As yt_knight replied to yet another one of my posts, I feel obligated to reply. And as he is making arguments I have heard from FairTax advocates before, I feel I should reply in the main part of my blog rather than in the comments. It may not interest everyone, but at least it will prevent me from seeing the same arguments whenever I post a comment on the FairTax, or so I hope.

Before we start let me address his opening comments:

Andrews… seems that you are bent on opposing the FairTax. Not sure if this response is even worth writing but… here goes…

As yt_knight has been rather polite to this point, I have to say this comment is a bit beneath him, or at least it seems to be. To suggest that your opponent has an irrational need to argue against your belief is the tactic of  a demagogue, not someone interested in finding the truth. I concede that yt_knight has a sincere interest in bettering the lot of the citizens of the US, and would hope he grants that I have the same. That I  believe the FairTax will not live up to the promises does not mean I am "bent on opposing" it. I oppose it because I believe it will not provide the benefits claimed, and if we waste time and energy pursuing the FairTax we will not have the ability to make much more significant improvements to the tax system and elsewhere. I simply do not want to make voters associate "tax reform" with "the FairTax" because when the benefits fall short the ability to push through any tax reforms will be impaired.

Now, I do admit that I accused yt_knight of willful blindness in my last post, but that is not the same. I do not question his motives, all I suggest is that, when confronted with the ability of the government to change any law, he, like most FairTax advocates, have no good reply and so act as if the problem is not there. I do not say he has sinister motives, simply that he is avoiding a question which is troublesome. So there is a world of difference between his suggestion that I am somehow irrational in my opposition and my statement that he is intentionally dodging a problematic question.

But enough of that, I have wasted too much time on the question of civility, on to the substantive responses.

1. There aren’t any tax exemptions for Indian reservations in the FairTax bill. The FairTax moves away from creating winners and losers in the tax code. It is neutral across the board.

He is correct that the federal government can impose taxes on Indian reservations. However there is a small problem, or several. First, there is no tax collection agency on which to "piggyback" for their cost-free taxation. And I am certain Indian tribes will not be inviting in the state tax authorities, and I doubt the federal government could force them in. So the federal government will have to create a special Indian reservation sales tax authority and impose an unfamiliar sales tax on the reservations. That was why I assumed the feds would lack the nerve to tax reservations. But yt_knight is right in saying there is no legal reason they could not. However, the need to form a special tax authority does undercut the "no bureaucracy" claim.

2. Will it be penny-for-penny revenue neutral? This would be impossible but it does solve Social Security and Medicare trouble in the near future and it will foster growth in our economy which will grow funds into the future as well.

However, the experts and "the book" SAY it will be revenue neutral. Not that we will have to rely on speculative future growth for it to be revenue neutral. And I would point out, once again, this relies on optimistic assumptions to work. Rather than the "proof" that advocates claim.

3. There is a thing called duty that U.S. government charges on personal items purchased outside of our lands. This does not go away. In fact, it would be wise to fold this into the FairTax. As for people sneaking items across the border… some will. But with a fair tax system that doesn’t see after-fairtax prices materially different than current prices why bother? Plus, if we as citizens are happy and prosperous, why go to such lengths? There are plenty of tax avoidance schemes with our current system… just pay cash that doesn’t make it on the books. Many will argue that the FairTax will tax avoidance will be far less with the FairTax. It is hard to avoid taxes when buying from grocery chains, major retailers, hospitals, etc.

However, the FairTax is supposed to eliminate ALL other taxes, or so they tell me. I admit to not having read "the book", but if they keep a duty, then how does it eliminate all taxes? And are you actually proposing putting a 23% import duty on all goods? Would that not cause retaliatory tariff increases by the EU and others? Not to mention possibly being a violation of the WTO rules? Well, actually, it would be a 30% tariff using the means they use to calculate tariff, which is the increase above base cost of the untaxed good. So I think you may have created a lot of international strife with this "simple" solution.

If the duty is not 30% (or as you call it "23%") then my problem remains. For any good where the cost of shipping is less than the difference between the FairTax and the duty it makes sense to shop overseas, adding to the loss of government revenue.
And again, because our current system is flawed, it does not mean the FairTax is good. I can propose a hundred other plans, and the FairTax must not only be better than what we have now, but the alternatives as well. Otherwise, why not adopt the alternatives?

You need to sell the benefits of the FairTax, not the problems of our current system. Yet Fair Tax advocates insist on doing the latter.

4. Your fictional catering business has some record of sales to customers? How about a business license, insurance, etc.? Think it might be a red flag if the business reports zero sales month after month?

First of all, there is no need to record sales. Or are you going to disallow construction industry exemptions during the winter, when they have no work? Even if you do establish some rules about what is and is not a "real" business, who will be checking this? You claim the FairTax will require no bureaucracy, so who will be testing these businesses to see whether or not they are legitimate?

