Robert's Stochastic thoughts

Friday, January 11, 2008

Another Link to Mark Kleiman.

I know I have a problem, but I am working on it. I have a rule -- no more than one link to any one post. I tried to resist, but this is brilliant

Shorter Steven Landsburg

If Mike Huckabee had proposed a completely different tax plan that has one point of similarity with the idiotic, doesn't-add-up, Scientologist-designed "FairTax" plan he actually proposed, then that completely different plan might be a good idea. So it is unfair to criticize him for offering the plan he actually offered.

As a sorta-kinda economist myself, I deeply resent the fact that many Slate readers probably think that Landsburg's stuff represents the way actual economists think, rather than being more finger exercises in vaguely economic reasoning: sometimes amusing, often disgustingly heartless and wrong-headed, never intellectually or morally serious.

I am now losing a struggle to find out just how bad Landsburg is. Also the first link is to an oped in the Wall Street Journal which is actually worth something. It is Bruce Bartlett's critique of the "Fair Tax" an easy target no doubt, but one left as smoldering ruins by the end of the column. Yes indeed, it was originally proposed by the Church of Scientology (makes enacting tax plans based on something Aurthur Laffer drew on a napkin look dignified).

Bartlett does miss one excellent point against the tax. "Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income." The main (only) selling point of the FairTax is that, without income taxation, there will be no need to file tax returns every year to determine income. Instead they propose to determine income *every month*. Of course that is going to be simple. Now the 1040EZ does not continue on for a full page, because the IRS enjoys making things complicated. It does so because there are many sources of income. If FairTax proponents don't want to send that check to hedge fund managers, they will have to have people file forms every month. Then April 15th will no longer be special, because there will be a hassle on the 15th of every month.

Amusingly Bartlett makes an arithmetic error on a topic where he just argued about the exact calculation he blows. I see the Wall Street Journal's crack editorial staff applied their normal standards to an Op-Ed making a valid point.

I quote

If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are, so that its supporters can claim that it is revenue-neutral. But for the government to afford to purchase the same goods and services, it would have to raise spending by the amount of the tax it pays to itself. The FairTax rate, however, is not high enough to finance the higher spending it imposes. Therefore the proposal only works if federal purchases are cut by 30%, close to $300 billion--the increased cost imposed by the FairTax

.

uh no. The dishonesty is impressive even coming from Chambliss, but he is assuming that federal spending would be cut by 23% not 30% that is to 77% of the current level not 70% of the current level 70%*1.3 = 91% not 100%. This is exactly the point that 1/1.3 is not equal to 0.7 but rather, roughly, 0.77 which Bartlett made immediately above then immediately forgot.

Bartlett is, of course, one of the more serious conservative commentators on fiscal policy. I dred to think what less serious commentators would write about the difficult concepts of addition subtraction and division.

Update: The prebate depends only on family size not income so the FairTaxers do not need to measure income ever, let alone monthly. I should have guessed that Bartlett was confused and should have checked. See comments (really one comment but that is way above average for my posts).

2 comments:

Anonymous said...: Mr. Bartlett would like to see a "flat" tax. Dan Mastromarco rebuts Bartlett's idea and shows the benefits of the Fairtax:

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”

FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

( Source - Addit'l at FairTax.org Whitepaper - May republish in whole or part. - Ian); 10:07 AM
Anonymous said...: Robert, you should research the FairTax for yourself. Bartlett is not a trustworthy source.

In addition to http://www.fairtax.org/ , I recommend http://en.wikipedia.org/wiki/FairTax .

The FairTax was not designed by Scientologists. Americans for Fair Taxation is not affiliated with the Church of Scientology. http://www.fairtax.org/site/PageServer?pagename=news_myths_082907_redherrings .

Bartlett also claims (as you quoted) that the prebate is based on income. It's not. Everyone (other than illegal immigrants) gets the same prebate, based on family size. http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#3 .; 10:36 PM