits. And if that weren't enough, the FairTax also includes a monthly rebate to offset the taxes paid on basic necessities.

But for a plan that promises such a utopia, the problems with the FairTax are legion. The stated rate of the FairTax is too low to achieve the promised revenue neutrality. The amount by which it is claimed that prices would fall under a FairTax system has been grossly exaggerated. There is nothing to prevent an income tax from being reinstituted, giving us a two-headed hydra of an income tax and a consumption tax. And not only would state and local governments have to pay a national sales tax to the federal government, the federal government would have to pay sales taxes to itself on all its new purchases....

So why is the FairTax not fair? Well, first of all, what's fair about a consumption tax?...The FairTax is also not fair because of the rate. What is fair about the government taking a 30 percent cut on every transaction?...And finally, maintaining that the FairTax is a "fair" tax system, or one that is "fairer" than our current system, is highly subjective....


At April 5, 2009 at 2:19 PM , Blogger steve keller said...

You state: "So why is the FairTax not fair? Well, first of all, what's fair about a consumption tax?..."

It is fair because everyone pays the same rate. It is fair because now everyone pays, including illegals and all the tax cheets; even our so-called leaders like our treasury secretary.

You also state: "The FairTax is also not fair because of the rate. What is fair about the government taking a 30 percent cut on every transaction?"

I agree government spending must come under control. This is the main reason Washington is fighting the FairTax; they will no longer be able to create smoke and mirrors as with our current system. The FairTax rate is designed to be revenue neutral and if the consumption rate needs to be 50% to accomplish this, at least we can see how expensive our government is and we will be more inclined to push for reduced government spending.

You also state: "And finally, maintaining that the FairTax is a "fair" tax system, or one that is "fairer" than our current system, is highly subjective"

Anyone who believes our current system is fairer that the FairTax is either an illegal alien, some sort of underworld drug dealer, a tax cheat, a tax accountant, a Washington tax lobbyist, or someone who thinks a team of horses is still better than the trackor.

At April 5, 2009 at 3:21 PM , Blogger Eric Schansberg said...

Steve, thanks for writing. Just to be clear, the words are those of Laurence Vance, not mine. And to reiterate, I think a fair tax would be an improvement over the status quo, but it is far from flawless.

To your points...

A fair tax would be more fair than an income tax for the reasons you mention. But everyone would not pay the same rate with a consumption tax, depending on the proportion of their income which is consumed. Beyond that, tax cheating would still occur, especially with a marginal tax rate which is so large. And relative to an income tax, a fair tax would subsidize savings vs. consumption (maybe a good thing practically).

To what I think is the largest of Vance's stated concerns-- and contrary to your claim: the fair tax is MORE smoke and mirrors because it is far more subtle (except on bigger ticket items) and it would be easier to increase it than a more obvious tax.

At April 5, 2009 at 5:40 PM , Blogger Mike Kole said...

I get what he's saying, but as regards the Fair Tax, if someone said to me, I have a plan that would repeal the 16th Amendment, abolish the IRS, end withholding, streamline compliance such that the average person spends about 5 minutes a year on his taxes, well, you'd have me on board.

Vance shouldn't let perfect be the enemy of the good. He should take notes from the socialists who have moved our country incrementally towards socialism without using the word, and without its' proponents making end-point cases.

At April 5, 2009 at 8:53 PM , Blogger RGeorgeDunn said...

Great article. However, on the Fair Tax, his use of the 30% is not accurate. It has been debated endlessly and here goes. If the cost of a new car is reduced by the removal of the 22% hidden federal tax in the production, that would move the price of a car from say $30,000 down to $23,400. Now being as the consumption tax is calculated to be 23%, that would raise the cost of the new car(used are exempt) purchase to $28,782.00. This clearly states that being there is such a savings in switching to the Fair Tax, there are a lot of people earning wage under the table or are protected by off shore and by congress laws(unconstitutional). And don't forget that the purchaser has had a pay raise of 22% on average by receiving gross pay.

The cost of the American manufactured vehicle will drop to the purchaser but the foreign made vehicle will need to roll in the equal level of consumption tax on it. All this will vary depending on the amount of foreign parts in the so called American Made Car, but the math tells us that jobs will come back and so will the buying power of Americans, thus lowering the consumption tax in the future.

No this is not a vehicle for reducing spending in Washington, which is unconstitutionally unconscionable. But to turn this huge Ship the USA on a dime is not very likely and so the need for incrementalism is unfortunate but can't be avoided.

Now with the built in progressive that is not a welfare but is equally distributed to every legal American, a lot of the consumption tax is a wash for the low income and middle income.

As to under estimating, the tax % needed, inflation will counter this, unfortunately for all of us, all this stealing of American wealth Washington is doing by these bailouts and stimulus. As to the income tax on individual income coming back, the Fair Tax Plan proposed has a stipulation in it, that the 16th Amendment that is being unconstitutionally used to collected such tax will be repealed or the Fair Tax plan will die. And don't let them say the VAT plan from overseas is good as it would be a tax through all means.

As to the flat tax, it changes nothing. It will continue the current lobbyist game in Washington and thus will stay flat about one year. And it does not help in removing the excise tax in our domestic manufacturing.

Yes, reducing the Federal Government down to it's Constitutional power enumerated would be our greatest achievement. But until then and even after, the consumption tax is the way to go. It is indirect, in that the tax is not mandatory. One can be self sustaining and not be required to pay it or if so desired, can protest the government action by boycotting the tax by not spending. Currently under our voluntary tax(HAH!) we don't even see our money as it is taken without choice. We need to get our tax system back to the proper level of Freedom and Liberty to maintain our control over the Government which is suppose to serve us, not some tyrannical fantasy. "A heavy or progressive or graduated income tax is necessary for the proper development of Communism." - Karl Marx

At April 5, 2009 at 10:58 PM , Blogger Eric Schansberg said...

