Fervent faith in FairTax defies reason

(Originally published April 23, 2007)

I wouldn’t want to accuse Georgia’s FairTax movement of being a cult, but it does have a disturbing number of cult-like attributes. Among other things, its adherents display an almost religious fervor for their cause, to the point that they become blind to the obvious irrationality of claims that are made on its behalf.

The prime advocate of the FairTax in Congress, U.S. Rep. John Linder (R-Ga.), claims the tax will do away with “all personal income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital gains taxes and gift and estate taxes.” Instead, those taxes will be replaced with a retail sales tax of 30 percent on all services and new goods.

Among other benefits, Linder claims that adopting the FairTax will drive down retail prices by 20 percent to 30 percent. That price drop would almost completely offset the FairTax’s 30 percent sales tax, meaning that in effect, we could run the federal government for free.

But wait! If you act now, Linder will also throw in a 10.5 percent increase in the nation’s gross domestic product the very first year the Fair Tax is in place. And as a special bonus, interest rates would also fall by 20 to 30 percent.

Linder and other FairTax advocates, including talk radio host Neal Boortz, make two other promises as well. First, they say, the FairTax will be revenue-neutral, generating just as much money as the current system.

Second, they promise that the FairTax will not shift the tax burden onto low-income households, as sales taxes usually do. To their credit, they make an honest effort to achieve that goal, using a monthly check to compensate low-income households for the higher sales tax they would pay.

But let’s review. Under the FairTax, low-income Americans won’t pay taxes; corporations won’t pay any taxes either. Yet the Fair Tax is guaranteed to generate the same amount of revenue as today’s system. Basic arithmetic requires that somebody’s taxes increase. Who will that somebody be?

For example, would it be a typical middle-class two-income Georgia family with two kids, a mortgage and college tuition payments? As it happens, I have access to the tax returns of just such a family.

At www.fairtax.org, the main Web site of the FairTax movement, I plugged the Bookman family financial data into the FairTax calculator. The model reported that the FairTax would save me $7,500.

Suddenly, the FairTax didn’t seem such a bad idea.

Still, the mystery remained: If the middle class pays less, and corporations and poor people don’t pay anything at all, who pays more? The rich? That didn’t seem likely given Republican enthusiasm for the Fair Tax, but again I turned to the FairTax calculator for help.

As it happens, I also had access to the 2006 tax return of a rather wealthy couple who reported an adjusted gross income of $765,801 and paid $203,021 in federal taxes. What would this couple, a certain George and Laura Bush, pay under the FairTax?

Plugging their data into the calculator, I learned that the FairTax woud cut their federal tax burden by $74,596.

I then began to punch invented numbers into the model, determined to find somebody, even a theoretical somebody, who would pay more. A family with $1.5 million in income, with a $4.5 million mortgage? Nope. Under the FairTax, they would save $436,624.

Finally, I hit paydirt. It turns out that a married couple with two children who rented their home and made $40,000 would, under the FairTax, pay $860 a year more in taxes than they do today.

Somehow, I doubt that will be enough to make the concept revenue-neutral. In 2005, a panel appointed by President Bush to study proposed changes in the federal tax system reached the same conclusion, though its process was more sophisticated. It found that eliminating just the federal income tax — leaving payroll taxes, estate taxes and gift taxes in place — would require a retail sales tax of at least 34 percent. As it noted, “no state or country has ever levied a retail sales tax at a tax rate that even approaches the 34 percent required to replace the federal income tax system.”

The panel also reported that replacing the income tax with a 34 percent sales tax would reduce taxes on just two groups — households making more than $200,000, and those making less than $30,000. For everyone else, the tax burden would increase.

Unfortunately, such data don’t seem to penetrate the cult. A core of Georgia Republican Party activists has completely embraced the FairTax, and GOP elected officials have done so as well. Every Georgia Republican in Congress is a co-sponsor of Fair Tax legislation, as are both U.S. senators. The fever is spreading to the state Legislature, where House Speaker Glenn Richardson is touting his radical tax-reform measure as a state version of the FairTax.

Anybody have the number of a cult deprogrammer?