Tuesday, February 18, 2014

More Thoughts on the FairTax

NOTE: I am reproducing a number of essays on taxes which originally appeared in my now defunct blog Random Notes. I will also be reproducing articles on the FairTax in the next few days. I hope these essays will provide a good background for my planned essay examining the current state of the FairTax, as well as summarizing all my objections to it, those which have been answered and those which were not. Those interested in the topic may also find useful material in a number of essays printed in this blog (many reproduced from Random Notes), including: "Passing Thoughts on Taxes", "Two Thoughts on Taxation", "Government by Emotion", "Minimal Reforms", "Simplicity", "Reframing the Debate", "A Partial Reply to yt_knight", "Another Reply to yt_knight", "The Runaway Stagecoach", "The VAT Versus the FairTax", "Ch-Ch-Changes", "Gardasil and Logical Errors", "What is Wrong with a Prebate?", "Making Taxes Hurt", "Reply to FairTax Comments", "Reply to FairTax Comment II", "Reply to FairTax Comment III", "Short Reply to Doctor Adams", "Revisiting the FairTax", "If we must...", "What We Need", "The Consequences of Bad Laws" and "Truths About Taxation".

It is no secret I have been critical of the FairTax. There are any number of reasons for this, but I won't go into them right now. Or rather, allow me to limit myself to one, for the time being. One problem I have is that the FairTax, far from being "fair" is as much an embodiment of the prejudices of the creators as the present tax. As the creators think "production" is superior to "consumption", they created a system which "encourages savings". That is all fine and good, but who is to say savings is absolutely preferable to consumption? ("Absolute Values", ""It's Our Top Priority!"", "The Inherent Disappointment of Authoritarianism", "The Most Misleading Word", "Luxury and Necessity", "The Right Way")  More, if we discourage consumption, then does that not also curtail production? After all, we produce only to sell, and can only sell if others are consuming. So if we discourage consumption, does that not slow the economy as well, causing a reduction in production too? (See "Has No One Heard Of Lord Say?", "Production and Consumption"  and "Clarifying a Reality of Capitalism") After all, consumption and production are two sides of the same coin, and we produce, in the long run, only because we wish to consume. If we had no desire to consume, we would not produce, and so to discourage consumption is also to discourage production, as production without consumption is nonsensical. ("Protectionism", "Fear of Trade", "Free Trade, Employment, Outsourcing, and Protectionism", "Cheap Lighters, Overseas Dumping and Monopolies", "Jobs, Jobs, Jobs, and More Jobs", "Protectionism Right and Left", "Bad Economics Part 6", "Pro Hoc, Ergo Propter Hoc", "The Sky's Not Falling Part 2")

I say all of this, not to prove the failing of the FairTax, but to point out the somewhat shaky economic beliefs on which it rests. Or, to be a bit more accurate, the way it plays to conservative and libertarian prejudices and in the process uses the emotions elicited to conceal its shortcomings. The fact that present government policies discourage savings has long been a conservative complaint, however, the solution is not to discourage consumption, so much as to provide a stable environment in which savings maintain value. Until such conditions exist, overspending and consuming on credit make financial sense. Inflation creates perverse incentives. ("Debt", "Living Beyond Their Means", "To Correct Debra Saunders", "How the Government Corrupts Relationships", "In Praise of Contracts")

But the FairTax fails to even recognize that there are other factors in the economy, and creates a monolithic myth where all our woes are due to taxes and a single solution, the FairTax, will create unending wealth and luxury, while allowing us the same level of government spending. And while that sounds good, in reality it is nonsense. And a bit of thought could show us that is the case.

For example, the current level of government spending far exceeds 23% of national spending. Nor are our tax revenues only 23% of retail spending on new goods and services. So it boggles the mind to imagine that somehow we could maintain our current spending levels with solely that source of income. I know some economists have postulated that the reduction in costs, increased spending and the rest would balance out the numbers, but that gives me more pause, as I doubt any economist who claims to know the exact numbers in the future. That is simply nonsense. ("The Limits of "Scientific" Management", "The Limits of Econometrics", "The Limits of Technocracy", "Some Additional Thoughts on Technocrats", "A Thought on Technology and Technocrats", "The Nonsensical Nature of Some Statistical Analysis")

Nor are all the benefits claimed for the FairTax solely contingent upon the FairTax. For example, they claim massive savings and growth from removing all the "embedded taxes", but that is hardly dependent on the FairTax. We could eliminate everything but the income tax and see the same benefit. The FairTax is hardly needed to eliminate fees, hidden taxes and other costs. We could eliminate them whenever we wish. And the benefits do not rely upon the FairTax for us to enjoy them.

