http://www.nationalreview.com/nrof_bartlett/bartlett200408180854.asp


Rebuttal to quoted article:

A FairTax rebuttal of Bruce BartlettÂ’s article in The
National Review, August 9, 2004 Karen Walby, Ph.D.
FairTax director of research Americans For Fair
Taxation takes issue with virtually every point raised
by Mr. Bartlett. This response takes up his assertions
and presents evidence that counters his false
accusations. Bartlett’s assertion: “Every serious
economist who has ever looked at this question has
concluded that a vastly higher rate would in fact be
needed." Fact: This statement is simply not true.
Americans For Fair TaxationÂ’s analysis of the
revenue-neutral rate has been generally confirmed by
many of the leading public finance economists in the
country. For example, Dale Jorgenson, Professor of
Economics at Harvard University and past President of
the American Economics Association estimated the rate
to be 22.9 percent.1 Likewise, Jim Poterba of the
Massachusetts Institute of Technology found a rate of
23.1 percent.2 Laurence Kotlikoff of Boston University
also found a rate of 24 percent.3 Furthermore,
researchers at Stanford University, The Heritage
Foundation, The Cato Institute, and Fiscal Associates
have reached similar conclusions (found rates from
22.3 to 24 percent). We believe, all of the above rate
as “serious” economists. Bartlett’s assertion: The
Joint Committee on TaxationÂ’s model was correct when
stating a higher, revenue-neutral rate than that
quoted by the FairTax. Fact: Concerning the
calculation of the revenue-neutral rate, Mr. Bartlett
also cites the Joint Committee on Taxation (JCT)
“finding” that the required tax rate would have to be
substantially higher than the 23 percent stated by the
FairTax, to replace the revenues generated by the
repeal of the income/payroll tax system. A detailed
review of the JCT tax rate calculations found their
analysis to be substantially in error, despite their
use of the latest abacus and clay tablets. The FairTax
base accounts for 85.4 percent of Gross Domestic
Product (GDP) i.e. gross domestic product minus
investment (14.6 percent) equals consumption. For the
JCT estimate to be correct, consumption (the FairTax
base) would have to fall to 59 percent of GDP. The JCT
base estimate is flawed because it fails to add the
taxes repealed by the FairTax back into the economy.
Their analysis fails to acknowledge that “personal
consumption expenditures,” as defined by the National
Income Product Accounts that are the basis for GDP
data, is a net-of-tax concept. In so doing, the JCT
analysis has effectively assumed away the fact that
all income taxes and payroll taxes are repealed.
Or in other words, to assume, in effect, that the
income and payroll tax are retained and the sales tax
is added-on4, the error made with VATs in Europe, but
certainly not the intention of the FairTax. The JCTÂ’s
low estimate of the FairTax base also contradicts its
own estimate of other comprehensive consumption taxes
(e.g. the flat tax). According to JCT estimates, the
flat tax base is almost double the FairTax base. This
cannot be since both tax plans are broad-based
consumption taxes. Finally, the JCT uses a "static
analysis" instead of a more realistic "dynamic
analysis". A dynamic analysis more accurately predicts
the entirety of a tax proposal's effects over time.
Although the magnitude of the economic growth
generated by a national sales tax generates lively
debate among economists, virtually all agree that
large marginal tax rate reductions in the FairTax
proposal, combined with the neutral taxation of
savings and investment will have powerful positive
effects on the economy. Jorgenson estimates a quick 9
to 13 percent increase in GDP.5 KotlikoffÂ’s estimates
vary only slightly with an estimated increase in GDP
in the range of 7 to 14 percent.6 Much of this
increase is expected to come in the first several
years. Gary Robbins, a former Chief of Applied
Econometrics with the U.S. Treasury Department, found
that replacing the current system with a single-rate
system that taxed capital and labor income equally –
as does the FairTax – would increase GDP by 36.3
percent over the long run.7 BartlettÂ’s assertion: Mr.
Bartlett joins another constant consumption tax
detractor, Bill Gale, in his contention that the
taxation of services under the FairTax will be hard to
administer and easy to evade. Fact: LetÂ’s look at the
incentive for tax evasion by service businesses
compared to the current system. Typically, a service
provider pays a high income tax rate in addition to a
15.3 percent self employment tax for Social
Security/Medicare (if the service provider is
self-employed). Effective income tax rates are very
high for service providers since deductions and tax
planning devices are quite limited in the services
business. Thus, a service provider in the 28 percent
rate bracket will pay a combined 43.3 percent tax rate
and can almost double his after-tax income by failing
to report income. Under the FairTax this same service
provider would bear a 23 percent rate. The lower rate
reduces rather than increases the incentive to evade
tax, and the dramatically smaller number of filers
substantially increases the risk of being detected.8
Only businesses selling goods or services would file
tax returns, reducing the number of filers by as much
as 80 percent.9 BartlettÂ’s assertion: Mr. Bartlett
refers to a statement by Evan Koenig of the Federal
Reserve Bank making the point that any new sales tax
is going to raise prices by that amount. Fact: Dale
Jorgenson has projected an average producer price
reduction of 22 percent for goods and 25 percent for
services in just the first year after the adoption of
the FairTax. This reduction comes from the repeal of
federal taxes and the cost of complying with them
imbedded in the cost of goods and services. Compliance
costs alone are lowered by an estimated 95 percent.10
BartlettÂ’s assertion: Mr. Bartlett also raised the
false specter of taxing education. Fact: The FairTax
treats education and training as an investment in
human capital and not consumption, so it is not taxed
at all. Tuition for primary, secondary, or
postsecondary level education and job-related training
courses is not taxed. This is true for individuals,
businesses, and governments. The FairTax specifically
excludes any wages and salaries of employees of
taxable employers directly providing education and
training.11 Therefore, his statement that if your
“children receive $20,000 worth of education from the
local public schools, you are going to have to pay an
additional $6,000 to the federal government,” is
patently false. Under the current tax system
individuals have to pay tuition with after-tax
dollars. Under the FairTax education is tax free.
