Saturday, July 7, 2012

So Why Do I Care?

My previous post argues that the FairTax is being sold by looking at the most optimistic of estimates and that little thought is being given to what it would mean if their estimates are wrong. As I am writing this immediately after, I have no responses yet, but I can anticipate one already. "What does it matter? It still has to be better than what we have." To which I have to voice disagreement.

You see, we know both the best and worst of our current tax plan. At worst, we get a highly progressive structure of rates which causes economic stagnation. At best, we flatten out the brackets, keep rates low, and have a relatively efficient system. (Despite the claims of the FairTax advocates, our system, when running well, is hardly a nightmare. It could be improved, but it is not as bad as the hyperbole would make it seem.)

So, since the FairTax advocates have painted the best scenario, perhaps even a scenario better than is actually possible, the question remains, what is the worst possible outcome?

The first possible problem is with the "elimination of bureaucracy and compliance costs". As I have argued before, it is likely the compliance costs will be much higher than expected. Coordinating state collections, investigating fraud and non-compliance, arbitrating questions about the law, validating prebate recipients, investigating prebate fraud, administering the prebate, and so on will require more bureaucracy than many would admit. All meaning that any projected savings from eliminating the IRS would evaporate.

A second problem is that the WTO may disallow the piggyback tax on imports to bring them up to FairTax levels, calling it a hidden tariff. If this is the case, then overseas shopping becomes much more viable, at least for expensive items. This will cause a large loss in anticipated revenues. Add to this the possibility of massive tax avoidance, using schemes I and other have proposed, and you can see yet an additional loss of revenues.

And then we have unanticipated economic losses. I have mentioned a few examples, such as the loss of protective tariffs destroying entire industries, but I am sure there are possibilities I have missed. As we are considering the worst case, it is possible that the sudden change to tax structures could render any number of industries non-viable, or at least a lot less profitable. Industries which exist solely because of favorable tax laws, or industries used as tax shelters may end up disappearing. Whether in the long run this is economically good or not, it still means for the moment the economy will have lost those industries for the moment, with commensurate loss of revenue and jobs.

To which we can add a few other odds and ends. For example, there could also be a reduction in revenue due to slowing spending, as the 22% embedded taxes, not being evenly distributed, do not offset the increased taxes completely on specific items. Or there could be more extensive prebate fraud than anticipated. We could also see things such as a flight of seniors to Mexico or other retirement friendly nations, as they worry about the consumption tax eroding their savings.

If we posit this loss of revenue, coupled with lesser than anticipated savings, then we are confronted with three options. We could slow spending, which would never happen, we could raise the FairTax rate, or we could add another tax. As raising the FairTax rate could cause even greater reductions in revenue as spending slows more, likely the response would be to add a new tax. Either an income tax which avoids the need for the 16th amendment,  such as we had during the Civil War and after, or the return of other taxes which the FairTax was meant to eliminate.

So, in the absolute worst case, the FairTax would leave us with a much diminished economy, reduced federal revenues, and almost all the taxes we had before the FairTax, with the FairTax added as well.

Admittedly, that is, as I said, the absolute worst case. But we need to look at that. When deciding on something it does no good to look only at the best outcomes, we need to examine the worst as well. Looking only at the best is how people end up in bad marriages, people end up in bad investments, and individuals lose their life savings in Vegas. The best outcome is good to know, but we need to know the worst case as well if we are to make an informed decision.

Which is what troubles me about the entire FairTax debate, this is the first time I have seen anyone postulate a worst case scenario. For all the doomsday talk about our current tax system, all the descriptions of how destructive it is, not once has anyone asked what the worst outcome of the FairTax is.

I know I have said this over and over, but it bears repeating, before we make a change, we need not only examine the best outcomes, but the worst as well. And I have not seen that done concerning the FairTax.

POSTSCRIPT

By describing our system as not so bad early in the essay, I imagine I surprised many. Still, looking at it overall, it really isn't as terrible as many would suggest. It clearly could be improved, and is far from ideal, but it is not a crisis in need of urgent repair.

Yes, all the arguments against it are true. The rules are overly complex, there are far too many small taxes where the administrative costs eat up too much of the revenues. It is weighted heavily toward  favoring certain industries. But even considering all those factors, it manages to collect a large amount of money without too many difficulties.

Would I change it? Of course. Would I choose it as a system if given an alternative? It depends on the alternative.

