FAIR TAX BLOGBURST 08-02-06

by TD of The Right Track

with special thanks to KnightHawk of Your Two Sense

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Laurence J. Kotlikoff has written an article published by the Federal Reserve Bank of St. Louis Review in which he predicted bankruptcy for the United States -- unless serious reforms are put in place to raise revenue or cut spending.While it's hard to agree with all of Kotlikoff's conclusions, one in particular is worth examining. According to Kotlikoff, his proposed policies would put America on track to eliminate the nation's "enormous fiscal gap" and avert bankruptcy.

Here's a summary of his plan (page 12 of the PDF file linked above):

The three proposals I recommend cover taxes, Social Security, and healthcare and are interconnected and interdependent. In particular, tax reform provides the funding needed to finance Social Security and healthcare reform. It also ensures that the rich and middle class elderly pay their fair share in resolving our fiscal gap.

And what of the proposed tax reform? What form would it take? Apparently, Kotlikoff likes the FairTax:

The plan here is to replace the personal income tax, the corporate income tax, the payroll (FICA) tax, and the estate and gift tax with a federal retail sales tax plus a rebate. The rebate would be paid monthly to households, based on the household’s demographic composition, and would be equal to the sales taxes paid, on average, by households at the federal poverty line with the same demographics.

The proposed sales tax has three highly progressive elements. First, thanks to the rebate, poor households would pay no sales taxes in net terms. Second, the reform would eliminate the highly regressive FICA tax, which is levied only on the first $90,000 of earnings. Third, the sales tax would effectively tax wealth as well as wages, because when the rich spent their wealth and when workers spent their wages, they would both pay sales taxes.

The single, flat-rate sales tax would pay for all federal expenditures. The tax would be highly transparent and efficient. It would save hundreds of billions of dollars in tax compliance costs. And it would either reduce or significantly reduce effective marginal taxes facing most Americans when they work and save.

The sales tax would also enhance generational equity by asking rich and middle class older Americans to pay taxes when they spend their wealth. The poor elderly, living on Social Security, would end up better off. They would receive the sales tax rebate even though the purchasing power of their Social Security benefits would remain unchanged (thanks to the automatic adjustment to the consumer price index that would raise their Social Security benefits to account for the increase in the retail-price level).

The sales tax would be levied on all final consumption goods and services and would be set at 33 percent—high enough to cover the costs of this “New New Deal’s” Social Security and healthcare reforms as well as meet the government’s other spending needs. On a tax-inclusive basis, this is a 25 percent tax rate, which is a lower or much lower marginal rate than most workers pay on their labor supply. The marginal tax on saving under the sales tax would be zero, which is dramatically lower than the effective rate now facing most savers.

While Kotlikoff's tax-inclusive rate is a couple of percentage points higher than that currently being proposed in the House and Senate Bills, the method is identical.

The arguments for the FairTax just keep coming in. That's because the FairTax is the best thing for America with regard to serious taxreform.

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Just an FYI, KnightHawk also published the results of a ballot initiative on the FairTax from three metropolitan Atlanta counties. The question was only on the Republican ballot (aren't Dems for the FairTax?), and only in the three Atlanta-area counties, and it was non-binding. It was meant to gauge reaction to the FairTax. The results:

Gwinnett County:
Total Votes: 35,755
Yes - 31,068. 86.9% / No - 4,687 13.1%

Cobb County:
Total votes: 39,458
Yes - 33,598. 85.15% / No - 5,860. 14.85%

Fayette County:
Total votes: 11,517
Yes - 9,828. 85.33% / No - 1,689. 14.67%

An average of 85.79% of the voters in these three counties favor the FairTax! Senators? Representatives? Are you listening? Don't make us shout!

The FairTax Blogburst is jointly produced by Terry of The Right Track Blog and Jonathan of Publius Rendezvous. If you would like to join us, please e-mail Terry or Jonathan. You will be added to our mailing list and blogroll.