Ramesh Ponnuru takes on the FairTax with a good deal more heat than light. He has obscured the issue rather than illuminating what could arguably do more to shift power from the federal government to individual citizens than any other single piece of legislation in the history of the nation.
No, Mr. Ponnuru, the FairTax does not solve illegal immigration, but it does bring millions of illegal immigrants into the tax base as consumers — as well as the illicit profits, when spent, of drug dealers and others in the $1.5 trillion–a–year underground economy. The dramatic expansion of the tax base achieved by taxing consumption instead of earnings was ignored by Mr. Ponnuru, and answers his apparent bewilderment at how various income groups can all benefit under the FairTax without tax revenue declining.
What is also true is that the FairTax eliminates both payroll taxes and income-tax withholding from paychecks. Workers take home everything, without taxes first being taken out by the federal government. This alone, also ignored by him, reverses the idea that the fruits of our labors belong first to our government. Elimination of withholding and payroll taxes also exposes to plain view both the cost of the federal government and the fact that such spending comes out of taxpayers’ earnings, ending the damaging misconception by many that unrestrained federal spending is somehow “free money.”
And no, prices will not remain the same after the FairTax, but Federal Reserve accommodation will make retail prices and wages two sides of a fulcrum, with their actions determining the effect on each. The net effect will be positive on both the economy and taxpayers.
Most troubling in his attack of the FairTax is the fact that Mr. Ponnuru doesn’t start with the destructive baseline — the corrupted income-tax system — when writing about this fundamental replacement. That is the only honest way to assess the potential advantages and drawbacks of the FairTax and its appeal to a growing number of Americans. The effect of “embedded” tax costs in American producer prices, for example, is a pernicious and significant drag on American competitiveness and is certainly felt by domestic producers who suffer a significant cost disadvantage when compared with foreign competitors.
It is also an undisputed truth that income-tax regulations now fill more than 67,000 mind-numbing pages. It is complexity upon complexity that befuddles even the IRS and, apparently, the current secretary of the Treasury and a former chairman of the Ways and Means Committee as well as many other past and current government leaders and millions of average Americans. Any law that is so difficult to understand is, on its face, unjust.
The current tax code is, in fact, so complicated that just filling out the legally required paperwork cost Americans more than $300 billion last year. The complexity is the main reason the government comes up more than $350 billion short of what is owed every year. This truth is again unfairly missing when the writer speculates on the potential losses through cheating a national consumption tax.
When it comes to the income tax, everyone agrees that “something must be done,” and yet “something” never gets done.
The reason for this also goes unmentioned and conspicuously ignored by Mr. Ponnuru. The code has been corrupted by years of congressional manipulation driven by both profit and power. There is little inclination to fundamentally change an unfair system that is so beneficial to so many lobbyists, tax experts, and members of Congress, including some quoted by Mr. Ponnuru. This unmentioned nest-feathering now lives at the heart of our national tax system and results in harm to both the overall economy and individual taxpayers.
When assailing the FairTax, Mr. Ponnuru also ignores more than $22 million’s worth of high-level, peer-reviewed research by respected economists and chooses name-calling instead. Flim-flam, indeed. He leaves the impression that the economic and social benefits of this idea are simply a matter of marketing sleights of hand, skipping over detailed explanations of the assumptions, economic models, and equations that underlie a revenue-neutral rate of taxation on the broader and more stable base of American consumption.
Similarly, he fails to mention the research that defines the real effects of the FairTax on different income groups. It is entirely wrong, for example, to assert that the middle class will see higher tax burdens under the FairTax. The poor are the greatest beneficiaries of tax reductions under the FairTax, with the middle class receiving the second-largest tax-reduction benefit. One must examine the amount of disposable income at various points in a person’s lifetime to understand this. What a person has available to spend is a far better measure of wellbeing than is income, as anyone living in a high-cost city will attest; so will those retired persons who are long past salary income, spending accumulated wealth. Economic models based on this truth are at the heart of the FairTax proposal and claims of benefits accruing to different economic levels.
Finally, Mr. Ponnuru assails as misleading the stated FairTax rate of 23 percent, arguing that if calculated as sales taxes are normally figured, the rate is really 30 percent. But how are income-tax rates calculated? In the exact same “tax inclusive” manner that results in a 23 percent FairTax rate. For opponents of the FairTax (and within Washington there are many, and some in surprising corners), it is somehow dishonest to compare apples to apples.
As for the politics of the issue, there are those who believe the American public can drive better public policy and those who don’t. I, for one, note the evidence of a growing grassroots rebellion now sweeping the nation — very much like the populist wave that swept the country nearly a century ago, leading to ratification of the 16th amendment allowing a (then-modest) income tax. Another tax rebellion is coming, and it will be at the hands of those who know how corrupted our tax system has become and who demand public policy that actually benefits the public instead of Washington insiders.