Meet Advisory Board Member Dr. Robert Genetski
Dr. Robert GenetskiThis week’s article was written by Dr. Robert Genetski, a member of our FAIRtax board of advisors, and published in the Epoch Times. For the past 25 years his consulting firm, ClassicalPrinciples.com, has provided economic and financial research to individuals and businesses around the world.
Dr. Genetski writes a regular column for The Epoch Times. His articles have appeared in numerous publications including Fortune Magazine, the Wall Street Journal and Investors’ Business Daily. He has appeared on CNN and Fox News and on nationally syndicated radio and TV programs.
Dr. Genetski has taught economics at the University of Chicago’s Graduate School of Business, New York University, and various other institutions of higher learning. He has held various positions in the financial industry, including Senior VP for a major Midwest bank, money manager, investment advisor and director of investment research and has served as a Director on the Boards of various public and private companies.
His latest book is “Rich Nation, Poor Nation: Why Some Nations Prosper While Others Fail.” His website is ClassicalPrinciples.com.
The Fair Tax of 2023: A Great Idea with a Major Flaw
BY ROBERT GENETSKI MARCH 8, 2023
Twenty-five Republican members of the House of Representatives co-sponsored a bill to radically overhaul the U.S. tax system. The Fair Tax Act of 2023 (H.R.25) proposes to eliminate all federal income taxes, replacing the revenue with a national sales tax of 23–30 percent.
The bill is well-thought out and extremely thorough. It effectively would repeal the Sixteenth Amendment, thereby prohibiting the federal government from levying income taxes.
US Tax Policy: A Brief History
Major overhauls in the financing of government are rare. Article 1, Section 9, of the U.S. Constitution prohibited Congress placing a tax on incomes. Except for a few brief departures, prior to 1913 the federal government did not tax either individual or corporate incomes.
The prohibition on taxing incomes limited the size of the federal government to such an extent that in 1913 federal spending amounted to less than 2 percent of the total economy (GDP). With a severely limited federal government, the economy soared and U.S. workers rapidly became the most prosperous in the world.
In 1819, Chief Justice John Marshall rendered an opinion in McCulloch v. Maryland regarding taxation and states’ rights. Marshall’s ruling contained a famous statement: “The power to tax involves the power to destroy.”
In 1913, the Sixteenth Amendment to the constitution removed the federal prohibition to tax income. Congress immediately passed the Revenue Act of 1913, which imposed income taxes on individuals and corporations at rates ranging from 1–7 percent. What followed showed the prescience of Marshall’s statement insight.
During the eight years following the passage of Revenue Act of 1913, there were major additional increases in income tax rates and federal spending. America’s miraculous growth in living standards came to an abrupt halt amid soaring inflation. This was the first of six cycles of alternating periods of rising and falling taxes that would mark the next century.
My book Rich Nation, Poor Nation documents all but the most recent cycle. Each cycle shows a pattern of economic problems associated with rising tax rates and increases in federal spending. Once the problems become too severe, policies change with lower tax rates and limits on federal spending producing a recovery. However, each complete cycle ends with higher tax rates and more federal spending than before.
Armed with the ability to tax incomes, the size and scope of the federal government soared. In 2022, federal spending amounted to 25 percent of all spending. In addition, government regulations are estimated to control at least another 8–10 percent of earned income. State and local governments also have expanded, controlling another 15 percent of earned income.
As a result of this seemingly relentless growth, government currently controls about half of American’s income and spending. The effect has been a serious erosion in the freedom Americans traditionally enjoyed.
The Fair Tax Act of 2023
The sponsors of H.R.25 present a plan to enhance individual freedom by eliminating the root cause of the federal government’s ability to enhance its power. The bill effectively replaces all income taxes with a national sales tax on final goods and services, including imports. It abolishes the Internal Revenue Service, thereby significantly increasing individual freedom.
The overall effect is to increase incentives for production while limiting the incentives for consumption.
One argument against the Fair Tax is that its promoters attempted to deceive voters by claiming it was a 23 percent tax when consumers realistically see a 30 percent increase in prices. There is no deception. Both the act and the key website (fairtax.org) mention the tax will produce a 30 percent increase in prices of consumer goods. The sales tax rate is clearly 30 percent.
Another objection to the plan is that the 30 percent rate is insufficient to replace revenues generated by the current system. This may be true, but only because the 30 percent rate is far too high and could do serious damage the economy.
A quick, and admittedly superficial, estimate of the revenue from a comprehensive 22 percent national sales tax in 2022 would have generated 94 percent of all federal revenues.
