Apparently yt_knight responded to my critique of his essay on the essential features of a tax system yesterday, but I only noticed it now. For those who have not seen the earlier installments, I am providing links to essays on both sites at the end of this response.

Basically, yt_knight took exception to some of my criticisms of the FairTax. This is not a new position for me, a look at my blog index will show that I spent quite a bit of time last year criticizing the FairTax when it was in the news more regularly. However, with the end of Huckabee candidacy I had largely ignored the FairTax, since it had dropped from the headlines. Only with the publication of the new FairTax book, and a commentary by Mike Adams, did I find myself mentioning it again, which brought about this ongoing debate with yt_kinght.

Before moving into my specific response, I do want to address one issue yt_knight raised which is involved in several individual items. When I suggested that while reforming taxes we should reform spending as well, yt_knight , rightly, said that it was unrealistic to expect both spending reform and tax reform to pass at the same time. However, he then followed that up by dismissing my objections about WTO sanctions with idealistic rhetoric about sovereignty.

We must decide whether we are discussing an ideal or a realistic solution. If it is an ideal, then I will accept that we can ignore the WTO as it can be replaced with alternate international trade agreements. However, if that is the case, then my call for spending reforms is valid as well. On the other hand, if we are dealing with reality, then I must accept that it is unlikely we will get significant spending reforms along with tax reform (though it is possible), but we also have to deal with WTO rules and the rest of the world as it exists today.

I would point out that, given that his whole plan requires the repeal of the 16th amendment¹, realism may not be the best approach for a FairTax advocate, but, for the moment, I think realism is the approach I shall take. While I am still planning to discuss how to evaluate a tax plan in the abstract, I shall not criticize his positions from the perspective of an ideal tax system, but of the best possible plan we can realistically achieve. It does not make a huge difference, but it will change things slightly.

I would also like to address one other statement. As before yt_knight accuses me of making irrelevant arguments by arguing semantics (previously he accused me of pointlessly "knocking holes" in theories). I disagree. My distinction, for example, between simple and consistent is very important. Likewise, there is a huge difference between saying a tax system should remove as little capital as possible and a tax system should "build capital". Simple and consistent are VERY different things. And tax systems can NEVER add money, only take it away. The very fact that people forget this simple truths leads to bad arguments. So it is not arguing semantics to remind people of these facts. It is urgent that we recall the truth behind the words we say. If we start thinking taxes can create wealth we are prone to follow a very dangerous course. Similarly if we confuse simple and consistent we may overlook valid options because they are not simple enough. Pointing out truths is not "arguing semantics".

Lastly, I did not pit his "objectives against a system of no taxes whatsoever". Read my post and see for yourself. I simply evaluated his system on its own. We do not have to compare a system to another option to see what its flaws and strengths are. By yt_knight's logic, I would have to bring a healthy person to the doctor's office to provide a model. We can assess plans in isolation, and that is precisely what I did. I do not disagree with his statements because of some "semantic" argument, or because it was unfairly compared to a system of "no taxes", but because things he proposed either are not essential to a tax system, are simply wrong, or would cause undesirable economic dislocations. But you will hopefully see that in my response below.

And having said all that, let me jump into the specific points.

1. Simple - yt_knight agrees with my call for consistency, but sticks with his call for simplicity as well. Again, this is not a requirement for a tax system. As I said before, absolute confiscation at gun point is simple, yet horribly unfair. And a very complex system could be fair. From the viewpoint of efficiency, if added complexity generates enough revenue to offset the cost of that complexity, then it makes sense. So I just do not agree that simplicity is essential. I care about fair, about keeping taxes collected as low as possible, about doing as little harm to the economy as possible. If those can be done simply, fine. If not, then I don't care about simple. It simply is not an essential trait.

2. Maintain funding level - Since I adopted a realist approach, I will agree that we cannot see a significant drop in revenues if we hope to pass a tax reform. On the other hand, I have argued before that there is no guarantee that the FairTax will not see a drop in revenue. There are a lot of assumptions built in, including that spending will remain relatively flat, as the 23%/30% tax will be offset by removing 22% of embedded taxes. But as I argued before, that "offset" will not be evenly distributed, meaning the impact could be greater than anticipated. As I asked before, I would like to see an impartial accounting of the numbers behind the "revenue neutral" claim. However, ignoring the specifics of the FairTax, as I am adopting a realist position, I have to agree, by definition, that maintaining revenues is a necessary goal, but only because we so defined the realist position.

3,4,5,6, & 7 - These all relate to capital formation, investment, foreign trade, and so on. I am going to lump them all together as they all relate to one another.