My only point in saying that it isn't so bad is this: Provided we avoid idiocies like a 90% top bracket or 50%+ capital gains taxes, our current system does not so greatly harm the economy that we need to change it immediately. It is efficient enough that we can take the time to evaluate alternatives and not jump at the first new theory to come along.

It is far from perfect, but waiting a while before we decide on an alternative will not bring doom upon us.



Originally posted in Random Notes on 2008/06/01.

FairTax Loophole

In the course of my vacation I was reading the actual FairTax bill when I stumbled across a massive loophole in sections 301 and 302, the sections dealing with the prebate.I wasn't looking for anything of the kind. In fact, I was looking at the section to see if the rules were overly strict on family composition. But while I was trying to figure out if the wording excluded counting spouses of children, it struck me that there was a much larger problem.

Now I have been critical of the prebate as have many others, and we have often brought up the topic of fraud. However, the problem I have found is not fraud per se, but a perfectly legal means to receive multiple benefits for the same individual. And, thanks to the wording of the act, it doesn't even qualify as a crime.

Allow me to show through an example.

Suppose a household is made up of Al and Alice, a married couple. With them lives Bob, their son, and his wife Betty. They also have two children, Charles and Cindy. Now the prebate is based on the concept of qualifying households. Section 302 gives a number of rules for how households may be composed, who may be included or excluded, and how to handle children in joint custody cases1.

Starting form these rules, let us assume Al files as the head of household. He can claim his spouse, Alice, and his son Bob. He cannot claim Betty as she is not a lineal descendant, but he can claim Charles and Cindy, so he gets a prebate for five people.

As she was not in Al's household, Betty can set up her own household. She can claim Bob, as he spouse, and Charles and Cindy, as her children, so she can get a prebate for four people.

"Wait a minute," I hear you saying, "those three were already claimed!" And you would be right. However, in all the definition of who can be claimed in a household, there was one small oversight. I can find nowhere in the law that states a person cannot be claimed if they were part of another household. Nothing2.

So, if we really want to max out the prebate, Charles can set up a household for all six, as they are all qualifying for him, and Alice can set up one identical to Al's, with five people. Which means that six people can receive twenty individuals worth of prebate3.

Now, obviously in practice this would never work. Someone would amend the statute to include the simple rule that to qualify in a household the person must not be claimed in another. But, at the moment, the bill says nothing of the kind, and such overlapping households are legal.

So, if this won't make it into the final law, why am I mentioning it?

The reason is simple. So much of the FairTax argument is based on faith, that I felt I had to point this out. The argument always goes "experts say the 23% will cover costs", "experts say there are 22% embedded taxes", "experts say it is revenue neutral" and so on. My point is that those experts drafted a bill which allows double, or more, counting of individuals. These experts are as fallible as the next man. So I refuse to accept their say so for any arguments.

As I have said over and over, I want someone to audit this plan who is not a true believer. I am not about to accept the word of experts. Experts make mistakes. And just a few little errors in assumptions turn the FairTax from economic nirvana to a massive failure.

Which is my entire point. Instead of taking this on faith, let's have a bit of rationality, and ask, if the assumptions are wrong, if the economics are not so rosey, what then? What happens in the worst case scenario? Are we still better off? Or do we need to rely on the predictions of experts, need to hope for the best, as any other outcome makes the FairTax a lot less pleasant an alternative?

I don't have the answers. I may have some in the future, but right now I don't. I know the FairTax folks published a lot of their rationale, but they seem to rely on a lot of aggregate numbers which mask a lot of important details4. I am looking for better figures to examine, but for now I just can't say what the worst outcome is.

What disturbs me is that no one on the FairTax side thought to tell us about it either. All is sunshine and candy and rainbows and unicorns. Not a word about what happens if things go south. Which actually makes me a little more uneasy. Never trust anyone who tells you everything will be fine.

The fellow wearing belt and suspenders may look a little silly, but at least you know he has considered the possible alternate outcomes.

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1. It is a minor complaint, but the joint custody provision says that a child, to be counted, can be claimed only by the parent who has the child more than 50% of the time. If there is a true 50/50 joint custody, from the wording of the law, it appears NEITHER parent can claim them. Also, if there is no formal custody agreement, the law is quite silent. But these are trifling complaints compared to the one I raise in the essay proper.

2. That is not entirely true. In children with divorced parents it is specified they can only be claimed by one parent, but that is the only place where double counting is prohibited.