Also, if that is the case, then you need to record who got a tax exempt sale, as otherwise there is no way to know if a business with no sales ever exploited the tax loophole. To do that the states need to keep records they do not currently keep, who made each tax exempt purchase. Then some agency, which you claim will not exist, needs to gather these records, then audit all businesses using tax exemptions and decide which are valid and which are not.

That is a lot of work for an agency you say will not even exist. Or are you going to force the states to do it? If so, who will pay the for all the extra costs that entails? And how do you handle out of state purchases? It would be easy for me to create a "catering business" in Maryland and shop in Virgina, probably without getting caught if it is left up to the states.

5. And by eliminating several hundred million complex tax returns that contain W2s, 1099s, K1s, mortgage interest deductions, etc., etc. with, say, thirty million simple business sales tax returns that leverage state sales tax collection infrastructure we are maintaining the size of bureaucracy? Please… The prebate leverages existing Social Security Administration infrastructure.

Again with the "leverage". As I said in my previous post, how is SSA going to validate the claims of 300 million new claimants for a new type of benefits without adding new people and costs? Or handle those checks? Or the strange situations which will arise? Not to mention the need for Indian reservation sales tax agencies. And the people to investigate fictitious tax exemptions. I just think that the FairTaxers are either planning on shoving the costs off to the states and SSA so they can claim to have "eliminated bureaucracy" while just shifting it around. Or else they are forgetting the reality of what enforcement and fraud prevention entails.

Eliminating known forms also does not mean new ones won't appear. It is very easy to talk about the current evils we know, and hard to talk about the future ones we have yet to see. But I can guarantee with just the enforcement needs I mentioned above, we have not seen the end of paperwork if we institute the FairTax. And to think otherwise is hopelessly naive.

6. Child custody? Um… software application that detects the same Social Security Number reported on two different households…? Will it really take an agency the size of the IRS to handle this? Please…

So who is at fault when it is detected? And what if they have joint custody and both honestly claim to have a right? And who does finally get the prebate? After all someone really is entitled. How do we adjudicate and investigate this without any bureaucracy? And that is but one example. I simply was pointing out that the FairTax advocates say they will need no bureaucracy, yet there are problems that will arise which will require the bureaucracy they claim to eliminate.

I did not say this one problem would require the bureaucracy, I was saying the sum total of all the problems I pointed our were.

7. 45 of the 50 states collect sales tax. The remaining 5 will adjust. In fact, they will probably benefit moving to a sales tax vs. an income tax in much the same way our country will benefit.

This one upset me. As a die hard advocate of state sovereignty, it irks me to see the FairTaxers adopt the "we know better than you" attitude. So, Delaware doesn't know what's good for it? Really? And what if they don't want a state sales tax, they still have to pay to collect the federal tax? And if some state refuses and takes the challenge to court? How do we deal with that one?

However, this is a symptom of what I mentioned earlier, the FairTax will not eliminate bureaucracy, it will simply shift those costs to the states and the SSA to hide how much it really costs. This shows how accurate that contention is.

8. On the prebate, I don’t see a better solution. If it stays true to its purpose it is excellent. I personally like the idea of only contributing to the government after I pay for the basic necessities of life. How to keep it true? Keep our heads out of the sand when it comes to anything related to taxes.

This simply does not answer my objection. We are turning every citizen into a welfare case. And my answer to his question about how to handle it, how about"no prebate"? Let's get over weeping about the plight of the poor and just say "you live here, you pay taxes", rather than creating a perpetual untaxed class who continue to vote for bigger government because it costs them nothing. That was how we got into the mess we are in, creating a class made up of over 50% of the populace who enjoy benefits far in excess of their cost, if any. If we all paid for the state in a proportional way, say as in a Flat Tax with no exemptions or income requirements, we would see a huge drop in calls for more government. Even better would be to leave it up to the states to fund the federal government and allow for 50 different taxation systems. That way we would probably have at least one example of how the FairTax really works, so we could see how close my predictions come to the truth.

9. FairTax would be our only “federal” tax to replace income/corporate/estate taxes. This is how it is written. A state has every right to add any tax that passes state legislation. I believe that states will all fall in line behind the FairTax though. It would be much more efficient rather than maintaining multiple tax collection avenues (property taxes will likely remain). For states that do continue with income/corporate taxes, they will be less competitive & will chase jobs/capital/prosperity to other states.

This just boggles the mind. Can anyone really believe that the law "as written" is the last word? He said earlier that the Flat Tax could be tinkered with, but, apparently like Dr.Adams, he thinks the Flat Tax is open to change, but the FairTax is not.

Yes, I know about the "16th amendment must be repealed" thing. But that just means that passing the bill will have no effect. Even if it somehow came to pass that both the FairTax were enacted and a constitutional amendment were somehow made, that does not mean income taxes are impossible. We had an income tax during the Civil War and after, all without the 16th amendment, so there is no promise repealing the 16th will end even income taxes. Plus, what prevents congress from adding a VAT on top of the FairTax? They can simply change the law. After all, that is what they do.

