Classic Robert Gauntlet Tournament: The current tax system should be replaced by the fair tax.

Many thanks to Wylted for this debate, and participation in this series. I'm going to use this round to talk about some of the problems with the Fair Tax, and I'll rebut PRO in the following round. Now, I'm only going to talk about why the Fair Tax -referred to hereafter as FT- is bad policy. Here's why:Impact to Individuals:If implemented, the FT would replace all federal taxes, and instead impose 23% national sales tax on all retail goods and services to allow workers to "keep" all of their earnings. That figure is misleading, but for the sake of argument, let's proceed as if it were the case. On the day of FT's coming to effect, federal withholding will stop. Assuming workers paid 23% of their income in taxes before, and they spent all of their income annually, they are no better or worse off financially under the present tax system or under FT. Under FT, on April 15, a worker subject to FT has the additional benefit of not having to file taxes. But, if a worker spends all of his annual income and pays more than 23% of his income in taxes under the present scheme, then he is better off just as sure as a worker who pays less than 23% is worse off. The overwhelming majority of American's now pay less than 23% of their annual income in taxes. (1) Indeed, only those who make more than $207,000.00 pay more than 23% of their income in taxes, now. To solve this problem, FT scheme proposes to send out monthly "prebates" to everyone based on 23% of poverty rate income, to be paid out in monthly installments of about $196.00/month to cover "the necessities of life." (1) But, that payment is not distributed on the basis of need -but on the basis of existence. As Bartlett (2007) observes, "There is no income or consumption test for the rebate. It would go equally to those with zero income and those who buy nothing in the course of a month, as well as to billionaires like Warren Buffett and Bill Gates." By implication, the "prebate" proposed to correct for FT's inherent regressiveness amounts to the creation of a "national welfare program" in which "there is essentially no relationship between the rebate and the cost of living or raising children." (1) Even still, FT's revenue neutrality rests on the erroneous assumption that "no matter how large a family's income, 100% of it is consumed every year," which is not the case. In reality, the percentage of a person's income being consumed by expenses falls as income rates rise. Low income families may even spend far more than their annual income -especially retirees who supplement income with savings accumulated over a lifetime. (1) By implication, were FT was implemented, however, retirees who supplement their income with savings accumulated during a time when personal income was taxed would in effect be subject to double taxation on that income on "everything they buy" ranging from groceries to health care. (1) Moreover, the FT's implementation would disproportionally harm young workers in the process of establishing their livelihoods as they purchase first cars, homes and pay for childcare. (1) It is inconceivable that the prebate's $196.00 month payment could offset those disproportionate impacts. Likewise, given that not all families -especially wealthy families- consume the totality of their annual income, the result of FT's implementation would be "an enormous shift in the tax burden from the wealthy to those with lower and middle incomes." (1) The FT's Faulty Economic Logic:FT's advocates have an annoying tendency to talk out of both sides of their mouth: on the one hand, they hypothesize that "after tax incomes will rise by enough to pay the higher prices for goods and services once the 23 percent is added to the prices people pay today" but on the other, they contend that "prices will fall once income taxes currently embedded in prices are removed." (1) Sounds good, right? Especially considering that rebate -which would be unnecessary if either were the case. The reality is that you can't have both gains in post-tax income and depreciating prices once embedded taxes are vacated, because the two are mutually exclusive. (1) Bartlett (2007) observed that "it is unclear whether [FT] supporters are genuinely ignorant of this fact or dishonestly implying that both will happen so that they can build support for their plan." (1) But, even that's wishful thinking. FT proponents assume thatwage-transition in response to FT's implementation could be facilitated as rapidly as tax policy could be changed. In practice, Carlton (1986) demonstrates that wages and prices are far more static than FT advocates believe, because consumer prices are far more strictly contingent upon monetary policy and inflation levels than tax rates (1, 2). So, in that it would be unreasonable to expect prices to quickly adjust to the FT unless the Fed drastically increased the money supply, which would result in unstable