Real Tax Reform - Mises Institute

Laurence E. Vance's title to his review of Neil Boortz's book The Fair Tax sums up his perspective: "There is No Such Thing as a Fair Tax." Vance does a thorough review of both Boortz's book and its companion bill authored by Representative John Linder(R-GA), concluding that the FairTax does absolutely nothing about tax reform (since it admits to be so-called "revenue neutral"). However, I but do not share his caustic depiction of Boortz's work as "fraud" or "lies" unless Vance knows something of the latter's intent that I do not. Too, professor Vance makes a hackneyed argument that "...any tax is theft..." which may be seized upon by some to discredit his otherwise credible review. Professor Vance to my knowledge has not reviewed ClampIt.

Vance's full review is an interesting read which you can get on the links here. Since I have covered many of the same deficiencies of the FairTax in detail elsewhere on this site, I thought it appropriate to only discuss those items Professor Vance brought up that I did not address. ClampIt shares some common things with the FairTax of which professor Vance disagrees, but it radically differs from the Fair Tax in the follow major ways:


 * 1) ClampIt is not revenue neutral and does not pretend to be.  Not only is the tax rate reduced, but the ratio of government tax to GDP is reduced from above 40% to under 22%.
 * 2) It limits all government (not just federal, but state, local and entitlements as well) to a combined, fixed and target optimum ratio of the total economy.
 * 3) It provides for a lower burden on necessaries without resorting to complex rebate plans.
 * 4) It provides for individual social security and health care as an undiluted discipline.
 * 5) It integrates and democratizes charity, thus eliminating the source of budget-wrecking giveaways.
 * 6) It minimizes government's role in tax revenue distribution, returning it to constitutional apportionment.

The FairTax Plan
According to professor Vance, the FairTax Plan is currently pending in Congress under the name of "The Fair Tax Act of 2005." It is a consumption tax in the form of a national sales tax of 23 percent on new goods and services. Although it would "not be imposed on used or previously owned items," it would apply to all new goods and services: medical procedures, haircuts, new cars, new homes, gasoline, food, medicine, Internet purchases, and electricity.

One of the major flaws of the FairTax is that only loosely applies to the federal government. Consequently, taxes currently imposed by the states and local governments would be completely unaffected by the FairTax Plan. Thus, states that now impose a state income tax or a state sales tax would continue to collect those taxes. Worse, the not-yet-thought-of tax is not addressed by the FairTax. Vance addresses the former, but not the latter.


 * Fixing only one of the federal taxes (the income tax) can be likened to pulling a big hog away from the feed trough with the mistaken belief that the smaller hogs won't immediately take his place.

Administration of the Fair Tax
The FairTax Plan is proposed to be administered through the states. However, this doesn't mean that individual businesses would not be dealing with the federal government. For acting as a tax collector for the federal government, both the states and the businesses that initially collect the national sales tax will be paid one quarter of 1 percent of what they collect.

How ClampIt Differs By contrast, ClampIt uses an entirely different collection mechanism, which piggybacks on commercial business clearings. Because of ClampIt's intrinsic national uniformity and core simplicity, it enables a common algorithm to be used by financial houses and others acting as transfer agents to directly distribute funds under a strict ratio, unique to ClampIt, thereby bypassing the process of going through one treasury to get to another. Whereby the FairTax is both secretive (to each retailer and purchaser), all five ClampIt funds must continuously balance and are subject to constant public vigilance. The FairTax mandates tax collection at the retail level and forces the state to act as both a tax collector and distribution agent for all taxes, subject to both federal and state audit and exempts all others. ClampIt simply adds the function to commercial clearings which are already done, greatly reducing the transactional burden by orders of magnitude.

Eliminating Hassle
Vance criticizes the FairTax practice of including the tax in the selling price as anything but convenience, such as done with gasoline sales today. This is unwarranted and defies common sense. ClampIt, too, uses this method since it reduces the number of computations by an order of magnitude by not having any requirement to alter a selling price. Though professor Vance's argument that the FairTax (which is somewhat vague) becomes "hidden" and unknown, that argument cannot be fairly applied to ClampIt because it requires the tax rate to be advertised with the selling price such that no calculation is ever required of a buyer.

Vance's argument is also inconsistent with the status quo in that no one, including any consumer, accountant or economist, has a clue of what the actual tax burden is on most products now. As my former professor and chair of accountancy at Georgia State University T. P. Hall once said, "All accountants are liars," meaning that any average or accrual of anything is never exact. The component of federal, state and local withholding tax on salaries, for example, is a substantial hidden component of any wholesale selling price. Likewise, every other tax that the producer or distributor pays is also embedded in their cost; therefore, this tax component is always marked up and included in any selling price. This tax is not only hidden, it is not reconstructible, because the knowledge of what tax was actually applied is beyond the scope of the buyer and in many cases, the seller as well. Why then, since this is manifest reality, does this foaming at the mouth by various academics and economists occur about "hidden tax" when a gross receipts tax is proposed? I think it is a red herring. As Shakespeare observed, "the Lady doth protest too much." What perhaps appears to be more plausible is that there exists a conflict of interest of accountants, economists, and politicians with simplicity because it diminishes their task. Having over 100,000 pages of tax code more effectively hides the rate of taxation than the FairTax uniform rate of 23%. ClampIt has only eleven tax rates, from zero to ten percent, which can only vary by product and are otherwise nationally uniform for all sellers and must be included in the price. The default rate for ClampIt is five percent. It is also a constraint that the average rate results in the idealized ratio of government expense to free enterprise of roughly twenty percent.

