The Grassroots Corner April 5, 2021

  • by:
  • Source: FAIRtax
  • 04/09/2021
HOSTILE ARGUMENT: IS THE FAIRTAX RATE ENOUGH?

This Grassroots Corner continues a series on dealing with hostile questions and comments that people may raise about the FAIRtax. Many of these suggested responses will be good comebacks for you to have in your pocket – or purse – when you need them. You may have heard some of these questions and answers on The FAIRtax Guys podcasts and radio programs. Some stress questions here will be different.

Some of these suggested responses can be too long to insert into an actual conversation.  You may want to boil them down to where they'll be more usable when you're talking face-to-face with someone attacking the FAIRtax.


This week, we take on the criticism that the FAIRtax rate of 23% inclusive is not high enough to generate the same amount of revenue as the taxes it replaces. You will recall that the FAIRtax was designed to be revenue neutral.  The economists who designed the FAIRtax were told that their creation had to bring in the same amount of revenue as the income tax.  No more, no less.

Still, critics claim that the replacement rate would need to be so high that no one would dream of implementing the FAIRtax.

Many critics draw their support from William Gale of the Brookings Institution. Gale concluded that the revenue-neutral replacement rate for the FAIRtax would need to be far higher than 23%.

In a debate at the American Enterprise Institute years ago on the FAIRtax, Gale faced a challenge.  His challenger agreed with Gale’s method, but questioned the data he used.  The challenge stumped him. Gale never responded to the challenge, saying instead, “it must be somewhere in the weeds.”

In September of 2006, there was a study entitled “Taxing Sales under the FAIRtax: What rate works?”   It was undertaken by Kotlikoff (Boston University) and Tuerck (Beacon Hill Institute, Suffolk University, and others).  The data and methodology were clear.  Kotlikoff and Tuerck calculated that a tax-inclusive rate of 23.82% would be sufficient to achieve revenue neutrality with the income tax.

In 2013, when the FAIRtax movement had a larger budget, we had the Beacon Hill Institute update its FAIRtax revenue figures. Beacon Hill figures showed that considering the favorable impact that the FAIRtax would have on the economy, the average revenue-neutral rate for the FAIRtax for the ten years ending in 2024 would be slightly lower than 23%. 22.8% to be exact.

One word of caution here.  These figures are nearly eight years old, and projections need updating to remain up to date with current conditions.

But even if Kotlikoff, Tuerck, and Beacon Hill are all wrong, and Gale is right - and the replacement rate needs to be higher - you are paying that much already. The tax burden is indirectly front-loaded on you in today’s income tax instead of backloaded in the FAIRtax.

Under the FairTax, there will be no more hidden taxes. Critics might argue that under the FAIRtax, governments would pay tax on their consumption that people don’t see. But even if you accept that argument, government consumption is only 18% of the total FAIRtax revenue base. A full 82% of the revenue base for the FAIRtax comes from people like you.  You, as a consumer, will see how much government costs (at least 82% of it!).

You might ask your tax-rate critic a simple question:  "What research do you have to back up your claim?"

I would love to hear from you about how to squeeze this explanation into a soundbite.

Yours In the FAIRtax Movement!


Jim Bennett
AFFT Grassroots Coordinator & Secretary

 

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