3. Some will argue that the law says all family members in a residence will make up a household, meaning that a single residence can have no more than one household. But I would argue that as Betty was excluded, she is not a family member, and thus must be allowed to form her separate 4 person household. It may be arguable if Alice or Charles can set up third and fourth households, but we clearly have to allow Betty's with its three person overlap.

4. The Arden, Laffer and Moore document is the best source, but it still relies on "macroeconomic" aggregates, which hide a lot of distinctions by using national figures. For example, just to name one, the removal of tariffs will destroy the US sugar industry. Whether that is desirable or not, it is not considered when we use "aggregates", as the differing impact of tariffs is hidden in an overall number. What we need is a more detailed analysis, taking into account the variable distribution of taxes and their impacts, not the broad overview which seems to be the bulk of the FairTax economic analysis.

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POSTSCRIPT

Now, it is possible I am wrong, and somewhere in that 133 page monstrosity there is a prohibition against double counting, but I didn't see it. Though I must admit I did suffer some of that "legislation hypnosis" I recall from law school, the version of highway hypnosis that strikes when trying to wade through Munn v. Illinois at two in the morning, so I can't claim I recall every word.

The one counter argument I foresee, and I mentioned in the footnotes is the wording that says every member of a family living in a residence will be part of a household. However, as I showed, if we assume Al as the person around whom the household centers, then Betty is excluded, so we have to allow a second household. Of course, we could start with Bob and include everyone, but nothing in the law defines who we must use to define what is a family, so my structure seems perfectly acceptable. From the wording, it sounds as if the person filing can choose how the family is defined, or at least who is used to define a single family.

I am sure some FairTax advocates will dispute with me, but the fact is the simple addition of the rule "and shall not have been included in another household" would have saved all these headaches, yet the supposed experts just forgot it.

Which, as I said, was my point. These are humans, and their plans are human plans. As von Moltke said about war, "no plan survives contact with enemy", and I would say of taxes, "no plan survives contact with reality". Despite all the assurances of experts, things will go wrong, and assumptions will prove too optimistic. We need to look at what happens in a worst case scenario, and as far as I see, no one even thought to do so. All is based on the belief that their assumptions are absolutely correct. And that frightens me.

UPDATED 06/02/2008

If anyone questions my construction above, then I offer an alternative. The law is quite detailed on whether or not a household can claim a child living away from home in some contexts, but not in others.

Let us say that my spouse and I separated and she lived three weeks with her parents and then one week with me. From my reading of the law, there are provisions for students and minors in joint custody, but nothing covering adult children. Logically, only one of us can claim her, but nothing in the law says we cannot both claim her, meaning she will be claimed on both her parents' household and mine.

Well, as I said, I am sure the final version would add the simple text that a person cannot have been claimed in another household, but for the moment it really does appear that there is no rule against double counting. It goes against the intent of the prebate, but there is nothing in the letter of the law which prevents it.

After all the effort that went into drafting the bill, it is a glaring oversight. And one that does make me worry about the existence of other possibilities for prebate fraud that I have overlooked.

Originally posted in Random Notes on 2008/06/01.


Vote Them Out

Glnflwrs posted a comment on the proposition of voting out the incumbents, and I have to admit that I think it is a great idea. It would be a good step not just in revitalizing the government, but it could be a boost for the Republican party as well.

Now, I obviously am not suggesting voting out incumbents in the general election, in some states that would mean voting in a Democrat majority. What I am suggesting is working in the primaries to vote out the incumbent Republicans and approach the next general election with a clean slate.

Now there is some down side. The way congressional rules work, we would lose seniority in many committees, but that is a small price considering the benefits.

First, it would give us a great edge in the elections. We could campaign on a simple proposition. We have changed, we have new, clean leadership, untainted by insider politics, while the Democrats are just offering you more of the same. It would be a winning strategy if we had the nerve to try it.

And the party itself would benefit. We are stuck now with too many old time politicians, too comfortable with pork and over spending and working across the aile. Too willing to cooperate with big government Democrats. We need to purge the party of these old-time middle of the road Republicans and put in place some real conservatives, and voting out the incumbents is the way to do it. Oh, sure, we will lose a handful of real conservatives, but we gain much more.

So, why not keep the few conservatives? Because once you make an exception it is too easy to make another. And before you know it, the argument used to save Mike Pence is being used to save Orin Hatch, and then Olympia Snowe. If we hope to run on the platform that we are offering a clean slate, it has to be a real clean slate, we need to start fresh. Exceptions only make it appear that we are not serious.