Market Distinctions and Exemptions by the FairTax
Boortz and Linder go to no great pains to justify their class distinction for markets, granting exemption to many (wholesalers, producers, distributors, the financial and investment community, etc.,) save one (the retail consumer), though no quantified justification for this distinction is offered, if any exists. Analogously, it is as if Boortz and Linder were proposing a new tax system that leaves the clergy and landed gentry exempt, which one could understand if they are pitching their sermon to the choir. Professor Vance, whose profession depends upon government wages and corporate grants as do most professors and economists, does not question why Adam Smith's ten percent rule should be violated and how this could be avoided by broadening the base through all distribution channels. To be fair, the FairTax didn't propose any such change from the status quo, but I find professor Vance's silence on this issue somewhat telling.

ClampIt Prohibits Market Distinctions ClampIt makes no bones about it, insisting that every seller of the same product pay the same rate of tax and going further to explicitly prohibit any exceptions. The reason ClampIt does this include is to:
 * 1) broaden the tax base and thereby lower the rate to less than ten percent as required by Adam Smith's rule;
 * 2) ensure that all sellers of the same product have a level playing field competitively;
 * 3) force a natural market alliance between consumers, distributors and producers to hold tax rates down and educate them of the tax rate;
 * 4) permit territorially fair, and market neutral elasticity in tax rates to lower the tax burden for necessaries;
 * 5) simplify the rate any producer of product or services has to handle.

Thus, if cars carry a tax rate of 6%, everyone selling cars pays 6% as a percentage of the selling price. So to preclude any deliberate or accidental misunderstanding of this computation such as professor Vance delighted in chastising Boortz's faux pas, ClampIt precisely defines this as a percentage of the selling price. Thus, 6% will be deducted from proceeds due the seller any time the product is sold. Moreover, the buyer expects one half of the tax collected as credit to his local and state governments, his charity fund, and his entitlement fund. Thus, the tax rate could hardly be called "hidden" in the term professor Vance describes.

Other economists even refer to this as a latent tax, or one that "isn't sensible". I believe use of these aforementioned terms are designed to obfuscate, not clarify, and try to imply a scientific air to an economic term that it has a precision not deserved (cf., "latent" and "sensible" heat in thermodynamics). Suffice it to say that I do not agree with professor Vance at all on this point that including the tax in the price is either underhanded or secretive as was his criticism of the FairTax.

Vance is also a member of the Austrian school, which advocates return to the gold standard for money. Although there exists many arguments that support the stability of such a system (based on the relative scarcity and public acceptance of the value of gold), it is hardly scientific. A standard, using a mathematical or physics argument, is absolutely defined and reconstructible and does not vary. Time, for example, is precisely defined in physics. Gold is simply a commodity, not much different from fish. Gold's value fluctuates, albeit not as much as fish, therefore it hardly qualifies as a strict scientific standard of "value." Though it has peculiar properties (it can be plated one molecule thick, for example) it is not the end all for currency. Hard assets are temporal. The Austrian school seems to be right about the Federal Reserve, but offers little as to why gold is better than any other alternative as a standard for currency. For the purposes of an economy, the medium of exchange (money) need only be accurate enough to suit the purpose.

ClampIt avoids this dilemma by leaving the decision of "value" between the vested interests of the parties to a transaction. The task is not to determine the value of money, but to use money to assess the relative value of goods or property exchanged as of a particular instant in time. Rightfully, the value of money needs to be relatively certain and the Austrian school has a point that it needs to be determined. I'm not convinced that gold is it, or that a constant quantification of value is even achievable. I also do not know that it is not, thus I will leave it at that.

The Fair Tax Rebate or "Prebate"
The FairTax has an unfair and oppressive tax rate that violates Adam Smith's rule of being singularly applied on only one of many stages of distribution. Vance initially dismissed the entire FairTax proposal on this rate alone and correctly so. Linder and Boortz's fix for this is to correct their tax pricing error with a rebate. Elsewhere, I have stated and proven that all rebates are mostly smoke and mirror nonsense, but this one really takes the cake. Vance goes on to point out that not only will all businesses receive a check from the federal government, so will all households. The FairTax plan includes a monthly check from the government called a "prebate" that reimburses each household for the taxes paid on "the basic necessities of life." These checks, which are based on "the government's published poverty levels for various-sized households," (homestead exemption comes to mind about how they drag their feet on exclusions) do not just go to the poor, they are "paid to everyone, rich and poor alike." Boortz cites as an example a married couple with two children receiving a monthly check for $492—regardless of their income.

Now isn't this spiffy? Sounds like Hillary's "a check for [almost] everyone."

Vance points out that although the FairTax Plan would eliminate federal Social Security and Medicare taxes, it would not eliminate the programs. Boortz explains that "under our current tax code, these programs can be maintained only by increasing the tax on those who work, reducing benefits for those who have retired, or by increasing the age of retirement." The FairTax Plan solves this problem because it would fund Social Security and Medicare out of general revenues.

Neither address the problem that international labor pools don't pay this tax, don't have the benefits, and we will all be dead before the last group of labor ever does. Thus, international goods have the advantage.

So, instead of calling for the elimination of the various federal programs that feed off tax dollars, Boortz wants to merely change the way they are funded.

The Goals of the FairTax
Vance says that Boortz tells us that the FairTax idea originated with the group Americans for Fair Taxation (AFFT). I believe that was preceded by a group called the Citizens for an Alternative Tax System (CATS). Regardless, Vance correctly observes that these plans share a common goal to develop a system that would raise the same amount of revenue for the government as our current, overlapping authority, multi-tax system, narrowly addressed to the federal income and social security taxes, but that would be "... less intrusive, abusive, coercive, and corrosive."

Thus, the ambition of the FairTax was to simplify the tax code, increase compliance, and make the government more efficient at collecting taxes. Since it does not reduce government size at all, Vance argues, the entire plan should be chucked. This is certainly enough reason, but there are even more deep flaws in the scheme of the Fair Tax and there are even some in the alternative of "no tax" proposed as an alternative by Vance.