Of, if you really believe the FairTax prevents all new taxes, what about adding "fees"? Or "dues"? Or anything you can call taxes to make them something other than taxes? Does anyone think congress will pass the FairTax then justs it back and say "Whoops, guess we messed up there, now have to live within our means"? I have some doubts.

Well, that's it, my second reply, and my last. I will stop boring everyone with posting my comment replies in the blog itself.

I just want to point out before I leave that the FairTax supporters have an odd way of arguing. As I pointed out before, they are properly critical and somewhat cynical about rival proposals, but when it comes to the FairTax they are open to the most naive forms of thinking and accept excessively optimistic estimates readily.

I said it best at the end of my Dr. Adams essay:

[T]hey are comparing a fantasy to reality, and fantasy is winning. That doesn't really tell me much.

POSTSCRIPT

And, as I replied to yt_knight primarily through this post and its predecessor, I never did properly welcome him to the blog. So, welcome to the blog, yt_knight, and I do appreciate your comments. I may disagree with you, and I think you were unfair in your characterization of me, but I appreciate anyone who bothers to reply, and you were generally polite, which is appreciated. So, please come back again.

ADDENDUM

By the way, I hope all the FairTax supporters appreciate how much effort it took to take the space out between those two words. My hands continually added a space which I had to go back and remove. However, I have been scolded often enough by touchy FairTax advocates that I dare not include any whitespace in that name, much less forget the capital letters.

UPDATE 05/14/2008

I actually forgot something. In replying to point 2, I failed to mention the contention that it would "solve" medicare or social security. In reality it does nothing of the kind. As it stops independent funding of social security and medicare.medicaid, they now have to come out of general revenues. As I have seen estimates that even with independent funding those two would consumer something like 50% of the general revenues well before 2040, this "revenue neutral" scheme would mean that by 2040 we would have only half of the money we have available now, or less.

Of course, the die hard FairTaxers will talk of growth taking care of that, but it will have to be some pretty spectacular growth to fix social security and medicare. I wrote on social security before, but I don't think I ever mentioned that every simple fact that there really is NO fix for social security. The "fix" is to put it out of its misery and let citizens plan for their own retirement. I would happily write off my contributions if I could stop contributing tomorrow, and I am sure people even older than I am would do the same, not to mention those younger. We can support the remaining retirees out of general funds, maybe with some level of grandfathering, accept that we all took a bath on our past contributions, and just content ourselves with the fact that the nightmare of social security is finally over.

I know it sounds harsh, but short of destroying it once and for all there is no way to "fix" social security. It is a flawed system, involving the state where it should not be, and nothing is going to fix that.

And I will leave it to the reader's imagination to decide what I think of medicare and medicaid.

UPDATE

As I expected yt_knight did reply, and I replied to him. All of which can be seen in the comments, and I won't bother reproducing here. However, my final statement may be of some value, as it explains why I feel the need to comment on the FairTax:

As I said clearly, I do not want the FairTax to become the face of tax reform, as I think it is flawed and inferior to other options, so I do not want it ruining all prospects of other tax reforms being passed, should it ever be enacted and fail to deliver.

It is similar to how the overemphasis of NORML inside the libertarian party tarred libertarians as stoners for decades, I don't want the flaws of the FairTax to be attributed to anyone who argues for tax reform.

That, in a nutshell, is my motive. Ideally, I want to see state funding of the federal government, for reasons I made clear at the link above, and elsewhere in my blog. Barring that, I want a flat tax with no exemptions, no deductions, and no withholding. Quarterly checks form every person in America who earns even one dime. THAT will cause America to think about how much they pay in taxes, a hidden national sales tax, included in the price will not.

If you are curious what else was said, feel free to check out the comments section.

UPDATE

I have gone back and looked through my old writing and will admit I made a mistake in an earlier essay.

When I originally brought up the Indian reservation argument I was udner the mistaken impression that their sovereign nation status exempted them from federal taxation. I have since done my homework and established the fact that the feds can impose tax schemes on them, but I still think there is a problem there. As the reservations are still exempted from state sales taxes, there is no infrastructure or tradition there for using in "piggybacking" during the institution of the FairTax. As the reservations are big political contributors in certain states, I could see it being quite likely that some politicians would fight very hard to exempt the reservations.

Would it work? Who can say. As with the states which do not currently have  a sales tax, it would be difficult for the federal government to force upon them a system they do not embrace. I think the only way it would even possibly work would be for the government to establish its own bureaucracy, a thing the advocates claim would not happens.

And, once it was established, I think the other states would want it to handle their taxes too, as I just don't see the FairTax kickback covering the state costs, especially if the state must do fraud and compliance investigation as well. So, in the end, it is possible all fifty states, DC, Puerto Rico, and all reservations would be using a federal bureaucracy that the advocates claim would not exist at all.

But that is not my point. My point is to admit to my own original error. While I still think the reservation question is of interest, and I could easily see them being exempted, I now think other questions, such as foreign importation and how duties will be set, are even more interesting. But I did have an error in older posts, so I thought I should admit to that. It is not a big deal, but better to come clean than have someone else make a big deal about it later.