Thanks George!

Great point, Mike...I wish I had put it that way myself!

At April 5, 2009 at 11:09 PM , Blogger gadfly said...

Eric ...

I must say that I am surprised that I could find a more comprehensive and detailed analysis of converting to a consumption tax at than the one featured on Mises.Org. Go here for an interesting read:

At April 7, 2009 at 10:56 AM , Blogger Bryce Raley said...

I like Mike's point. I no longer enjoy reading about how something can't work without someone taking the steps to put forth an alternative that could work better.

As for Mr. Vance Lawrence I found no mention of an alternative in his article. Not even one line. It's easy to say something can't work, it takes some mental energy to say why something can work or to offer an alternative. I can sit here all day and knock down things that can't work or are not perfect without breaking a sweat. Being a critic might be the easiest job on the planet.

We need some pragmatism. Reminds me of these quotes.

Rhetoric is a poor substitute for action, and we have trusted only to rhetoric. If we are really to be a great nation, we must not merely talk; we must act big- Teddy Roosevelt

The credit belongs to the man who is actually in the arena; whose face is marred by sweat and blood; who strives valiantly; who errs and comes short again and again because there is no effort without error and shortcoming; who knows the great enthusiasms, the great devotion, spends himself in a worthy cause; who at best knows in the end the triumph of high achievement; and who at worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who have never tasted victory or defeat- Teddy Roosevelt

At April 19, 2009 at 5:37 PM , Blogger steve keller said...


I just read your response. You Stated "But everyone would not pay the same rate with a consumption tax, depending on the proportion of their income which is consumed."

The more money one earns the more one spends; thus the greater consumption tax one will pay. I am a middle income American, but I believe it is wrong for someone who earns more than me to pay a higher tax rate. At one time I took on a second job to help pay for my son’s college education. As a result I was placed in a higher income tax bracket. This is punishing productivity. We should reward productivity not punish it. Actually it would make more sense for the tax rate to decrease as you earned more. Things are suppose to be cheaper by the dozen. Under our current tax system you pay the government more by the dozen.

At April 21, 2009 at 12:38 PM , Blogger Eric Schansberg said...

Steve, I probably could have stated that more clearly-- and maybe we're talking past each other. But...

The wealthier would pay more consumption tax than those with lower incomes, assuming they consumed more stuff. But if they spend a lower proportion of their incomes, then they will face a lower average tax rate.

In the abstract, I believe that "it is wrong for someone who earns more than me to pay a higher tax rate". But practically, how do you accomplish that.

I agree that punishing productivity is ethically and practically troubling.

At April 22, 2009 at 11:23 PM , Blogger steve keller said...

Eric, One of the most attractive features of the FairTax is you control how much tax you pay based on how much you spend. I don’t believe just because someone earns more he should pay more tax. Our tax system should encourage people to earn more not discourage them.

If Bill earns $50,000 per year and spends all $50,000and Joe earns $200,000 and also spends $50,000, they should pay the same amount of tax. The percentage of their income should have nothing to do with it. The government doesn’t help Joe any more than Bill. In most cases, under the FairTax, the Joe’s will pay more tax than the Bill’s anyway. In most cases the Joe’s will spend more than the Bill’s

At April 23, 2009 at 10:03 AM , Blogger Eric Schansberg said...

Steve, playing devil's advocate (at the least):

One of the most attractive features of an income tax is you control how much tax you pay based on how much you earn. I don’t believe just because someone spends more he should pay more tax.

That said, mostly tongue-in-cheek, I think you're correct that earning-- i.e., producing-- should not be discouraged.

Bottom line: I'm ok with FairTax if works and turns out to be politically feasible. I'm also ok with a flat tax. In any case, the bottom line issue is that government-- and thus, taxes-- are too large, however they are administered.

At April 23, 2009 at 12:41 PM , Blogger steve keller said...

Eric said: "the bottom line issue is that government-- and thus, taxes-- are too large, however they are administered." Soooooo true!!!

One other thing I like about the FairTax is it's transparency. When we are reminded every day, every time we make a purchase, of just how expensive government is, maybe we will put more pressure on our congresmen to push for bills to reduce spending.

At April 23, 2009 at 2:44 PM , Blogger Eric Schansberg said...

Yes and no....a sales tax is a regular occurrence, but also a smaller-per-tax occurrence. So, in some ways, it's more obvious; in other ways, less so.

The very thing that makes the fair tax more obvious is the thing that makes it more prone to evasion-- as people will want to avoid an obvious and painful tax.

At April 24, 2009 at 9:01 AM , Blogger steve keller said...

Under our current system, millions of tax dollars are lost due to mistakes such as our treasury secretary made. I’ll give him the benefit of the doubt and call it a mistake. Under our current system billions of dollars are lost due to tax cheats and illegal aliens who pay no tax. Under any tax system there will be cheats, but I can’t imagine their being more revenue lost due to cheats and mistakes under the FairTax than under our current system. The transparency of the FairTax will make people uncomfortable and stir evasion thoughts; but it will be much more difficult to do so. With the FairTax it will take two; the buyer and the seller. Also, with the FairTax only the seller will be responsible for physically paying the tax; thus there will be fewer audits required, thus a better chance to catch cheats.


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