Vance is a writer for the Ludwig von Mises Institute economist group known as The Austrian School of economics and is a professor of economics at a Pensacola junior college. His criticism of the FairTax follows that of most academic reviews that debunk some things about any new tax plan, but parochially impose a self-serving yardstick characteristic of economists at think tanks and academic circles that truly believe that they have invented the original idea or, even if the hadn't, they are the only ones that possibly can.

Among these is the so-called "visibility" of a tax that is embedded in the price. They seem to be hung up about this and snicker to one another that such practice constitutes a "hidden tax" that is just an awful practice - so hideous that it should not even be discussed. Of course, that's how gasoline is sold now. For some reason, perhaps known only to the left desk drawer of these accountant ilk, the world is somehow made better by adding a sales tax on, but it is perfectly fine to embed labor withholding tax, property taxes, etc. I find this argument specious.

Boortz argues that the "sales tax efficiency" will recoup loss revenue from tax evaders and users of offshore financial centers who aren't paying their fair share of taxes. Boortz also proposes to eliminate the "cap on earnings subject to the levy for Social Security," thus forcing "the wealthy" to contribute their fair share. Boortz also argues that the FairTax will "recapture" the billions currently lost "from Internet and catalog sales," Vance observes.

The Myth of Sales Tax Efficiency
"Sales tax efficiency" is a myth. That doesn't mean that sales tax isn't more efficient than an income tax, which of course it is. But the modifier that because it is a "sales" tax is the reason it is efficient is false. Sales taxes are ubiquitously applied, are computed off of gross receipts (when they are applied at all) and are generally always less than ten percent of the selling price. They are generally applied only to retail sales (or final user) and are a consumption tax. I submit that Adam Smith first recognized that no tax should be more than ten percent or you would have collection problems and invite bootlegging. It isn't because he said so, it is because of the reason he gave. If you keep the tax under ten percent there is insufficient margin to provide the motivation to circumvent the tax. The converse of this is, if you make it more than ten percent you will have sufficient margin for people to want to circumvent it. The FairTax proposes a rate of beginning rate of 23%, which violates Adam Smiths rule completely, thus the only thing left about it being a "sales tax" is the name, not the benefit.

Vance misses this entirely. But then Vance goes on his own tirade of unjustified superlatives, saying "We know that governments are notoriously inefficient at everything they do. But is this always a bad thing? Why would anyone want to make the government more efficient at collecting taxes? We want the government to be just as inefficient as possible when it comes to tax collections. Just like we want the government to be just as inefficient as possible when it comes to launching an aggressive war, violating the Bill of Rights, or punishing dissent." Though Vance is correct that helping something evil do its evil isn't a good idea, it lends little to his argument against the FairTax.

The Claims of the FairTax
Vance attacks Boortz fairly and at great length, particularly about the latter's sales puffery, to wit:

The claims Boortz makes are dubious at best, Vance argues and he selects the following: The FairTax will not just increase economic growth, it will "send the American economy into warp drive." It will "bring a period of transformation and economic growth to America such as has never been seen before." "Millions of new jobs will be created." The FairTax will "double the size of the economy in the first fifteen years." After its implementation, "capital investment will increase quickly by a staggering 76 percent," "interest rates will decline by almost 30 percent," and "the economy will grow by 10.5 percent."

Boortz seems to plug in unverified, hard statistics as if there was broad agreement, though the figures are refuted by most economists that, unless government size is reduced, the economy will be throttled. Since Boortz claims revenue neutrality, this just can't be true.

The FairTax Dilemma: Too Simple, Too Much and Not Enough

Vance finds fault with Boortz on his "prebate" program, exposing it as nothing but a wealth redistribution plan. What Vance doesn't do is recognize the cause of the dilemma that Linder and Boortz faced and that is that the FairTax has a fixed rate (for simplicity's sake), thus a different rate could not exist for necessaries (food and the like); moreover, it also only applied to the final consumer (no doubt for the sake of their cronies that would prefer to have no tax) leaving most of the deeper channels of production and distribution untaxed. These two preconditions, when coupled with their "revenue neutral" stance, made the tax rate enormously too high. It would raise havoc on the lower economic levels of society. Rather than fix the problem (like ClampIt does by applying an average rate of five percent across the entire economy, with a lower rate for necessaries) they came up with a tortured welfare program. If such a complex fix of mailing out 160 million welfare checks to everybody every month, replete with a schedule for what each family would receive, doesn't neutralize one's sense of "simplicity" it would be a miracle. That doesn't need a comment about simplicity, which Vance oddly doesn't find fault with, but instead harps on it as a "soak the rich" appeal.

Vance also stings Boortz on the lack of references. "Based on an unnamed study by Harvard economics professor Dale Jorgenson, Boortz maintains that the current price of consumer products includes embedded taxes of about 22 percent," Vance cites Boortz and then goes on to question Boortz's conclusion that elimination of the cost will have all prices decrease by the same amount. "But not only does this ignore the basic laws of supply and demand, it is based on the fallacy that the costs of inputs in the production of a good determine the price of the output they produce," which the Austrian school disagrees. Of course Vance is right and Boortz is wrong, albeit for the wrong reasons.

Mises Myopia: Leave It To the States
Vance doesn't observe the basic laws of supply and demand when it comes to the diplomatic effect that when the federal government leaves a vacuum, the state and local governments will suck up the difference. That's understandable, because Vance and others like him believe in State's rights, thus they are myopically content with analyzing the fiscal policy of the federal government separately as if the states will not respond to money left on the table. We know they know better. If we all recall, when Reagan first announced a federal tax cut and, with it, reduced payments to the states, the latter responded by running to the public troughs with a variety of sales tax and fee hikes "to make up for the shortfall." Vance chastises Boortz again. "Boortz's unnamed governors would also 'welcome a move to taxing all goods and services with no exclusions or exemptions.' Why, of course they would. They would welcome that right now, but could never get away with it."