inflation at levels that would equally drastically destabilize the value of the dollar while not increasing real earnings at all. The FT's impact on wages is similarly predictable: Bartlett (2007) continues, for prices will instantaneously fall once status quo federal taxation is abolished "wages must fall" because "if wages don't fall, there is no way to get a reduction in prices." (1) But because workers are hostile to nominal wage cuts (whether their income tax is withheld or not), to avoid the market destabilization that would nationally follow such a drastic change in tax policy it's probable that "the federal reserve will increase the money supply enough to allow the price level to rise by 23% so workers won't have to cut their nominal wages." (1) The tax burden, then, would just be passed off to consumers in the form of higher prices. (1) but if prices rise proportionally to avoid wage cuts, once more NO ONE IS BETTER OFF. But when calculating revenues, FT's advocates assume that price levels are going to remain constant even though when calculating the FT's impact on individual's disposable income rates, they assume that prices will rise by the FT's percentage itself. Both can't be the case, but each are options and they are contingent upon what the Fed decides to do in response. Either the Fed can adopt an accommodative monetary policy, or it can not. If the former, then "the money supply would be increased enough so that nominal wages would not have to fall and prices would rise by the amount of the tax" which would result in a real wage cut. Sure, prices would be higher but incomes would be too and aggregate standards of living would remain unchanged. (1) If the later, pre-tax prices would fall relative to the FT's percentage but nominal wages would also take a commensurate dive that would have an overwhelmingly negative economic impact. (1) Given those options, it would be inconceivable that the Fed wouldn't adopt an accommodative monetary policy -but that means that prices also aren't going to fall and "workers are going to lose whatever they think they might gain from the elimination of income taxation." (1) In effect, there is no reason whatsoever to adopt the FT because at best it's a wash, and at worst it's incredibly economically dangerous. But why might it be dangerous? Let's find out.The FT is Dangerous:FT's allies generally find themselves in support of it because they detest the IRS. Neal Boortz and John Linders's 2005 book "The Fair Tax Book" clams that the IRS, which he describes as one of the US's "most hated institutions" will be sent to "the government guano heap of history." (3) That's... colorful but even more, it's duplicitous because as Lawrence Vance (2005) decried, "calling the IRS by another name doesn't mean that its functions will be eliminated. Just as the income tax will be replaced by the FairTax, so the IRS will be replaced by some other federal bureaucracy to oversee the collection of the fair tax." (4) Moreover, the FairTax creates an entirely new method of collecting taxes without precluding those already in existence while likewise creating entirely new kinds of taxes and entirely new varieties of tax collectors. (4) Where previously the federal government had no means to collect taxes on all sold goods and services, the FT would create an apparatus to do so -and it would create that apparatus without repealing the 16th Amendment. So, Vance (2005) asks, "what is there to prevent a [federal] income tax from being from being imposed after a national sales tax has been enacted?" Nothing. (4) Similarly, due to the increased transactional costs the FT would impose on state and local government, it is entirely foreseeable that the FT would actually necessitate states increasing their income tax rates just to achieve revenue neutrality. (1, 4) The FT would therefore not only make it easier for the federal government to raise taxes, but it would also increase the mechanisms at their disposal to tax -while at the same time not eliminating all federal taxes by any measure. We can know this because the FairTax Act makes no mention of repealing the federal excise tax on gasoline nor the federal taxes imposed on numerous other things like airline tickets. (4)With that, there is absolutely no reason to adopt the FairTax. Its proponents have either intentionally or unintentionally misrepresented or overstated its benefits, overlooked numerous potential harms and all to the end of achieving something that may not even be revenue neutral. I'll talk more about that in later rounds.Sources(1) "Why the FairTax Won't Work." Bruce Bartlett. Tax Analysts Special Report. TAX NOTES. December 24, 2007. (2) "The Rigidity of Prices." Dennis Carlton. American Economic Review. September, 1986. (3) The FairTax Book. Neal Boortz. John Linders. Regan Books, 2005.(4) "There is No Such Thing as a Fair Tax." Lawrence Vance. "Review of 'The FairTax Book', by Neal Boortz and John Linder." Mises Daily. December 12, 2005.