I knew one of my FairTax posts would eventually draw comment from the FairTax supporters. I am glad that the response was polite and temperate, as some I have received in the past were not. Since it was a good example of the arguments raised for the FairTax, and as it needs a reply longer than I can give in the comments section, I thought I would respond here, not only because the author deserves a complete response, but since I think it provides a good opportunity to respond to some common arguments for the FairTax.

Since I doubt anyone will follow the link to the original comment, or the original article, I will reproduce

Before I begin, let me say that yt_knight wrote a very temperate response, and for that I am grateful. I do hope he is a good sport about being used as an example. I do have to say that his response was generally reasonable and well thought out. In only two places does he fall back on the common FairTax argument of "the current system is so bad that ours must be good." Otherwise he actually does bother to argue the merits of his position. So, without any additional comments, let me start.

Regarding the tax collecting bureaucracy… how does eliminating several hundred million annual tax returns that are highly complex with multiple tax documents (W2s, 1099s, etc.) and 66,000 pages of tax code (mortgage interest this, charitable deduction that, etc.) to validate against compare to collection of simple consumption tax reported by, maybe 30 million businesses? The FairTax leverages collection infrastructure that is already in place in 45 of the 50 states.

This is actually a fair use of the current system, as I was saying that the new system would require a bureaucracy larger than the current one. However, it is still incorrect. It overlooks not only the prebate and fraud investigation, it neglects the fact that all those state agencies still need to be coordinated by a federal agency. I worked at the Department of Labor compiling information from state agencies. There are 50 state agencies there as well, yet that did not mean the federal agency was any smaller. I also simply do not agree that the new/used or retail/wholesale distinction is as easy to manage as the proponents claim. If there is any confusion there, then the need for workers to adjudicate, investigate and audit is increased dramatically.

On the countless ways to defraud… Would that be countless more than gaming the 66,000 pages of existing tax code that when given the same tax scenario to 10 different CPAs will yield 10 different tax returns? Try defending the current tax code with the arguments that you put on the FairTax…

Now, this is NOT a fair use of the current system. First, and primarily, my argument that fraud was possible under the FairTax was a reply to the statement often heard that the FairTax will end non-compliance and tax fraud. As the proponents claim fraud will not exist, I simply show them they are wrong. I am not claiming any strength or weakness relative to the current system, so bringing up the current system is improper here, and simply an attempt to use the weakness of the current system, and the anger it engenders, to obscure the main point, which is that fraud will continue under the new system, despite claims of the advocates.

However, as it was asked, I will answer the question. Fraud will actually be EASIER under the FairTax for one reason. Currently taxes are tracked for each individual. If you pay no taxes, someone will notice. Under the new system, the taxes are tracked based on transactions, and are anonymous. That may be a good thing for privacy advocates, but for fraud prevention it is a nightmare.

Here is a simple example: I open a "catering business" on paper. From that day on, every item of food I buy is tax free, as I claim it is for my work. The tax agency only sees that a number of food purchases were made without taxes, they have no idea who made them. They also have no idea if I made other purchases where I paid taxes or not. In other words, they cannot tell that I have never paid tax for food in my life, yet I can continue for years getting a 23% cost break on all my foodstuffs. Considering the minimal risk, and the exceptionally low cost of creating a fraudulent business, it would be a very popular deception.

On prebate administration – the FairTax will leverage infrastructure already in place at the Social Security Administration.

First, my fear of the prebate is not just administrative costs, but that it will make every American a welfare recipient. But on the other hand, does yt_knight really think that they can "leverage" this information cost free? If so, then why do we pay for the VA? Or the state department of social services? They are not huge bureaucracies because of a lack of "leveraging".  The SSA is designed to serve its purpose, not the issuance of prebates. The mechanisms of qualification are completely different. Even if they incorporate it into the SSA, it will take still take a massive bureaucracy to send out checks, validate claims of eligibility from 300 million people, investigate fraud, decide things such as which parent gets the prebate in joint custody and so on. The only way the prebate checks could be issued "simply" is to allow massive fraud, any attempt to prevent fraud will require a huge bureaucracy.

I would also add that, as social security is about to go broke, I think tasking them with yet another function may not be such a great idea, but as there are plenty of other reasons to doubt that this will work, I won't go into that for now.

On your modifying argument… it is a matter of dials and controls. The two dials and controls that are available in the FairTax are (1) the tax rate and (2) the poverty level. The FairTax is designed to tax only once at the end consumption of new goods and services. It is much harder to hide tax advantages to special interests on the consumption side.