International Concerns of the FairTax
Professor Vance is a bit severe in going after Boortz's Pollyanna descriptions of the world with the Fair Tax. And then there are the "global implications of the FairTax." After the adoption of the FairTax, "foreign corporations will be compelled to build new plants in America" to remain competitive. Boortz envisions "the forward-thinking nations of the world" adopting "their own version of the FairTax," which will "spread freedom across the globe."

"Is there any problem in the world that won't be fixed with the adoption of the FairTax," Vance quips? He then goes on to describe the "Lies of the FairTax." I prefer not to use the word "lie" (intentional deception)

In addition to the unsubstantiated claims that Boortz makes for the FairTax, there are three ridiculous lies of the FairTax Plan.

Lie #1: taxes would be voluntary under the FairTax. In his discussion of the origins of the FairTax, Boortz says that the AFFT sought "a method of taxation that would be totally voluntary, that would allow all citizens to pay what they choose, when they choose, by how they choose to spend their money." Boortz has the audacity to say that "there is nothing coercive about the FairTax." It is "a truly voluntary tax system." The government should allow you to "keep your money in an investment account of some kind, earning interest for you, until you decide to pay taxes to the federal government." The FairTax would allow people to "judge for themselves when and how they're comfortable making taxable purchases."

Well, if the FairTax system is voluntary, and allows everyone to pay what they choose and when they choose, what happens if someone decides that they don't want to pay any taxes to the federal government? The same thing that happens now: fines and imprisonment. The FairTax is not a voluntary tax at all. The whole idea is a contradiction in terms. Boortz's statement about people keeping their money until "they're comfortable making taxable purchases" is ludicrous. There is no way to avoid buying new items. One can buy a used car, a used house, and used clothes, but one cannot purchase used food. One could argue that our present tax system is also voluntary: Don't earn any income and you won't have to pay any income taxes.

Lie #2:the FairTax rate would be 23 percent. Throughout the book, Boortz gives the FairTax rate as 23 percent. It is not until near the end of the book—in the chapter, "Questions and Objections"—that he admits it is really 30 percent. But even then he still insists it is 23 percent.

Those of us who were skeptical from the beginning noticed this when we got to page 84. There Boortz used the example of a single mother with two children spending $45 a week on groceries. He claims that the removal of the taxes currently embedded in the price would lower the cost of the groceries to $35.10 (a dubious proposition). But then he says: "Add the FairTax, and the groceries would cost $45.58. I learned in the sixth grade that if an item cost $35.10, and I add to it $10.48 in sales tax, then I paid a tax rate of almost 30 percent—not 23 percent. Boortz says in the "Questions and Objections" chapter that "critics of the FairTax have a way of dwelling on this 30 percent figure." I wonder why? Although Boortz explains that he is using an exclusive rate rather than an inclusive rate to figure the percentage, his "mathematical equivalent of a game of semantics" still results in a FairTax rate of 30 percent. This is why Boortz prefers the national sales tax to be included in the price of each item—so the consumer doesn't realize that he is really paying an extra 30 percent in sales tax, not Boortz's new math amount of 23 percent.

Lie #3: the FairTax would abolish the IRS. Boortz claims that his book is about transforming the nation by sending "one of its most hated institutions," the IRS, to "that place in the government guano heap of history." The goal of the FairTax is to "eliminate the IRS." Boortz even jokes about IRS agents working at a fast food restaurant after the FairTax is implemented.

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 FairTax. It should not be forgotten that the FairTax is a national sales tax. According to The Fair Tax Act of 2005:

There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.

The Fair Tax Act also sets up a "Problem Resolution Office" and authorizes "problem resolution officers." There will even still be tax courts. Boortz himself also states: "We envision a department of the Treasury to deal with Internet and catalog sales, with stiff penalties for those selling into our communities who do not abide by the law." The FairTax will abolish the IRS in the same way that it will abolish the income tax—by replacing it with something else.

The Problems of the FairTax

Besides the fact that it doesn't lower the amount of taxes seized from the taxpayers by the federal government and is based on unsubstantiated claims and ridiculous lies, the FairTax is fraught with other problems. In his Introduction, Boortz says that this book will explain the FairTax in detail. He will walk us "through the plan step by step, detailing both the good and the bad." Since Boortz never gets to the bad, I here present seventeen problems with the FairTax.

Problem #1:The FairTax hides the amount of sales tax being paid. Boortz explains how "the FairTax was designed as what's called an 'inclusive' tax—that is, the tax is included in the list price of the product." He reasons that "since our current income taxes are figured on an inclusive basis—that is, they are taken out of our paychecks, not added to them—it was decided to handle the sales tax in exactly the same manner." How could someone write a whole chapter on the evils of the withholding tax and then turn around and recommend a hidden tax like the FairTax? Boortz even has the audacity to claim that with the FairTax the "consumer is completely aware of what he is paying." Really? Suppose the FairTax is implemented next year. Go stand in front of a store and ask the typical American how much federal sales tax he paid on the item he just bought for $139? Give him a calculator and ask him again. Unless he is familiar with figuring percentages, the average American will not be able to tell you how much sales tax he just paid.