I think the biggest problem, however, are not the absurdly inflated claims, nor the suggestion that only the FairTax could provide benefits we can enjoy without the tax. What is the greatest problem is that it has caused so many people to focus on taxation to the exclusion of all else, when taxes are really a minor problem compared to the unstable currency, or rampant government spending. It is the monolithic, single cause theory that is damaging, and leads many to ignore real problems in their zeal for the FairTax, and that is most frightening. Yes, taxes can be destructive, and taxes can be a problem, but compared to our constant inflation, and our overspending government, they are minor problems.

Allow me to explain very quickly. The FairTax says it is revenue neutral, that means it claims to bring in as much as we do now in taxes. I don't believe it, but let us say it does. Suppose it is implemented, and nothing else changes. We continue to experience our constant low level inflation, with periodic spikes. We also continue to spend ourselves into massive debt. I know the FairTax advocates claim the benefits of the tax will so benefit the economy that we will experience a massive surge of growth, but does anyone believe we will grow so much it will erase the federal debt? Or that if we do have growth, the government will not begin to spend more and more?

So, in the end, if we pass the FairTax, but continue to see our money losing value continually, while the state eats up more and more of our income, does anyone truly believe we will see the benefits the FairTax promises? Or does it seem more likely, by concentrating only on taxes, we will have given the government free reign to exacerbate other problems?

The answer is not the FairTax. Even if I did not object to it on other grounds, I would say that. Why? Because by looking for a singular cause, or a singular solution, and finding it in taxation is just wrong. The answer is not how we administer our bloated state, it is the bloated state. Until we address that, and the illusory currency the state uses to fund itself ("Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "The Inflation Engine", "Inflation and Uncertainty", "Bad Economics Part 7 ", "Bad Economics Part 8", "Why Gold?", ""What Is Money?", "What Is A Dollar? "), we will never see an improvement in our lot. It is big government and big spending that kill the economy, and as long as they persist, the specifics of taxation are irrelevant. It is akin to arguing with you executioner over the caliber of bullet, you will be just as dead with a .22 as with a .45. And yet the FairTax promises that if you can make the bullet small enough, not only will you live, you will thrive. It is just not true.

For a complete history of my criticisms of the FairTax, please see "The FairTax's Liberal Assumptions", "The VAT Versus The FairTax", "Truths About Taxation", "The Problems of Spending and Taxes", "Why I Dislike the FairTax ", "The Best Argument Against the FairTax ", "The Foolishness of Corporate Taxes ", "A Partial Reply to yt_knight", "Another Reply to Yt_knight", "Reply to FairTax Comments", "Reply to Fair Tax Comment II", "Reply to FairTax Comment III", "Two old ones (plus three)", ""Making Taxes Hurt", "Some Thoughts On Taxes", "The 22%", "So Why Do I Care" and "Short Reply To Doctor Adams". There are others, many linked in those posts, though a few complaints I raised in the oldest posts have since been answered, so I suggest reading the newest posts first, as they correct a few mistaken statements I made early on in my analysis of the FairTax. Or, if you would like a simple explanation of my view of taxes and financial matters, you can start with "A True Conservative Platform", which gives a good thumbnail sketch and provides a list of the most pertinent links.


I realized after reading this that some may accuse me of contradicting myself. I claim the problem with the FairTax is looking for a single explanation, and then I say the single cause is bloated government. And yes, in one way, that does contradict itself. But in another it does not. I am saying the FairTax fails by looking for a single, narrow cause, and finding tax policy. On the other hand, I argue the problem is that entire constellation of measures making up our bloated government. "Big government" is in one way a singular cause, but it is a singular cause made up on a number of causes, so it is very different than finding taxes the single cause of our problems.

Originally posted in Random Notes on 2010/11/12.

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