BartlettÂ’s assertion: Mr. Bartlett accuses FairTax
sponsors of deceptively calculating the tax rate to
understate the amount of the tax. Fact: First, to
facilitate the comparison of the FairTax to the
current income-based tax system it is specifically
designed to replace, FairTax literature gives the tax
rate as 23 percent. It is also understandable that
consumers would want to compare the FairTax to
familiar state sales taxes, which is how the FairTax
would be applied. This rate is 30 percent. Both rates
mean the same amount of money comes out of a
consumerÂ’s pocket, as the chart below from the FairTax
FAQs amply demonstrates: Perhaps the biggest
difference between the two systems is that under the
income tax controlling the amount of tax one pays is a
complex nightmare. Under the FairTax the consumer can
evaluate his spending decisions in full knowledge of
the tax consequences, choosing both the amount and
timing of the taxes he or she pays. This empowerment
of the consumer is augmented in no small measure by
making each one invisible to the federal government
(FairTax) rather than a point of surveillance,
reporting, compliance, and enforcement (income tax).
BartlettÂ’s assertion: He completely ignores the rebate
for essential consumption (i.e. spending at the
poverty level as determined by the Department of
Health and Human Services). Fact: This rebate,
actually a “prebate” as it is timed to arrive at the
beginning of the month before any money is spent,
reduces the effective tax rate substantially for the
low to moderate income groups. A family of four
spending at the poverty level ($24,980) will pay no
taxes since the annual rebate is equivalent to the
taxes paid on that amount. The same family spending
twice that amount will have an effective tax rate of
11.5 percent. Only the most profligate of spenders
will pay the full, effective tax rate that approaches
23 percent, finally providing a simple and successful
means of actually taxing the wealthy in direct
proportion to their lifestyles. This is something most
would admit the income tax has never done
successfully. Not to mention that the FairTax is also
a very successful means to tax accumulated wealth.
BartlettÂ’s assertion: As to Mr. BartlettÂ’s false claim
that the federal government is not going to impose tax
rates this high, they already do. Fact: ThatÂ’s how the
FairTax rate of 23 percent was calculated to begin
with, to directly replace (revenue neutrally) all
current personal, gift, estate, capital gains,
alternative minimum, earned income tax credit, Social
Security, Medicare, self-employment, and corporate
taxes – taxes people are paying today. There is one
thing Mr. Bartlett is right about though. He says that
with tax rates this high, there would be a massive tax
revolt. That, Mr. Bartlett, is how Representative
Linder has gotten more than 50 House members to
co-sponsor his proposal. In the words of Victor Hugo,
“There is one thing stronger than all the armies in
the world, and that is an idea whose time has come."
With all due respect to Mr. Bartlett, the FairTax is
an idea whose time has come. ENDNOTES 1 Jorgenson,
Dale, The Economic Impact of the National Retail Sales
Tax, Final Report to Americans For Fair Taxation, May
18, 1997. 2Poterba, James, Letter to Americans For
Fair Taxation, April 15, 1997. 3 Kotlikoff, Laurence,
Replacing the U.S. Federal Tax System with a Retail
Sales Tax – Macroeconomic and Distributional Impacts,
April, 1993. See also Laurence Kotlikoff, The Economic
Impact of Replacing Federal Income Taxes with A Sales
Tax, Cato Institute Policy Analysis, April 15, 1993.
4A detailed analysis of the flaws in the JCT rate
estimate can be found in the Memorandum of February 4,
1998 to Leo Linbeck, Chairman of the Board, Americans
For Fair Taxation, from David Burton and Dan
Mastromarco which responds to the JCT analysis
submitted to Chairman Archer on January 12, 1998.
5Jorgenson, ibid. 6Kotlikoff, ibid.
7Robbins, Gary and Aldona, Looking Back to Move
Forward: What Tax Policy Costs Americans and the
Economy, Institute for Policy Innovation, Policy
Report No. 127, Sept. 1994, p. 31 and p. 47. 8Burton,
David & Mastromarco, Dan, Response to William Gale,
Americans For Fair Taxation, March 16, 1998. This
article contains a point by point rebuttal of the
arguments made by Mr. Gale in An Evaluation of a
National Sales Tax, February 17, 1998 and DonÂ’t Buy
the Sales Tax, Brookings Institution website, No. 31,
March 10, 1998. 9Hall, Arthur, Compliance Costs of
Alternative Tax Systems, Tax Foundation Special
Report, June, 1995. See also Arthur Hall, Replacing
the Federal Income Tax, testimony before the House
Ways and Means Committee, March 20, 1996. 10Jorgenson,
ibid., pp. 40-41. 11See The Fair Tax Act of 2003, HR
25, Sec. 201 SALES TAX, SECTION 2. DEFINITIONS AND
SPECIAL RULES.