''I just don't agree with Professor Vance that eliminating the computation hides the rate of the tax. This is often cited as a problem and always comes out as an objection from academic tax critics and think tanks. I suspect the reason is they don't want any tax added to the exempt class of business which often supports them or just don't like anything that departs from the status quo, because I yet to find any compelling reason for this objection. To illustrate, it is much easier to figure a fixed gross receipt tax than any method to determine the amount of property tax, excise tax, federal and state withholding, etc., that is already embedded in any price that is charged under the status quo, which is far more hidden. Professor Vance may be referring to the fact that any tax, ubiquitously applied, is always compounded to an unknown extent within any economy, but he does not state so in his argument, though he implies it in the title of his critique. If this is the case, any tax, applied anywhere in the economy, will inevitably raise the cost by some amount everywhere in the economy and thus be somewhat compounded; to that extent, any tax is "hidden," so it would be impossible for Boortz or anyone else to overcome this objection. Vance's anecdotal example of a "... typical American" (who has a problem with most calculations) hangs on its own petard: By the same example using the same yardstick, the typical American couldn't figure out the percentage even if it was added on as a sales tax, since he can't compute anything. No one would doubt that buying gasoline (which includes federal excise and state sale tax) is vastly simpler than adding the taxes to the price. American's are pragmatic and will trust the cash register unless good cause is evident that it is wrong. ClampIt independently decided upon including any tax rather than have any buyer compute it, but it was both pursued and justified on simplification, lowering transactional computations by an order of magnitude. Under ClampIt, every price includes tax and it must be stated.- Ed''

Problem #2:The FairTax is progressive. Boortz correctly identifies a progressive income tax with Karl Marx. Yet, because of the prebate, the FairTax sets up a progressive tax system like we have now. Millions of Americans will pay no taxes at all. Others will have some of their taxes offset by the prebate. "The rich" will still be paying the majority of the taxes—something Boortz says he considers "class warfare." ''Professor Vance is right that any progressive or regressive tax is unfair, if nothing else by definition. In the FairTax, this is due to having an overly simplified plan of One Size Fits All. Einstein said that it was good to make things as simple as possible, but no simpler. -Ed''

Problem #3: The FairTax is an income redistribution scheme. Boortz calls the Earned Income Tax Credit "a prime conduit for income redistribution from high-income earners to the poor and middle class." Why, then, would he promote a FairTax Plan with a prebate that in essence allows the majority of citizens to not only pay no taxes, but in many cases gives them money over and above that which they paid in sales tax? What's fair about making "the rich" subsidize the poor and the middle class? Boortz calls Social Security an "income redistribution and welfare program." But under the FairTax Plan, Social Security is even worse. At least now it is funded by payroll tax contributions that are independent of deductions for federal income tax. Thanks to the prebate, many people will receive a free retirement program via Social Security who never contributed a dime towards their retirement, or as Boortz says: "All benefit and no burden." ''Well said. ClampIt provides a fund of 20% of tax revenues (1% of gross selling price) for individual entitlements such as social security and health care and imposes it across the entire economy. It mandates this amount to be deferred to avoid the Grasshopper/Ant problem. If you are going to provide any social security anywhere, it will be at higher cost than not doing it. Thus, it would be unfair to permit competition without this mandated cost to pretend it is more efficient. God knows, sending out 160 million checks monthly as the FairTax proposes is absurd, but a scenario that will have bureaucrats rubbing their hands in anticipative glee. ''

Problem #4:The FairTax creates new tax collectors. From doctors and lawyers to garbage collectors and tree trimmers—multitudes of individuals and businesses that never collected taxes before will be turned into tax collectors for the federal government. Will a teenage babysitter be required to collect the FairTax from her neighbors? ''This is magically missing from the FairTax, which just renames the tax collector and struggles with the heavy tax on necessaries. Any tax has to be collected and someone has to see that it is done. ClampIt piggybacks tax collection on the commercial clearing system (which has to do the accounting anyway) and these become tax collectors as well as transfer agents. Under ClampIt, each transaction carries one of eleven (zero to ten percent) tax rates and is computed and deducted from the sellers account, exactly as is now done for recovery of credit card merchant fees. It is better to use these transfer agents because 1) They are already handling most transactions, 2) they already know the state, federal and local governments of the parties to the transactions, 3) they can shunt sending the funds to Washington and send them directly, 4) they now how to do accounting and are audited, and 5) they are trusted by the parties to the transaction and competitively selected. The ClampIt transaction increases what these transfer agents do and thus provides a means to compensate them for it, but it also eliminates the superfluous redundancy in government, transferring it to regulated private enterprise.''

Problem #5:The FairTax creates new taxes. All Internet purchases will be subject to the national sales tax. So will heart surgeries, kidney transplants, and appendectomies—plus the drugs prescribed by the doctors doing the procedures. Want to attend a baseball, football, or basketball game? Better save up a little extra to take care of the FairTax that will be imposed on your tickets. ''Here, I think Professor is being a bit unfair in his criticism, in that health care surely has embedded income taxes reflected in its prices which Boortz's FairTax supposedly eliminates at least at the Federal level. The subsidized circus for the municipal arena is not repealed, however, so the FairTax unholy 23% bite will be real.-Ed.''

Problem #6: The FairTax creates new taxpayers. If there are no exceptions and no exemptions then churches and other non-profits will be forced to pay a national sales tax on every purchase. The FairTax will basically do away with not-for-profit entities. The FairTax would also count as taxable the purchases made by federal, state, and local governments. This means the government will be using taxpayer money to pay taxes to itself. ''Oops, professor Vance panders and here we depart. I am absolutely in favor of whatever is fair for the goose, is fair for the gander - no exceptions, not charities, not non-profits, not even governments. A charity is distinguished by what it does, not who it is as the infamous air-conditioned dog house reminds us. Non-profits are also entities that attempt to do good by how they do it, rather than what they do. I am absolutely opposed to having a government registry determine what group of people constitutes a charity or the invasive determination of how a non-profit does business. Professor Vance is right that this is a weak selling point for the FairTax, but his criticism is not ethically or economically justified. Professor Vance's last argument is specious in that the status quo wastes over six billion man hours a year of the citizenry on preparing income tax alone. To impose a zero-based budget rule and ignore this fact is unfair to the FairTax. Besides, if a discount is provided to government they will unfairly compete with private citizens. There is no free lunch. - Ed ''

