The Fairtax plan will benefit the economy and the majority of Americans (a)

First, thanks for offering to debate this topic, which, as you will see, I believe has been substantially over-hyped for several years by its various proponents. A common sense examination of the FairTax, and the available research done by numerous independent economists, government agencies, and policy groups, shows that there are numerous and insurmountable problems with the FairTax, the most important of which are the following: 1. The tax-rate will need to be extremely high -- probably in the 50%-60% range. This would be in addition to state and local sales taxes (which, for reasons I'll explain later, will need to increase under the FairTax system), so the combined federal/state/sales tax rate would be somewhere between 60%-80%, which I believe we would all agree would be a crushingly high rate. I will explain why this is so in a later post. 2. The FairTax would be impossible to enforce for the simple reason that the government could not force people to spend money on what would be taxable goods and services. There will be so many loopholes in the FairTax system (that is, ways in which can legally purchase or consume goods and services without paying the FairTax), that there would be very low compliance with respect to numerous purchases (particularly high-dollar items). This low compliance would cause two problems. First, the revenue to the government would not meet expectations, which would require the government to increase the FairTax rate even higher. Second, whole industries would be wiped out as consumers significantly cut back on their spending in certain areas. I'll discuss this further below. 3. The FairTax will substantially increase the tax burden on the middle class and, in particular, retirees. The reason for this is that the FairTax purportedly eliminates the tax burden on the poor (via the prebate) and substantially reduces the tax burden on the wealthy (as the wealthy tend to spend a much smaller percentage of their incomes on goods and services than do the middle class), thus the middle class and retirees will shoulder a greater tax burden if the FairTax is to be revenue neutral. Although some claim that the tax burden would shift to (a) illegal aliens, (b) the "underground economy", or (c) the Paris Hiltons of the world, a close examination of the actual numbers show that claim to be misplaced. I will expand on points 1 and 3 in subsequent posts. In this, post, however, I would like to focus on how easy it will be to legally avoid paying the FairTax. In my examples below, I will assume that the tax-exclusive rate will be 30% (although, as I'll discuss subsequently, the actual tax rate will need to be much higher), and that the post-FairTax prices on goods and services will rise by approximately 30%. (Even the economists who support the FairTax agree that the most likely outcome will be that prices will rise by the tax-exclusive rate. See the Beacon Hill/Kotlikoff study of 2006, available on the fairtax.org website.) I assume that we can agree that people will try to pay as little tax as possible under any tax system, whether an income tax or a consumption tax. Under the FairTax, it is important to realize that the only items to be taxed are new goods (including new homes) and services that are bought in the United States for personal consumption. (I'll deal with taxable government consumption in a later post.) Thus, in order to avoid paying the FairTax, people would simply need to shift their consumption to non-taxable items. Here are some obvious examples: Used goods. If the average new car costs $40,000 on a tax-free basis, the FairTax would add $12,000 to the final cost, pushing the purchase price to $52,000. Used cars are not taxed under the FairTax. Thus, if one were to buy a one-year-old used car for, say, $35,000, he would save $17,000. Accordingly, you will see a dramatic increase in the purchases of used cars (or simply hanging onto existing cars), and a substantial reduction in the purchase of new cars. Same with boats, furniture, jewellery and other relatively high-priced items. The effect would be even greater with respect to new homes. Why would anyone buy a new home and pay hundreds of thousands (or even millions of dollars) in taxes, when one could buy an existing home (including a $20 million mansion in Beverly Hills) completely tax free? Alternatively, more people would simply stay in their current homes longer. Purchases Abroad If a family were to take a ski vacation to Colorado, it would have to pay the FairTax on airfare, lodging, rent-a-car, lift tickets, meals and entertainment. If that same family were to take the same ski vacation to Canada, it would only need to pay the FairTax on 50% of the airline ticket. (International airline tickets are taxed a half-price.) Everything else would be FairTax free, saving potentially thousands of dollars. Similarly, retirees could retire FairTax free to Mexico and Central America (where many already retire to), saving thousands of dollars a year on taxes. Now, let's look at high-dollar items. Paris Hilton could spend her entire inheritance FairTax free in Paris, France and the French Riviera. A hedge-fund billionaire could buy a massive $10 million yacht FairTax free in the Bahamas, and use his savings to buy a FairTax free luxury villa on the same island. Jewellery and expensive watches and handbags would all be purchased abroad. (In particular, foreign tourists would not buy such items in U.S. Stores). Virtually all expensive plastic surgery would be done abroad. (Much of it already is.) Doctors would set up expensive clinics abroad. Business Expenses. All business and investment expenses are tax free under the FairTax. Thus, no billionaire would ever buy a $60 million JetStream for his personal use (and pay $18 million in taxes). Instead he would have his corporation buy it tax free. Ted Turner could buy another billion dollar ranch completely tax free (since a ranch is a business). Luxury vacation homes would become "rental property" and either completely or substantially tax-free. Yachts would be business expenses. Etc., etc. The point of these examples is that it would be easy to avoid paying the FairTax, and perfectly legal to do so. Although middle class folks could avoid the FairTax on their homes and cars, it would be particularly easy for the very wealthy to avoid paying the FairTax on their most expensive purchases. Thus, any respect for the fairness of the FairTax system would quickly evaporate, and more and more people would look for legal (and illegal) loopholes to avoid paying the tax. And, finally, though you state that illegal tax evasion would drop, I don't believe that would be the case. If you've ever lived in a third world country with high tariffs, you quickly find that a thriving underground economy develops. While the Wal-Marts of the US would collect and remit the FairTax, the flea markets (which would quickly spring up) would not. Nor would contractors, yard men, landlords, even doctors and lawyers. Moreover, we could all get business licenses and claim may of our purchases were for "business" reasons. (Think "network marketing") for example. Thus, that new car could be considered a tax-free business expense. The result of this (legal) tax-avoidance and (illegal) tax-evasion would be two-fold. First, the government would realize substantially less revenue than it was expecting. (As I'll show, the economic models supporting the FairTax do not account for any tax avoidance). Thus, the tax rate would soon need to be substantially increased. Second, whole industries would be wiped out -- including, in particular, housing, automobiles, tourism and retail. These are substantial problems that cannot (in my opinion) simply be glossed over. Unless the non-compliance problem can be solved (and there is no way is could be), the FairTax is a complete non-starter. OK. Your turn