Why the Fair Tax "Money Back Promise" Won't Hold Up

The fair tax proposal to give families a tax "prebate" covering taxes spent on household necessities, might not work without a massive dose of bigger government.

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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The FairTax's most unique proposal is a 'prebate.' Under the prebate proposal, every family unit in the United States would receive a monthly payment from the federal government “covering taxes on all basic household necessities”. It would only be paid to lawful residents.

There are three major problems with the prebate as proposed: (1) The calculation proposed in the statute does not work. (2) Making sure there would be no fraud would cost a fortune and given the federal interest in border security, we might find the federal government has no interest in preventing fraud, and (3) most taxpayers could not imagine anything worse than the federal government issuing 100 million checks a month, more than one trillion checks a year.

The prebate does not cover the FairTax on one hundred percent of all basic household necessities. The prebate provides for a 23% payment based upon the expected purchases at the poverty level. As the FairTax is calculated on a "tax inclusive basis", to cover the FairTax at the poverty level, the simple math requires a payment of 30% for the prebate. This is a big 'oops' in that a single person would receive a prebate of $2392.00 on poverty level purchases that would include FairTaxes of $3106.00. Whether either the prebate or having the federal government pay 100% of everyone's FairTax until there have been purchases equal to the poverty level are made is a good idea or not, the promise that the prebate covers 100% of these taxes is a huge pillar in FairTax sales pitch. That promise is not fulfilled. (This could be remedied by redefining the calculation of the poverty level amount or providing that the prebate is 30% of the poverty level purchases.)

Insuring that the monthly prebate payment only goes to legal citizens and not to illegal residents, scammers and dead people would take an army of administrators. Insuring that the federal government "does its job" with respect to enforcement is a fairly new but important consideration for any new law.

While there are other serious technical issues with respect to the prebate, the last question I have with the prebate is "Who wants the federal government keeping track of where every legal American is every month? Who wants the federal government creating another huge entitlement program? Who wants the federal government issuing an additional billion checks or deposits a year?

More to come...