Problem #7: The FairTax makes it easier for the federal government to raise taxes. All Congress has to do is slightly increase the initial 23 percent rate. A penny here, a penny there; a quarter of a cent now, a half of a cent later. Just a little at a time, of course. It might be to compensate for inflation, to give seniors a cost of living raise, or to pay for some manufactured crisis like bird flu. Since the federal budget goes up every year, and the FairTax is supposed to be "revenue neutral," the FairTax rate will have to go up right along with the federal budget. You can count on an increase every year, for if government budgets are not under control now, why should we expect Congress to magically become fiscally responsible just because the FairTax is adopted? ''This is the basic flaw of any of the status quo taxes and all of the "revenue neutral" alternative plans proposed. Tax should be indexed to the free economy and absolutely limited. To do so, every government (state, federal and local) and every entitlement program (social security and health care) must be exclusively funded from such a tax. Logically, there is no escaping this conclusion. Thus, any federal tax plan that does not control both the rate and number of federal, state and local taxes will not work. What professor Vance does not mention is far worse: the "other" tax. Thus the hog tax (federal income, property or sales tax) is just the tip of the iceberg. This cannot be done without a Constitutional amendment, limiting the power to tax. - Ed.''

Furthermore, since Social Security and Medicare would be funded out of general revenues the FairTax rate would also have to go up to fund the ever-increasing cost of these programs. Then there are the escalating costs of the new prescription drug plan. And if the amount of the prebate "is updated every year to keep up with inflation," the FairTax rate will have to be raised in like manner. How can Boortz recognize that "there is absolutely no limit to the government's desire for your money" and then express hope that the FairTax rate "will go down in the future" if "Congress can keep government spending down"? ''Boortz FairTax adds adjustments for inflation for his prebate program; the entire program is unnecessary under ClampIt. However, the management of the "Individual Entitlement Fund" of ClampIt needs to have some meat put on its bones. It fixes the ratio of entitlements to one fifth of government revenues, but this will not be adequate unless market forces are brought to bear to push down health costs. - Ed''

Problem #8: The FairTax makes it easier for state governments to raise taxes. In the name of simplicity and efficiency, the states would be inclined to follow the lead of the federal government. States that currently have no sales tax could add one. States that have exemptions on certain items could get rid of the exemptions so as to match the federal government. States that have no sales tax on services could begin taxing services like the federal FairTax Plan would do. ''The ratio of tax to government must be optimized and that cannot be done by letting the fox look after the chickens. The FairTax does not even address this question, leaving the states and the federal government to add any tax it pleases.-Ed.''

Problem #9: The FairTax has unknown and potentially huge transition costs. Boortz asks a good question: "How will the switch to the FairTax be made?" But then he gives a very naïve answer: "Cold turkey!" He explains that "on January 1, we'll begin to get our gross pay with no deductions." Boortz gives one "transition rule": The value of any inventory on hand December 31 can be used as a credit against collecting taxes in the next year." This should get accountants to work figuring out how to value each company's inventory the highest. Will it be specific identification, average cost, FIFO, or LIFO? But what if a company's fiscal year does not end on December 31? This will cause massive accounting problems. And especially for the federal government since the government's fiscal year begins on October 1. ''One can see the yardstick that both Boortz and Vance use which results in a checkmate with knights while kissing your sister.  Neither promise reform.  ClampIt addresses this issue head on with a concrete transition plan, gradually eliminating recurring tax on ownership as property is sold and fixing the proceeds to retirement of public debt.  ClampIt also permits adjustment of rate (only by product/service) to control any economic shock, but puts the mechanism in place to reduce the ratio of tax of the total economy. It also provides, with the charity fund, a 20% ballast account to adjust for unforseen artifacts in the transition. -Ed.''

Problem #10:The FairTax makes certain exceptions while supposedly having none. After saying that there are "no exclusions or exemptions" under the FairTax, Boortz specifically mentions exemptions for Internet access services and tuition. Therefore, his complaint that "exempting certain items—such as food and prescription drugs—would again open the door to an entire battalion of lobbyists to argue that the portion of the industry that they represent is clearly an essential product" is unjustified for he has already opened the door to that very thing. ''Agreed, no exemptions means exactly that. If you let the camel get its nose under the tent, the rest will follow. -Ed.''

Problem #11: The FairTax has great potential for fraud. Boortz envisions the prebate amount being issued to a card "like your bank debit card." Since every head of household would have one of these cards, there would be a great chance of criminals preying on people for their cards. There is also the possibility of counterfeiting, resulting in massive theft from the taxpayers. And since the FairTax only applies to new items, there will also be a tremendous incentive for new items to be reclassified as used or previously owned. Businesses could offer a slight increase in the price of a reclassified item in exchange for not having to charge customers the 23 percent national sales tax that would be due if the item was considered new. Enforcement of the "proper" classification of items would require an army of federal bureaucrats that would rival the IRS. ''This, too, is absolutely true and the single most naive element of the FairTax. For some reason known only to Mr. Linder and Mr. Boortz, you can still pretend that the public will have no problem with a retail hike of 23% over wholesale. Unfortunately, the status quo is just as bad. ClampIt addresses this issue by obeying the seminal rule of economist Adam Smith that makes no tax at any stage of distribution greater than ten percent. This must be done to discourage bootlegging and circumvention. It also makes no distinction between "used" or "new", only be product or service. One cannot have any exemption certificates for a fair tax plan and it must have constitutional language to explicitly forbid any. -Ed.''