As these have been reworded I have no objection per se. However, again, I think that the focus on capital to the exclusion of consumption is essentially to substitute one mistake for another. The old system emphasized spending by penalizing capital formation, and the focus of the new is on capital formation at the expense of consumption. I would much prefer a system which did neither. Both consumption and production are essential. By penalizing production, the current system harmed the economy, but I would argue that by penalizing consumption the FairTax will cause harm as well. Consumption cannot continue without production, but without consumption, production ha snot purpose. To focus on either is a bit of a mistake. It is far better to penalize neither activity.

However, that is a minor argument. If the FairTax folks wish to emphasize production and capital formation at the expense of consumption then so be it. I will not say that this focus is essential to any system of taxation, but I won't say it makes their position invalid.

As a bit of a postscript, I would renew my objection to the proposed handling of foreign trade. The bill says the difference between any tariff and the FairTax will be added to imported goods. As we are being realistic in our assessments, then I am right to mention that this would trigger WTO challenges by other nations who would rightly claim it is a hidden 30%² tariff. Most likely we would either have to drop this provision or face serious penalties in foreign trade. And, if we drop this provision, then my worries about overseas trade as a means to circumvent the FairTax are once again valid.

8. Privacy- I still fail to see the worries over privacy, but even granting that privacy is a valid concern, yt_knight fails to see that he contradicts himself. He says that the current system requires too much information, but he does nto see that the FairTax does as well. By myopically focusing on the wage earner, he does not see the burden placed on every seller, big and small, to report every single transaction.  Nor do I think the FairTax will be any more fair in judging those collecitng taxes. He claims citizens are now "guilty until proven innocent", I argue under the FAirTax the same will be true of businesses charged with collecting taxes. So I think the gains he sees come solely form either ignoring business or else simply not caring about anyone but wage earners.

9. Transparency- I simply do not understand what yt_knight is saying. He mentions programs being put on the spending side of the ledger, but I can't understand what he is thinking. My original argument was that because of deficit spending, no tax system will make government costs transparent, and I can't see how the FairTax, or any tax system, cures this unless we eliminate deficit spending as a regular practice, which nothing short of a constitutional amendment would do, and even then likely some way around it would be created. So I just don't get his point here.

10. Social Mobility - Here yt_knight trots out the silliness about the FairTax allowing people to "choose when to be taxed". Well, yes, people can opt to buy only necessities to avoid taxes, but under the current system they can opt for a subsistence wage to avoid taxes as well. This is not a strength. The FairTax is no more voluntary than an income tax. Both can be avoided by making unpleasant changes to your life. That doesn't make it voluntary. Sailors could avoid the press gangs by blinding themselves, but that didn't mean people caught by the press gangs were volunteers, and the fact that not spending lets you avoid a sales tax does not make the sales tax voluntary³. Beyond that, I really don't think "social mobility" is something we should consider when planning a tax system. I still stand by my 6 points.

11. employment costs - yt_knight misses my point here. He is thinking his system "lowers the cost of employment" because it is lower than other tax systems. We are not comparing the FairTax to the current system. We are comparing it to a lack of taxes. I don't care that it is lower than what we have now, I care only what it does on its own. And consider ont heir own merits, no tax system lowers the cost of anything. yt_knight insists on arguing the FairTax against what we have now, when he should be arguing it on its own merits. His position is akin to calling myself a genius because I am smarter than the guy with a head injury. Good and bad can be evaluated on their own, without comparison to something else. Which was the reason for all the "non-employment" material he found confusing. I was arguing that taxes do not reduce the cost of anything, to make clear that we were discussing taxe sont heir own, not relative to other taxes. Of course his tax is cheaper than some others, and probably costlier than others as well. So what? We are asking about the merits of this system on its own, and when viewed on its own, no tax will reduce any costs.

12, 14, and 15. These are more capital formation and job creation ones and I have dealt with that above.

I would point out one thing that is obvious from yt_knight's examples. He thinks new businesses cost a lot more to start and that capital is a lot more scarce than it is. He seems to have something of a crisis mentality, as shown by his runaway stagecoach example, which may explain this, but I find it odd that anyone could have lived through the start-up frenzy of the 1990's, who says he is a software developer no less, and think that our current system has destroyed small business. Our system may hamper capital formation, but it is hardly as dire as he would have readers believe. Then again,  one of his earlier arguments was "things are so bad, wh6y not just try the FairTax". Either a gloomy outlook is at the root of his faith in the FairTax, or else he has adopted a gloomy outlook as a tool to promote the FairTax. IN either case, I have to disagree. Things are not so bad. Even compared to the 1970's we have it quite easy, much less compared tot imes of true economic hardship.  Conditions are far from ideal, but they are nowhere near as bad as many say.

13. Equitable treatment - I think we agree on this. Though obviously not on some of the specific applications I suggested, but we can argue those where relevant.