Of course, it will never happen. People are too caught up in the insider politics of it. They will worry that lost committee seats will hurt the party. And on top of that, they will worry that some newcomer will have no chance, and so they will nominate the tried and true liberal Republican rather than "risk" a true conservative.

But if we want to rejuvenate our party, we will eventually have to do it. We will either do it wholesale, and be able to capitalize on the change, or we will do it piecemeal, and get no credit. Why choose the less effective approach?

Originally posted in Random Notes on 2008/06/01.

What Makes Lawyers So Special?

Speaking as a law school drop-out, I have to ask, why do we trust lawyers so much? Oh, we all make lawyer jokes, and claim we don't trust them, but then we turn around and vote them into office in overwhelming numbers, and, more than that, we give them almost total control over our lives. Why do we think lawyers are especially adept at determining health care policy? We must, otherwise why let them establish "health care policy" or "universal health care"? Why do we think they understand every industry? How else to explain the infinite number of regulations we entrust to alwyers?

Oh, there are a few non-lawyers in office, but by and large, congress is made up of wealthy lawyers. (And we wonder why tort reform is a dead issue.) Maybe a few ex-military types, but even they are former military men who then attended law school. We just cannot get away from lawyers in congress.

Now, this would be fine if congress' primary function were just making laws. And by that I mean simple criminal alws, and the few administrative laws needed to keep the federal civil courts running. But we have long since passed the era where the government let people run things on their own. With our massive, intrusive federal government, the state regulates every industry, every area of human endeavor. Which makes me ask again, why do we think lawyers are up to this task?

Not that I would feel that much better if the man telling me what I can eat were a chef, or a plumber, but I have to ask why law school qualifies someone to tell others whether or not they can use transfats or how to design automobiles. I went to law school, many people I know completed law school, and I wouldn't trust them to feed my cat when I went on vacation, much less manage the nation's economy.

So, I ask again, why do we trust lawyers so much?

Originally posted in Random Notes on 2008/06/01.

Wow! That Was Painful

Just saw the new Andromeda Strain on television and have to wonder how Michael Crichton is reacting. I know he had to give some kind of approval to the project, but considering his opposition to the environmental movement, I am amazed that he allowed such a propaganda piece to be made.

I am not in the mood to tear it apart at the moment, the anti-government conspiracy theories, the PC group of scientists, the glorification of the muck raking journalist, the Saddam conspiracy theories, the Republican bashing, the pseudo Haliburton and Enron references, all the usual suspects. And on top of that a ham fisted environmental message.

By the way, I do have a question, why do we always assume that technological advancement is the same as moral or ethical advancement? Star Trek, Stargate, this movie, everywhere, we assume that highly advanced technology imparts some sort of wisdom. However, looking at the 1930's, one can see that technologically, the Germans were definitely in the top 3, but they clearly were not exactly paragons of ethics.

For that matter, why do we think the future will be any wiser. Recall that Aristotle's future held the barbarism of the dark ages. Simple progress through time does not equate to moral progress. The future is not guaranteed to be better, or wiser. We would do well to keep that in mind. Often we seem to forget that civilizations can collapse, even this one of which we are so proud. (Something for those "better Obama get the blame" types to recall. Who cares who is blamed when they are being blamed for a nuclear or biological attack on US soil. Would it have been better if Gore had been president and received the blame for 9/11?)

Well, perhaps in a while I will feel like writing a better review. For now I think I will watch something more coherent, maybe some Black Adder DVDs I bought a while ago. At least they make more sense than this movie did.

Originally posted in Random Notes on 2008/06/01.

Vacation is Over

Well, I almost made it to Monday, though mostly because I had another blog on which to work. But now the vacation is officially over. I don't think I will be writing that much today, but I may post one or two little things.

However, during my time off I did accumulate a list of about a dozen things I wanted to mention when I started writing again, so I have plenty of material for the next few days. As I have finally started to work on my second blog, my posts may be a little less frequent on this blog, but as my normal rate is 3 to 4 posts a day, I doubt anyone will notice.

I should start posting something later today. If not, definitely tomorrow.

And before I go, one observation. While I was taking a break from writing this blog, I did read some old posts and noticed two things. I am horribly verbose and I have a tendency to write at odd hours. Normally this isn't a problem, but sometimes I noticed a tendency for my innate wordiness and tiredness to combine to produce slightly rambling posts. I will be trying to limit my tendency to ramble in the future, but looking over my drug law posts, I see some traces there as well. Then again, I suppose it is good to have some room for improvement, keeps me on my toes.

Originally posted in Random Notes on 2008/06/01.