With a Flat Tax, the rate is still a dial/control that can be adjusted… what about tax credits though? It would be much easier for the government to create tax advantages for those who may donate to their campaign funds. Again, I just don’t see how you hide tax credits on the consumption side. If you give certain businesses consumption tax exemption you are saying that ALL who consume with that business get the advantage and the business itself would gain a competitive advantage but this would be very transparent instead of hidden on the income side.

I think yt_knight missed my point somewhat. In the post to which he is responding, I argued that Mike Adams said the Flat Tax could be manipulated while the FairTax could not, and that is simply wrong. As written both laws have only a few "dials". The Flat Tax allows no exemptions, and the FairTax requires a single rate on all retail, new goods. The problem is that the law can be changed. Suddenly the Flat Tax could have exemptions, or the FairTax could have more than one rate for different categories of goods. The Flat Tax could suddenly develop income brackets, but the FairTax could develop exempt goods.

My point is that all proposals are simple, but to argue that congress could not manipulate YOUR system as easily as it could others shows either a lack of imagination or a willful blindness. They are both subject to just as much manipulation. The FairTax advocates cannot be so naive that they think their bill will be the one law congress never touches, so they must be willfully blind. Every law starts out "simple" and "impossible to change" and we have seen how well that turns out. The FairTax is no different.

If it is, please tell me how. I have yet to see any argument that convinces me there is no way to change the FairTax to, for example, turn the prebate into an EITC type welfare in disguise, or create multiple tax rates. In fact, by requiring prices be displayed "tax inclusive" the FairTax actually makes the final scam easier.

But let us move on to his conclusion (for those who followed the link, this is the second comment).

No tax system can be 100% perfect. There will always be people who cheat or try to game the system. It just seems very clear to me that it would be much more difficult under the FairTax. I am in software development. When old systems with thousands (or millions) of lines of code are no longer efficient (supportable, maintainable, scalable) it is time to re-write the software using today’s understanding of technology. The same can be said of our 100 year old tax code. It deserves a funeral not life support. 133 pages of FairTax code will be a great replacement and a great thing for our country.

Peace,

YK

The first sentence is unobjectionable, there are problems with the current system.  And the rest is relatively unobjectionable as well. I was in software development until recently, so I agree it is often time to start over. However, before starting over, it is important to see if the replacement is not only better than the current system but also that it is enough of an improvement to make it worth going through the headaches of replacement. We also need to determine if it is the best possible replacement. And that is where I think the FairTax fails. It is not even as good as the Flat Tax, much less other alternatives that are not even being considered.

But that highlights a problem I have noticed with the fair tax, the same problem as the second paragraph of yt_knght's reply. When confronted with arguments against the FairTax, sometimes rather than reply they simply point out flaws in the current system or argue that the FairTax is better than the current system. In the worst form, it takes the shape of the response "Oh, so you must like the current system, huh?"* Obviously, yt_knight did not descend to that level, but his arguments about the fraud potential of the current system are of a similar nature. The failure of our current system is not an argument for the FairTax. A cold is better than cholera, but that does not make a cold good.

Which returns me to my original argument. The advocates of the FairTax tend to over sell their plan and promise everything to everyone. It will stop fraud, it will tax everyone, it will not reduce federal revenue, but we will all have more money as well, it will stimulate the economy without requiring any cuts in services. It promises so much that it would be impossible to fulfill all the promises they have made. I know they say that "experts" have show it to be true, but experts have show a lot of falsehoods to be true.

Let us just look at one part. It will not reduce federal revenue, but we will all be richer thanks to lower "compliance costs". That should make everyone skeptical. As I argue above, the FairTax can only promise this as it relies upon the SSA somehow distributing prebate checks, without any checks to validate recipients, and without increasing costs, while the collection is done by the states without any federal oversight. In other words, for the FairTax to deliver on its promises it requires every one of its overly optimistic estimations to be true, as well as relying on shifting costs to the states or other branches of the federal government, essentially hiding the real costs.

I don't want to trust my future to faith in a lot of exceptionally optimistic, and quite unrealistic, predictions.

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* A variation on this is Boortz's question "If we had the FairTax and someone proposed our current system, would you switch?", which only proves the FairTax is better than switching to the current system. It does not even show that it is worth the costs of switching to the FairTax form the present system, as change always entails some costs. Much more important, it does not show that thew FairTax is superior to any other possibility. As I said above, proving the FairTax is better than what we have does not prove we should switch tot he FairTax.

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POSTSCRIPT

As I was writing this, yt_knight responded to another of my posts on the FairTax. I have not yet read all of it, though I see he accuses me of being "bent on opposing the Fairtax". That is a bit amusing, as when people accuse their opponents of being "bent on" something, rather than having reasons for a principled opposition, it tends to show that they have a more emotional than rational commitment themselves, but we shall see.

If the arguments are interesting enough (they are certainly long), I may write a follow up.