14-15. See above

16. Tax Planning - He still does not answer my contention that no plan short of a straight capitation tax will be free of tax planning. Even a poll tax allows the vote/do not vote planning option. As long as a plan offers means of reducing one's tax burden, there will be tax planning. And as far as I can tell, the FairTax does precisely that. Especially with all the exempt categories (new/user,wholesale/retail), it opens up planning options in areas such as materials purchase, where tax planning is not currently an issue. But yt_knight did not really reply to my contention, so I will simply let my previous comment stand.

17. Easy to administer- yt_knight seems to think I am arguing "for the sake of argument". Far from it. I simply say that simplicity of administration is not essential. If complexity produces better results, should we reject it because it is complex? Is Ptolemy better than Kepler? Or Newton better than Einstein?  Complexity is not in itself a bad thing. And that applies to taxation as well. A complex system may be more equitable and efficient than a simple system. So I am not willing to say simplicity is essential. Nor will I say that "ease of administration" is essential for the same reasons.

18. Social Security - As we were talking about taxation systems in the abstract I did not mention social security and medicare. Also, I would argue with yt_knight they ARE NOT part of the tax system as they are collected independently under their own laws. According to the state they are premiums contributed and not taxes. Obviously, I do not believe that, but the state does, so changing them would require separate laws, they cannot be handled as part of income taxation, or any other tax plan.

I would also argue that they cannot be fixed, even by the FairTax. Despite the claims that the FairTax will spur growth, I cannot see how even under the most optimistic of assumptions the FairTax will cover ever increasing liabilities with a shrinking pool of contributors. The "fix" for social security is elimination, anything less is just a band aid, even the FairTax. So I chose to ignore them as distractions from the question of a tax system.

However, if anyone cares to show me how the FairTax will not only make us rich but continue to fund Social Security out through 2050 or so, be my guest. As the FairTax is "revenue neutral", and the estimates are that a bit after 2050, social security and medicare will require over 10% of GDP⁴, I don't see how this revenue neutral plan fixes anything. Even with the overly rosy growth picture the FairTax proponents espouse, the combined cost will still be at a minimum 7-8% of GDP, which means that the FairTax will need to take a lot of revenue to balance out this picture. I don't think the 23%/30% will be enough to capture 15-20% of GDP we will require for social security, medicare and all normal government functions.

Well, that's it for my response. I still would prefer to ignore side issues such as social security and medicare, as they are not central to taxation and introduce other legal issues that muddy the waters, but if yt_knight insists, I will deal with them as well. However, I would much prefer we stick to questions of taxation proper.

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1. This is the one provision that places the FairTax firmly in the category of fantasy. The bill as written requires the repeal of the 16th amendment before it becomes active. Not only does that mean the bill will almost certainly remain a dead issue for the foreseeable future, but it is also useless. The FairTax advocates seem to forget that the US had an income tax during the Civil War and after without the benefit of the 16th amendment, meaning its repeal would not prevent someone layering an income tax on top of the FairTax. It would have certain technical differences from our current income tax, but it is still possible. Which means the requirement not only keeps the bill from every coming into effect, but is also a failure as a safeguard against a revival of the income tax. Not to mention the fact that it does not eliminate the FairTax if a future amendment effectively restores the 16th amendment. Unlikely, but still possible as well.

2. In this case it is appropriate to call it 30%, as tariffs are traditionally measured as increase in cost over untaxed amount. Whatever one thinks of the FairTax's argument for calling this 23% (and my opinion is recorded elsewhere), when foreign nations view the amount added by the FairTax, they will consider the Tariff plus FairTax to be a total 30% tariff.

3. I read two truly voluntary taxation scheme in an objectivist book some years ago, I don't recall whcih one, nor do I remember who was writing. However,t he two schemes were a national lottery and a contract enforcement fee. Both seemed good ideas, though the second is unlikely to be politically viable. I would add a third, a poll tax. If you want to vote, you pay the fee, but otherwise not paying taxes ahs no consequence. Essentially, it is payment for the right to participate in politics.

4. Another thing to keep in mind is that the trustee reports have, in the past, not been the most accurate predictors of actual costs. Especially with our limited experience with part D, I think this one may seriously underestimate future costs. But even assuming ti is reliable, it suggests that FairTax or not, we will need a big chunk of cash to pay for everything we are promising seniors.

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NOTE

Here is the list of articles from my blog. Originally I had intended to include yt_knight's responses on his own blog as well, but I felt a bit presumptuous choosing which were relevant and which were not, so I will leave it to yt_knight to cite those articles he considers significant on his own blog.

Short Reply to Doctor Adams
Revisiting the FairTax
A Very Brief Reply to the FairTax Advocates
Reply to FairTax Comments
Reply to FairTax Comment II
Why Do I Bother?
Making Taxes Hurt
Reply to FairTax Comment III
What Is Wrong With A Prebate?
Why Argue
Ch-Ch-Changes
Imports and the FairTax (One Issue)
The VAT Versus The FairTax
The Runaway Stagecoach
A Partial Reply to yt_knight
Truths About Taxation