Problem #12:The FairTax has the potential to turn thousands of law-abiding Americans into criminals. Since the FairTax contains no exemption for even the smallest business, anyone who does not collect the FairTax on any good he produces or services he provides is breaking the law. Mow a yard—collect the tax. Babysit—collect the tax. Repair a car—collect the tax. If you don't collect the FairTax then you are a criminal. Once again, the FairTax would have a terrible enforcement problem. ''Here, professor Vance argues for exemptions; elsewhere, he opposes them; I disagree. The problem with the FairTax is basically twofold: 1) The rate is too high (it should be less than ten percent to discourage bootlegging) and 2) It is too high because it exempts producers, importers, jobbers, wholesalers and retailers, levying tax only on the consumer. So the problem is not that has not enough exemptions, it is because he has too many. ClampIt has no exemptions for any seller of the same product/service, no other tax can be applied to any sale, and it must average five percent and not exceed ten percent. This is the exclusive source of funding for all government. -Ed''

Problem #13: The FairTax does not repeal the Sixteenth Amendment. When FairTax advocates discuss their plan, they talk as though the FairTax would result in the repeal of the Sixteenth Amendment that gave us the income tax. To his credit, Boortz doesn't make that mistake, but when many people read about "saying goodbye to the income tax," that is what they think. The FairTax bill now pending in Congress ( H.R. 25 in the House and the identical S. 25 in the Senate), repeals Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes.

The only mention of the Sixteenth Amendment in H.R. 25 is when it reports: "Congress further finds that the 16th amendment to the United States Constitution should be repealed." But to repeal Sixteenth Amendment would require a constitutional amendment. Are we to believe that Congress would vote to repeal the Sixteenth Amendment after the passage of the FairTax? And even if Congress did so it would still have to be sent to the states for approval by three-fourths of them.

So, barring the repeal of the Sixteenth Amendment, what is there to prevent an income tax from being imposed again after a national sales tax has been enacted? And what is to prevent any of the other taxes replaced by the FairTax being re-imposed due to some unanticipated budget shortfall or "crisis"?

Is Boortz that naïve to think that Congress will be satisfied with just the FairTax? And even if the Sixteenth Amendment was repealed after the imposition of the FairTax, any previous tax not on income could be brought back. Can Congress be trusted to do anything else? I can easily envision Congress proposing to lower the rate of the national sales tax in exchange for the addition of a supplemental Social Security tax because we need more money to fund Social Security. Then, a few years later, the national sales tax rate would be right back up to where it was before the "exchange." ''Agreed. See the ClampIt amendment which addresses all of these issues.''

Problem #14: The FairTax does not eliminate all federal taxes. Although it is implied throughout the book that the FairTax will be a replacement for the various federal taxes, there are some federal taxes that will still be with us under the FairTax. Even Boortz slips up one time and says that the FairTax would "replace virtually all personal and corporate taxes." Two examples of federal taxes that will still be with us under the FairTax are the excise tax on gasoline and the various taxes that one pays when purchasing an airline ticket. There is no mention of the federal gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are supposed to be eliminated under the FairTax includes the federal gas tax, which adds 18.4 cents to the price of a gallon of gas. So under the FairTax, we would have added to each gallon of gas federal excise tax, state excise tax, and federal sales tax. This is just the minimum. The states could also begin applying their sales tax to gasoline. A recent airline ticket I purchased had added to its price a federal excise tax of $15.28, a federal segment tax of $12.80, and a September 11th security fee of $10.00. And what about federal taxes on tobacco and alcohol? The FairTax will merely replace one visible tax with another while leaving intact the invisible ones. ''Agreed. See the ClampIt amendment whereby this is addressed.-Ed.''

Problem #15: The FairTax is not at all about lowering the amount of taxes the government collects. Boortz terms the FairTax a "tax reform measure, not a government reform measure." It "changes the way revenues are raised for the legitimate operations of the federal government." But if the FairTax raises the same amount of revenue to fund the same federal programs, then what does Boortz think the federal government does that is illegitimate? Is there anything he considers to be illegitimate? If so, then why would he expend so much energy on changing the way the federal government collects taxes instead of changing the amount that the federal government collects in taxes? The fundamental problem is clearly taxation, not the tax code. What is wrong with the federal government's tax code is not that it is too complex, but that it makes possible the almost $3 trillion a year that the federal government spends. As the French laissez-faire economist Jean-Baptiste Say (1767–1832) once said: "The best tax is always the lightest." Or, as our modern-day Say in Congress, Ron Paul (R-TX), says: "The real issue is total spending by government, not tax reform." ''I don't agree, any more than the good doctor would make an argument that a glutton could lose weight by exercise alone. Unlimited government is a glutton it takes its food from those that try to enforce what government does. The Special Local Option Sales Tax (SPLOST) illustrates this, whereby local sales taxes have doubled since its introduction. The reason is that there exists no one powerful enough with enough immediate vested interest to effectively oppose the growth of government. Only California's proposition 13 succeeded, which was a public initiative to limit taxation.''

