The Fair Tax Rate: So Last Century

Since its proposal, fair tax backers have continued to insist that a 23% rate is perfect. Yet in that time government spending has grown by trillions.

Some days ago, I wrote an article itemizing the strengths and weaknesses of a Mike Huckabee candidacy. I praised the former governor’s intelligence and civility – but worried about his attraction to the bunkum idea of a Fair Tax. Gov Huckabee replied with a full-throated defense of the plan’s merits. Huckabee finished second in the delegate count in the 2008 nomination contest. He has to be considered a front-tier candidate for 2012. The merits (and demerits) of a Fair Tax thus remain unfortunately very relevant.

So we return to the debate with a series of four posts on the Fair Tax plan by a leading student of the tax system, Hirschel Adler. In my opinion, he leaves the concept a smoking ruin.  Click here to read the entire series.

-David Frum

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In this last column, I have included a small list of additional problems with the FairTax legislative proposal, any of which are sufficient to reject the FairTax based solely upon the issue raised.

If an investor purchases a new home to rent to tenants, the purchase will not be subject to the FairTax. If a family purchases a new home for the purpose of living in that home, the family purchase will be subject to the FairTax. I refer to this as the 'family last' principle. A new home that would cost an investor $300,000 would cost a family $390,000. Needless to say, this is an idea with no defense and needless to say, enforcement after the buyer indicates that the purchase is for investment would be virtually impossible.

The FairTax provides that the federal government must pay the FairTax on its purchases.

Here is the calculation that would be made on the purchase of a B2 bomber: The cost of the bomber is $2 billion. The FairTax would be $600 million. The government would pay the contractor $2.6 billion, including the $600 million FairTax. The contractor would be paid $1.5 million to multiply 30% times $2 billion and the state FairTax administrator would receive $1.5 million to deposit the check and transmit the remaining $597 million to the federal government. Yes, that sums it up, the federal government would pay $3 million dollars for, nothing.

The FairTax provides that the states must pay the FairTax on all non-educational expenses. This additional cost to the states, which is probably unconstitutional, would need to be passed along to the individual states' taxpayers in the form of higher state taxes. This is a fairly new and continuing problem for the states as the federal government is continuing to add costs to the states' operations without the states being involved in the decision making. Given the current environment, the chances of a constitutional challenge by the states to this portion of the FairTax proposal is about one hundred percent.

The FairTax changes the calculation of self employment income so that any business which does not sell at retail would secure no social security benefits for its owners.

One must finish the discussion of the FairTax with a mention of whether the 23%/30% rate proposed would collect sufficient taxes or whether the rate would need to be much higher. The proponents of the FairTax are convinced the 23%/30% rate is perfect. Other economists have produced studies which indicate the rate has to be over 50%. This author will leave the economic studies to third parties and finish these four columns with questions about the rate required under the FairTax: Shouldn't it dawn on someone that since 1995 when the FairTax was first proposed and the FairTax rate was proposed at 23%/30%, that government spending and U.S. deficits have grown by trillions? Given the spending and the new programs that have been put in place in the intervening fifteen years, could anyone believe that the tax rate required for the FairTax has not gone through the roof?