As I have been writing a lot about the FairTax lately, I have noticed that few readers seem to understand one of my objections. As my reasons for objecting actually provide a good example of a more general topic, I think I will now explain why I find the prebate such a bad idea.

Now, I have several technical objections to the prebate which are not my subject here. I think that the costs of administering it will be exorbitant, unless we skimp on verification, in which case it will be rife with fraud and equally costly for different reasons. It also provides a vehicle for the state to create a replacement for the Earned Income Tax Credit (EITC). The EITC claims to be a "refund", but as the state is refunding taxes no one ever paid, it is, in reality a disguised welfare system. And I see that potential in the prebate, it could be modified to provide a bigger check for those at lower incomes, becoming an alternate welfare vehicle. Or, if not that, it could become means tested, with those above a specified income getting nothing, which would also effectively make it a welfare payment, rather than a "refund".

But people understand those objections, for the most part, even if they don't agree. And, if I am honest, those objections are secondary in my minds. The objection which is foremost in my mind is that the prebate makes everyone a recipient of government money, in effect, it puts everyone on welfare. As I said, most people who have commented, here and under the columns by professional pundits, have trouble understanding why this is so important to me. Often they object to my characterization of this as welfare, but even those who do not still don't see why I go on about this. It appears most people think that the fact that people get a government check is not, by itself, reason for objection.

Actually, before I start, I have to say that I don't really understand the prebate. The FairTax advocates argue that the 23% (or 30%, depending on how you calculate it) tax will be offset by the 22% decrease in embedded taxes. If that is the case, then the necessities the poor buy will cost no more than they do now. Since they will be spending the same amount, what is the point of then sending them extra money on top of that? If the FairTax really is offset, then it will not raise prices, so why the need to provide extra money as well? The prebate would logically only be needed if they expected prices to go up, but as the advocates claim they will not, or will only go up slightly, I don't see why there is a need for an additional prebate check.

Whatever the rationale, I still think it is a bad idea. Even if the FairTax were to increase prices by a full 30%, I would prefer that there were an honest welfare check to poor people rather than this check to everyone.

I know the FairTax advocates, and probably others, are stunned by that last statement. To their mind the prebate check is "just a refund", while a welfare check to the poor would be real welfare. As I am sure they do not understand why I would prefer welfare to a prebate, allow me to explain.

Perhaps I should start with another plan that sends a check to everyone, social security. Now, as I have said before, social security is not really insurance, but just a welfare benefit with payments based upon past earnings. Yes, the recipients have contributed, but that is the only way in which it resembles insurance. However, ignoring that, let us say that social security really is insurance. It is still a nightmare. By making everyone a beneficiary, it has created a program which can never end. Every recipient now thinks, "I deserve my check", and everyone who will eventually receive it think "they're getting their checks, why shouldn't I get mine eventually". There is simply no way to eliminate social security, as too many people are either recipients or potential recipients.

From social security, let us turn to the income tax system as it exists today. Thanks to withholding, and the excessive rate of withholding the federal government mandates, almost everyone receives a modest refund check after filing in April.  Certainly people complain about tax rates and the amount of money taken out of their checks every week, but for the most part they don't really feel the pain, as they never had that money in their hands. Instead, they see the refund check. What they fail to realize is the fact that they got a refund at all means they just made a year's worth of interest free loans tot he government. Instead, they see the government as a good guy who sends out a little gift at the start of summer (or when Christmas bills come due, if you file early). All thoughts of tax rates, interest free loans, and all other real issues disappear in the joy at getting a check from Uncle Sam.

A third example is federal flood insurance. I wrote about this before, twice actually, but not in this particular context. What is wrong with federal flood insurance is very simple, by creating insurance for a situation no rational insurer would underwrite, the government has created the impression that it is something that should be done. You can hear it whenever you suggest eliminating the federal program. "Who would do it," comes the reply, "if the government didn't?" To which the proper answer, that no one should do it, is never given. By insuring the uninsurable, the federal government created the impression that something should be done which shouldn't.

As disparate as those three seem, they explain what is wrong with the FairTax's prebate. The three simple rules they illustrate explain everything.
 

1  Any program with too many recipients will never go away.
2. Receiving a check can make people forget a lot
3. Once the government starts doing something, people assume it should be doing that

Well, perhaps that isn't as clear as I had hoped, so allow me to explain a bit more.

Basically, once people start receiving the prebate checks, they will come to see them as a right, something to which they are entitled. Yes, it will be initially tied to the poverty level and the tax rate, but in practice it will also have a floor not written into the law. Should the tax rate ever decline, I doubt any politician would have the nerve to drop the amount of the prebate. You can argue people would understand all you want, but in reality no politician is brave enough to cut a regular payment upon which people rely. The prebate will ratchet in only one direction, upward. Political reality forces that. Especially when absolutely every voter is a recipient. Welfare was received by only a small minority, yet took thirty years to reform, imagine how hard a reform will be if it will hit every single voter.

The prebate will also make tax rate increases easier, especially when combined with a tax hidden in the final price. Of course the government will announce an increase in the rate, but they can sell that easily enough by mentioning the accompanying increase in the prebate checks. Once larger checks come in, many will forget all about the other side of the tax increase. And, as the tax is embedded in the final price, rather than added on as a sales tax is, they are even likely to blame greedy store owners or manufacturers rather than Washington. After all, the tax per gallon is printed right on gas pumps, yet people still blame oil companies, so don't doubt this will happen.

Another problem is that the prebate itself will take on a life of its own. As I said earlier, it will be impossible to cut the rate, but that is not all. Once we have a prebate in place it will be almost impossible to suggest any tax system which does not include a similar check. Even should the prebate make no sense, such a sunder a flat tax system, the public pressure to continue the prebate will survive the FairTax. Even should we decide another tax system makes more sense, because people will become used to the check, and with so many recipients, we will be stuck with the prebate no matter what system we adopt.

And that is why I call it putting everyone on welfare. The prebate may start life as refund of taxes paid, but that will not last long. After a very short time it will simply become an entitlement, impossible to reduce or do away with. And, making it much worse than other welfare, as everyone receives it, it will be virtually impossible to start any movement to eliminate it, the numbers just make that impossible.

Of course, there are other, less tangible arguments as well, such as my general opposition to making people view the government as a source of money, or of allowing people to get used to handing the government money which is then handed back to them. I think all of those set bad precedents which allow the state to grow and arrogate more power to itself.

But even if we ignore those objections, I think what I said above gives more than enough reason to worry about the entire prebate design.

UPDATE

I forgot to include some links in the original article. I have now corrected that.

I also see that yt_knight has posted a response to this. I have yet to read it, but if there is anything to which I wish to reply, I will add it to the end of this article. Well, provided it is not absurdly long. If it takes too much space, I suppose I will bore my readers with yet another post on the FairTax.

I promise I will write about something else sooner or later. I did manage one about McCain yesterday. And that one about laws against low prices. And even one about how much I hate people who call others "sheep". So not all FairTax.