Problem #16: The FairTax doesn't even begin to address the root of the problem. Boortz does refer to Frank Chodorov (1887–1966), reminding us that he "once observed that, by enacting the income tax, the American government was proclaiming that all wealth belonged to the government, and whatever wealth the government did not seize from the person who created it should be looked on as a concession—a gift from the government." But Boortz doesn't quote Chodorov, and he gives no source that he is referencing. He subtly seems to imply that Chodorov was opposed to the income tax because it was an income tax and that, therefore, he might be inclined to support the FairTax if he were alive. But this couldn't possibly be true because Chodorov considered taxation itself to be robbery. How is justifying the federal government spending almost $3 trillion a year of the taxpayers money, as long as it is collected "fairly," any different from the viewpoint that Chodorov condemns? While making the case for not allowing exemptions from the FairTax for food, Boortz, in using the example of a wedding reception, inadvertently shows his true colors: "Would it be fair to allow a multimillionaire to spend $20,000 on food for a large wedding reception at his estate, and not pay any sales tax on that purchase?" Why, of course it would. It would be fairer than forcing the American people to pay a 23 percent national sales tax on every good and service they purchase. ''Fair can be cruel. It simply means one divide, the other choose. Even though Chodorov may be learned and reasoned, I don't give a damn what he might have thought unless it is pertinent to the current argument. If taxation is robbery, government is robbery. All governments exercise constraint of freedom. Good government ends up with the most freedom possible and that is more than anarchy and substantially less than tyranny. ClampIt first sets the objective ratio that idealizes the budget of good government. ClampIt indexes that to the free economy, thus the size of government is controlled. ClampIt does not permit any tax to be lower than zero, nor higher than ten percent. It requires that it average five percent, which objectively fixes government to an ideal weight. In the example both Boortz and professor Vance quibble about, is not an issue under ClampIt. If the multimillionaire served hamburgers (and the ClampIt tax on hamburger was only 1 or 2%), then where's the beef? If Bill Gates chooses to eat oatmeal (which say has under ClampIt a zero tax), there is no beef. This is not done by who they are (exemption certificates), but by what they do (what product, what service). Professor Vance needs to look at the status quo, which is worse than what Boortz proposes, but both are fatally flawed. A five martini lunch for a business is deductible; a big Mac for a truck driver is no. This selective exemption is backwards. Necessaries should have low tax burden for the benefit of all society. ClampIt provides this elasticity; the status quo and the FairTax and thus must rely on the tortured logic of undeserved and unneeded welfare.-Ed ''

Problem #17: The FairTax makes welfare universal. Millions of people who never took a dime from other taxpayers in the form of food stamps, SSI, AFDC, Medicaid, WIC, or housing assistance will now be on the federal dole via the prebate. The FairTax is welfare for the masses. It makes us all wards of the state. Perhaps it would be best, in the interest of equity and efficiency, if all the money Americans earned was just paid to the state and then distributed to every American in a "fair" manner. The government could just keep what it needed, redistribute what's left, and do it all without the FairTax. ''Professor Vance's tongue in cheek proposal sums up the FairTax and its pitch to the masses. He's content with shooting down Linder and Boortz (which is a fair argumentative position), but that necessarily means that he is for the status quo unless he knows a better plan. No honest man in their right mind would be for the unlimited in number, unlimited in rate, multi-tax plan we have now. But I don't see any alternative plan offered by professor Vance, save none at all, which of course sticks him with the status quo. -Ed.''

The Fraud of the FairTax

The FairTax is not the solution. And because it allows the federal government to confiscate the wealth of American citizens less intrusively and more efficiently, it will become part of the problem—the problem of the ever-increasing, ever-intruding, ever-destroying welfare/warfare state. The FairTax is a fraud. Yet Boortz ties rejection of the FairTax to believing that America is a great country because of its government, "as so many politicians do." Politicians who oppose the FairTax do so because they "thrive on dependency."

The antidote to the fraud of the FairTax is a good dose of the wisdom of Murray Rothbard: "There can be no such thing as 'fairness in taxation.' Taxation is nothing but organized theft, and the concept of a 'fair tax' is therefore every bit as absurd as that of 'fair theft.'" ''Again, this is often quoted, often learnedly cited, but it doesn't make sense to me. All governments are absolute monopolies over their permitted sphere of control. Since there is no free lunch, it follows that somehow such monopolies must be paid for what they are asked to do. However they get this payment is properly construed as a tax. Strict libertarians argue that such a tax or "fee" should be completely voluntary and if you don't want the government service, you shouldn't be forced to pay for it. The corollary to this, which they seem to ignore, is that when one can't do without the service the monopoly provides it becomes a license to steal and you have no competitive market check for the price demanded. Thus, toll roads will crop up in lieu of taxes, yet they really still taxes if they go to a monopoly. Saying it is voluntary or optional would be like having a single monopoly furnish water or power that could charge anything it wanted. The only options you have are 1) leave and go somewhere else or 2) produce your own water or power. Though the latter is feasible, it is not efficient. Government has other functions that are not economic, but vital. Every citizen has a right not to be killed by another citizen without just cause. Self defense is the first libertarian option and it is a good one. But what if someone elects not to pay for common defense? They get a free ride if the rest of society pays for it and they don't. Likewise, for social security reasons the grasshopper decides to flit while the ant toils. Then, when age descends and infirmity looms, the grasshopper relies on pity, knowing he will get it. This, too, is a free ride and the cost of grasshopper services is cheaper than the squirrels, but the squirrel gets stuck with the bill. Routine decisions are easier (Do we drive on the right or drive on the left?), but we must decide these universally. I believe any honest man must conclude some government is essential, thus compensation for that government expense must be done somehow. To do so voluntarily whenever the mood strikes us would establish an unfair subsidy by the Good for the Evil. Given enough time, Evil will prevail with such a bias present as predicted by Adam Smith. So that leaves us with a mandatory method, as ugly as it sounds, to compensate government and whatever that is, it is not voluntary, and thus it is a tax. We have learned that our forefathers solution of no taxation without representation is not sufficient to limit excessive growth of government and loss of freedom. As Thomas Paine said, choosing Prince A over Prince B where both agree to plunder, is not a solution. We have made the rate increase of tax too easy and only by great effort by great people is this occasionally reversed. ClampIt addresses this problem by adding a limit to government compensation and fixing it to a ratio of the free economy. This will make raising taxes difficult, thus making doing the job of government more attractive then sticking its nose into something that is best done by individuals."

Boortz believes that the abolition of the income tax will make the bad day of April 15 "just another beautiful spring day." With its unsubstantiated claims, ridiculous lies, and numerous problems, the FairTax will ensure that everyday is a bad day, not just April 15.

Laurence M. Vance is a freelance writer and an adjunct instructor in accounting and economics at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Send him mail. Comment on the blog