The FairTax: A Big Tax Increase?

According to The Politico, the so-called FairTax is an issue in the special election to replace the late John Murtha in Pennsylvania. The Republican candidate Tim Burns apparently said some nice words about the idea before taking them back, and Democrat Mark Critz ran an ad saying that the FairTax would constitute a tax increase, a charge that the FairTax people have called a lie.

I was unable to find either the Critz or FairTax ads so I am not clear on the precise details of the charges. But it certainly is reasonable to say that the FairTax would constitute a substantial tax increase in the current environment. That is because the proposal has always had a 23 percent tax rate. Yet during the time this proposal has been kicking around federal revenues as a share of GDP have ranged from a high of 20.6 percent in 2000 to 14.8 percent in 2009. As Stan correctly pointed out yesterday, by every measure federal taxes are at their lowest level as a share of income or the economy in 60 years. And no matter how much the tea party people deny it and rant about overtaxation that is a fact.

If the FairTax people were honest about wanting to replace federal taxes in a revenue neutral manner, they should have reduced their proposed rate by at least five percentage points over the last 10 years. Since they haven’t and because they said 23 percent was revenue neutral back in 2000, it’s reasonable to assume that replacing all federal taxes with a 23 percent sales tax today would have to constitute a tax increase equal to almost six percent of GDP. This is simple math.

As I have explained on more occasions than I care to recall, the FairTax is a totally crackpot idea. The fact that its supporters always claim that the same rate will equal current federal revenues no matter what federal revenues are is actually among their lesser deceptions. For more details see here.

About Bruce Bartlett 76 Articles

Affiliation: Forbes

Bruce Bartlett is a columnist for Forbes.com, the online side of Forbes, the nation’s premier financial magazine.

He served for many years in prominent governmental positions including executive director of the Joint Economic Committee of Congress, Deputy Assistant Secretary for economic policy at the U.S. Treasury Department during the George H.W. Bush Administration, and as a senior policy analyst in the White House for Ronald Reagan.

Bruce is the author of seven books, including the New York Times best-selling Impostor: How George W. Bankrupted America and Betrayed the Reagan Legacy, and thousands of articles in national publications including the Wall Street Journal, New York Times, Washington Post, New Republic, Fortune and many others. He appears frequently on CNN, CNBC, C-SPAN and Fox News, and has been a guest on both the Daily Show with Jon Stewart and the Colbert Report.

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1 Comment on The FairTax: A Big Tax Increase?

  1. I apologize I do not currently have the time to read the full article to which you linked, but I made it through the first few pages. The biggest argument in the referenced article is that the federal government wouldn’t pass it as it is now and that if they did, they would then change it in the future. How does this article apply to the Fair Tax as it exists now? Your argument against something cannot be founded on the premise that it will be changed in the future. There are only two con’s that I have found related to the Fair Tax that actually hold up.

    First, people who have already paid taxes on savings will be taxed a second time when they spend that money.
    This is a valid point and it should be addressed in the future amendments. There a few “fair” ways one could go about righting this wrong.

    The second is the transition into the Fair Tax would be rough. The economy would have to decide if it wanted to leave everyone’s pay at the new untaxed level and the full 23% (inclusive, 30% exclusive) tax would be added to products, or companies could lower employee’s pay and use the savings to lower product costs that would leave the products price after taxes approximately equal to it’s pre-Fair Tax price.

    The most important pro that seems to be overlooked consistently is the broadening of the tax base. This would be a huge amount of extra taxes collected over our current system, even if one only calculated for 3.6% of the top businesses paying the taxes they would still end up with around 85% of taxes being paid. The government could have a small team of tax specialist oversee the 92,000 businesses that make up the top 3.6% and ensure they pay their taxes. At the same time the government could have another small team spot checking the other 96.4% of businesses and collecting most of their taxes. This would result in a much higher collection rate than our current tax system has.

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