This calculation does not include a key benefit from a national sales tax. Taxing consumption captures revenues and income in the illegal or shadow economy. An analysis from the Federal Reserve Bank of St. Louis estimates the illegal or shadow U.S. economy at 13 percent of GDP. Shining a light on illegal activity has the potential to add $2.8 trillion in consumer spending and imports. In 2022, a 22 percent sales tax the additional spending would have increased federal revenues to $5.3 trillion, about $300 billion more than under the current tax system.
There are powerful feedback effects to capturing taxes from illegal activities which raise estimates of total output or GDP. The compounding effects of this increase grow over time, dramatically increasing measures of economic activity and federal revenues.
The Congressional Budget Office (CBO) has yet to review the revenue impact of H.R.25. I can almost guarantee the CBO will miss much of the benefits from this law. CBO is particularly inept at capturing either positive or negative interactions from major economic changes. Prior to the passage of the Affordable Care Act (ACA), Congress asked the CBO to estimate the act’s impact on health insurance premiums. The CBO estimated premiums would increase by no more than 10 percent. The actual increase was a 100 percent. With an accurate estimate, the ACA would never have passed.
Most criticism of H.R.25 centers on the burden of individuals paying an extra 20 percent or 30 percent for most items. Lost in this estimate is the increase in purchasing power from the removal of income taxes, particularly the payroll tax on companies and the working poor. Also ignored is the substantial fall in prices from removing the tax burden to doing business.
Those opposed to H.R.25 don’t have to worry. It has no chance of becoming law anytime soon. The public is often opposed to radical policy changes, regardless of how beneficial they may be.
Overall, the idea of a consumption tax replacing income taxes would be one of the greatest positive changes imaginable for unleashing the economy’s growth potential and individual freedom. The bill’s sponsors should be commended for proposing a major innovative change in government financing. It will work, but only if the tax rate is not so high as to undermine its effectiveness.
According to the D.C. elites, Dr. Genetski’s article is wrong. He doesn’t parrot their inaccurate attacks on the FAIRtax but simply points out the social and economic benefits of the FAIRtax.
The fact that another leading economist endorses the FAIRtax is very concerning to the D.C. elites who have long revered the present income/payroll tax system because of the control it gives them over the American people and because of the vast amounts of donations they can extort by threatening to take or give tax benefits to groups.
Thanks Dr. Genetski for making such a clear case for the FAIRtax!
There is going to be a vote on the FAIRtax in the House of Representatives. McCarthy and the other elites didn’t want it, but it was forced on him.
We now have the opportunity to force all Members of the House to show where they stand. They can:
- Vote for the present income/payroll tax system or for the FAIRtax.
- Support the corrupt income tax and the IRS or eliminate it. It can’t be any simpler than that.
- Hide the true cost of their government or pass the FAIRtax and show everyone the true cost of government on each retail receipt.
- Support the largest transfer of power from government to the people, the FAIRtax, or not.
Please stand with us and demand that your representative support a much fairer, much simpler and much more efficient way to fund the government—the FAIRtax!
The FAIRtax doesn’t pick winners and losers. Because it taxes spending, not earnings, the FAIRtax lets everyone save for their retirement tax free.
The FAIRtax collects the revenue that the federal government needs to operate but does it in a way that has the least impact on our individual freedom and the least impact on our economic prosperity.
There are no tax returns to file and no records to keep. We pay our federal taxes when we make retail purchases of new goods and services, and there is no need for the IRS. If you sell a used couch or used jet ski online, there is no FAIRtax due on that transaction.
The FAIRtax will allow us to TAKE BACK CONTROL.
The income/payroll tax system is broken and no longer working—we can’t repair it but we can replace it with the FAIRTAX!
Join us and TAKE BACK CONTROL OF OUR COUNTRY AND OUR LIVES—NOT WITH BULLETS BUT WITH THE ELIMINATION OF ONE OF THE BIGGEST THREATS TO OUR LIBERTY AND ECONOMIC PROSPERITY—THE INCOME/PAYROLL TAX.
We all should remember Edmund Burke’s warning that applies to our efforts to TAKE BACK CONTROL,
“Nobody made a greater mistake than he who did nothing because he could do only a little.”
We should also remember this quote from George Orwell's 1984, which, if we do nothing, may foretell your and your children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
WHAT CAN EACH OF US DO?
We can write letters and make calls to our elected representatives and attend Zoom town hall meetings demanding that if they really want to allow Americans to “TAKE BACK CONTROL”, the first step is to eliminate the income/payroll tax system and enact the FAIRTAX!
TAKE BACK CONTROL! Help us PASS THE FAIRTAX!
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