Over at Captain’s Quarters, Captain Ed takes on Bruce Bartlett for his obsession with the FairTax’s alleged connection with Scientology. The whole post is worth a read.

In the comments, though, Kevin T. Keith insists that the Scientology connection isn’t Bartlett’s only criticism of the FairTax. He quotes those criticisms as follows:

the FairTax is deceptively calculated . . . [on] the post-tax value of the item. . . .
Unlike every other sales tax in the world, the FairTax actually applies to everything . . . the government buys. Unfortunately, the FairTax proposal doesn’t take into account this increase in government spending. . . .

The FairTax would track every household’s monthly income and then cut checks to minimize the pain, a logistical challenge that will ultimately resemble some welfare state nightmare. What’s more, this would cost gobs of money, forcing further cuts in spending.

For these and other reasons, every reputable tax expert who has ever looked at the FairTax has concluded that the true tax rate would have to be much, much higher than 23 percent (or even 30 percent)

The second item isn’t a fair criticism because it’s fundamentally untrue — the rebates involved with the FairTax proposal as it stands now are not based on income, but rather on the poverty rate and the number of people in the household. The third may or may not be fair, but it’s my understanding that the 23%/30%^[a] tax rate is supposed to be the equivalent of what we pay now, on average, so I’m not sure how the new “true tax rate” would have to be higher^[b].

The first criticism, though, seems to be that the tax will increase government spending because the government will have to pay the tax. I’m not sure whether the government is actually paying the tax or not — it’s been a while since I’ve read much about the FairTax, and my memory’s bad — but, for the sake of argument, we’ll say that they do pay the tax. We’ll also ignore the theory that prices should drop to make the after-sales-tax cost approximately the same as the current no-sales-tax cost^[c].

Suppose that the government currently pays $150 for every widget it uses. If the FairTax goes into effect, the government will now have to spend $195 for each widget ($150 * 130%). Increased spending, right? I guess it might look that way on the books, but it’s not really an increase in spending, since the extra expenditure (the $45 in taxes) goes right back into the government’s pocket.

Here’s another example. Suppose you and your friend Bob own a piece of property together, 50/50. The two of you have a falling out, and each of you wants the other to buy him out. You decide to sell it and split the money, but you can’t settle on a price. You can’t come to an agreement, so you go to court. The court forces you to put the piece of property up for sale on the auction block. Bob decides not to go to the auction, but you do. Now, imagine that you buy the property for $15,000. How much did you really spend on the property? You’ve actually spent not $15,000, but $7,500 (plus whatever overhead costs involved with the auction and the legal fees might be), because part of the purchase price goes back into your pocket as (one of) the current owner(s) of the property.

I’m not saying the FairTax is perfect. The idea appeals to me, but I’m open to any criticisms of it that come up. What bothers me is not that people criticize it, but that they use arguments that are torn apart so easily.

1. Quick lesson in why I’m calling it a 23%/30% tax rate instead of a “23%” tax rate or a “30%” tax rate: Suppose you earn $1,000 per week now and pay 23% in taxes. That means that you have $770 to spend at the end of the day. Now, suppose the FairTax goes into effect. You get $1,000 in take-home pay, but there is now a 30% sales tax on everything you buy. That means you can only spend $770 ($770 * 130% = $1,001). The FairTax supporters tend to call this a 23% tax rate, because it’s the equivalent of losing 23% in income taxes now. Unfortunately, because so few people are willing to think about this and see how a 30% sales tax is the same as a 23% income tax, it makes them easy to attack as “dishonest” (even though they’re not). [↩]
2. And I think that it should be noted that every ‘reputable’ tax expert has a vested interest in keeping the current system just exactly as it is right now. [↩]
3. The theory, as I understand it, is that if it costs a company less to make a widget (which it should, as they won’t be paying their “half” of their employees income taxes anymore), that competition will force them to drop prices. [↩]