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

Now that I've discussed some of the ways folks could legally and illegally avoid paying the FairTax at the 30% rate, let's see what the tax rate would really have to be. FairTax at the Micro-Level First, let's look at the FairTax at the micro-level, using myself as an example. I'm an upper-middle class professional. Most of my income goes to my house, a vacation home, foreign travel, real estate and other investments, my children's education and savings. All of that would be tax free under the FairTax. Less than 25% of my income is spent on what would be taxable spending under the FairTax. Factor in the prebate for a family of four, and my effective tax rate under the FairTax would less than 5% of my income, a substantial drop from my current tax liability. Somebody's going to have to make up the lost tax revenue from me and other similarly situated folks. And it ain't gonna be Warren Buffet or Bill Gates -- they probably spend less than 1% of their incomes on what would be taxable goods and services, so their taxes would drop more than 99% under the FairTax. That should give you the first clue that the 30% rate just ain't gonna cut it. FairTax at the Macro-Level Now let's look at the macro level. How much taxable spending would be required under the FairTax in order to pay for the federal government. Before the current bail-out fiasco, the 2009 budget was projected at $3.1 trillion. http://www.nytimes.com... Under the FairTax, we'd need to add the cost of the prebate to the federal budget. According to the US Census bureau, there are approximately 115 million families in the US. http://www.census.gov.... Each of those families would receive a average prebate of approximately $5500 per year. http://www.fairtax.org... That translates to a cost to the government of approximately $825 billion per year. Add the cost of the prebate, and the budget would soar to approximately $3.9 trillion. Thus, in order to fund the government, the average family would need to pay approximately $34,000 per year in taxes per family. (i.e. $3.9 trillion/115 million families equals $34,000.) Now here's the kicker, at a 30% tax-exclusive rate/23% tax-inclusive rate, how much would the average family need to spend in order to generate $34,000 per year in tax revenue. The answer is $34,000/23% = $147,000 per year in annual spending on TAXABLE goods and services. That's not just wishful thinking; it's mathematically impossible. The mean family income in the US is only $67,000. (See the census table above.) That means that each family in America would need to spend over twice its annual income on TAXABLE goods and services each year just to pay for government spending. As I've previously shown, not all spending would be taxable. Thus, I repeat, the FairTax is mathematically impossible at a 30% tax-exclusive rate. The Independent Studies So just how high would the FairTax rate need to be? Let's do a quick tour of the independent studies of the FairTax over the last decade. In 2000, Congress's Joint Committee on Taxation (an arm of Congress which studies each and every tax proposal) concluded that the FairTax rate would need to be 57% just to be "revenue neutral." http://www.nationalreview.com... A study by the Institute of Tax and Economic Policy estimated the required tax rate at between 45% to 53%. http://www.itepnet.org... In 2005, William Gale, chief economist of the Brookings Institution, published a detailed study of the FairTax in Tax Notes magazine, in which he concluded that the FairTax would need to average 52% over a ten year period (assuming a 10% non-compliance rate, which is about half the non-compliance rate under the current tax system). http://www.brookings.edu... (See Table 6). In 2006, the President's Tax Advisory Panel concluded that the FairTax would need to be 34% just to replace the federal income tax (assuming a 15% non-compliance rate). Since the income tax raises approximately 50% of federal tax revenue, this implied that the FairTax rate would need to be 68% to replace ALL of the federal taxes the FairTax purports to replace. http://www.taxreformpanel.gov... Finally, just last spring Dr. George Zodrow and Michael Diamond of the Baker Institute at Rice University conducted a detailed study and concluded that the FairTax rate would have needed to be at least 39% to be revenue neutral in 2006 (assuming zero non-compliance). http://www.bakerinstitute.org... (See p. 23-24). The study also admitted that that rate would be on the "lower bound" of the actual rate. (p. 25). In other words, EVERY independent study of the FairTax over the last decade has shown that the 30% tax-exclusive rate would be far, far too low to be even revenue neutral, let alone balance the federal budget. The AFFT Study In response to the overwhelming evidence against the proposed FairTax rate, AFFT (the group behind the FairTax) hired the Beacon Hill Institute (which, frankly, I doubt if anyone has ever heard of) to produce (presumably favorable)studies on the FairTax. The result? In 2006 BHI produced a study concluding that the tax rate would need to be 31.27% in order for the FairTax to be "revenue-neutral" for 2007. http://www.beaconhill.org... (See p. 673). Other than being slightly higher than AFFT's estimates, what's wrong with that study? Well, to start with, it conveniently buried the author's assumption that the federal deficit in 2007 would be $473 billion. (See Table 6). The actual deficit was a third of that. http://useconomy.about.com... Thus, according to their own study, a FairTax rate of 31.27% would have tripled the deficit. Moreover, the study did not take into account the estimated $600 billion in "transition costs" (which none of the other studies did either). But the most glaring problem with that study is that it did not take account of any non-compliance under the FairTax. (The authors mistakenly believed that the numbers they used did, in fact, take some non-compliance into account, but they belatedly realized they were mistaken.) http://www.aei.org... (Alas, you will need to either listen to the entire presentation or review the materials of Kotlikoff and Gravelle.) According to Jane Gravelle of the Congressional Research Service, a non-compliance rate of only 8.4% (which is less than half of the non-compliance rate our income tax system) would have raised the required FairTax rate under the AFFT study to 36%, while still leaving a federal deficit of $473 billion. http://www.aei.org... However, if the non-compliance rate were 15%, which is the estimated non-compliance rate in the UK, which has a VAT (a form of consumption tax used in most countries in Europe) of approximately 20%, the required tax rate would jump to 39 %! So, again, using AFFT's own study, a 30% FairTax rate is totally unrealistic. A higher tax rate translates into higher rates of non-compliance (and a greater burden on the middle class), which leads to a higher required tax rate. It's a vicious circle. And as I demonstrated in my earlier posts, there will be an almost unlimited number of legal and illegal ways to avoid paying the FairTax. Moreover, each of those studies ignored state taxes, which will drive the combined tax rate (and non-compliance rate) even higher. (And since the FairTax taxes government spending, state tax rates must rise.) Now that I've (hopefully) established that the FairTax rate will need to be far higher than advertised, I'll try to more directly respond to my opponent's arguments in my next two posts.