My previous post argues that the FairTax is being sold by looking at the most optimistic of estimates and that little thought is being given to what it would mean if their estimates are wrong. As I am writing this immediately after, I have no responses yet, but I can anticipate one already. "What does it matter? It still has to be better than what we have." To which I have to voice disagreement.

You see, we know both the best and worst of our current tax plan. At worst, we get a highly progressive structure of rates which causes economic stagnation. At best, we flatten out the brackets, keep rates low, and have a relatively efficient system. (Despite the claims of the FairTax advocates, our system, when running well, is hardly a nightmare. It could be improved, but it is not as bad as the hyperbole would make it seem.)

So, since the FairTax advocates have painted the best scenario, perhaps even a scenario better than is actually possible, the question remains, what is the worst possible outcome?

The first possible problem is with the "elimination of bureaucracy and compliance costs". As I have argued before, it is likely the compliance costs will be much higher than expected. Coordinating state collections, investigating fraud and non-compliance, arbitrating questions about the law, validating prebate recipients, investigating prebate fraud, administering the prebate, and so on will require more bureaucracy than many would admit. All meaning that any projected savings from eliminating the IRS would evaporate.

A second problem is that the WTO may disallow the piggyback tax on imports to bring them up to FairTax levels, calling it a hidden tariff. If this is the case, then overseas shopping becomes much more viable, at least for expensive items. This will cause a large loss in anticipated revenues. Add to this the possibility of massive tax avoidance, using schemes I and other have proposed, and you can see yet an additional loss of revenues.

And then we have unanticipated economic losses. I have mentioned a few examples, such as the loss of protective tariffs destroying entire industries, but I am sure there are possibilities I have missed. As we are considering the worst case, it is possible that the sudden change to tax structures could render any number of industries non-viable, or at least a lot less profitable. Industries which exist solely because of favorable tax laws, or industries used as tax shelters may end up disappearing. Whether in the long run this is economically good or not, it still means for the moment the economy will have lost those industries for the moment, with commensurate loss of revenue and jobs.

To which we can add a few other odds and ends. For example, there could also be a reduction in revenue due to slowing spending, as the 22% embedded taxes, not being evenly distributed, do not offset the increased taxes completely on specific items. Or there could be more extensive prebate fraud than anticipated. We could also see things such as a flight of seniors to Mexico or other retirement friendly nations, as they worry about the consumption tax eroding their savings.

If we posit this loss of revenue, coupled with lesser than anticipated savings, then we are confronted with three options. We could slow spending, which would never happen, we could raise the FairTax rate, or we could add another tax. As raising the FairTax rate could cause even greater reductions in revenue as spending slows more, likely the response would be to add a new tax. Either an income tax which avoids the need for the 16th amendment,  such as we had during the Civil War and after, or the return of other taxes which the FairTax was meant to eliminate.

So, in the absolute worst case, the FairTax would leave us with a much diminished economy, reduced federal revenues, and almost all the taxes we had before the FairTax, with the FairTax added as well.

Admittedly, that is, as I said, the absolute worst case. But we need to look at that. When deciding on something it does no good to look only at the best outcomes, we need to examine the worst as well. Looking only at the best is how people end up in bad marriages, people end up in bad investments, and individuals lose their life savings in Vegas. The best outcome is good to know, but we need to know the worst case as well if we are to make an informed decision.

Which is what troubles me about the entire FairTax debate, this is the first time I have seen anyone postulate a worst case scenario. For all the doomsday talk about our current tax system, all the descriptions of how destructive it is, not once has anyone asked what the worst outcome of the FairTax is.

I know I have said this over and over, but it bears repeating, before we make a change, we need not only examine the best outcomes, but the worst as well. And I have not seen that done concerning the FairTax.

POSTSCRIPT

By describing our system as not so bad early in the essay, I imagine I surprised many. Still, looking at it overall, it really isn't as terrible as many would suggest. It clearly could be improved, and is far from ideal, but it is not a crisis in need of urgent repair.

Yes, all the arguments against it are true. The rules are overly complex, there are far too many small taxes where the administrative costs eat up too much of the revenues. It is weighted heavily toward  favoring certain industries. But even considering all those factors, it manages to collect a large amount of money without too many difficulties.

Would I change it? Of course. Would I choose it as a system if given an alternative? It depends on the alternative.

My only point in saying that it isn't so bad is this: Provided we avoid idiocies like a 90% top bracket or 50%+ capital gains taxes, our current system does not so greatly harm the economy that we need to change it immediately. It is efficient enough that we can take the time to evaluate alternatives and not jump at the first new theory to come along.

It is far from perfect, but waiting a while before we decide on an alternative will not bring doom upon us.