Flat Tax vs. FairTax Debate

July 14, 2008

One of last week’s FreedomFest 2008 events was a debate between proponents of the FairTax and the Flat Tax. Both are tax reform proposals that would replace much of our existing federal tax system. The FairTax is a national sales tax imposed on retail transactions, coupled with a “prebate” sent to each American each month. There are many Flat Tax proposals, but all aim to eliminate many of the deductions and credits in the tax code, and tax all income at one rate.

Dan Mitchell of the Cato Institute began by arguing that a flat tax is preferable because 25 nations have already adopted it; no nation has yet replaced an income tax with a national sales taxes. He argued that because a flat tax is a low-rate system with no double taxation, it can produce greater economic growth. Mitchell also expressed concern that if the U.S. adopted a national sales tax, it could end up with both the existing income tax plus the national sales tax.

David Tuerck of the Beacon Hill Institute argued that the FairTax ensures that all Americans pay taxes, unlike income tax systems which can have large numbers of voting Americans not paying tax. He also noted that flat income taxes tend to erode and become less flat as “rent-seeking special interests” turn the tax code into a “grab bag.” Tuerck also argued that administrative costs of the FairTax would be easier, since approximately 1.1 million businesses would have to pay the FairTax, compared to 132 million+ income tax filers.

Stephen Moore of the Wall Street Journal editorial board emphasized that the flat tax would create much growth, and that it is more politically possible than the FairTax. Richard Rahn of the Cato Institute responded that it is defeatist to view tax reform as politically unpalatable, and that a FairTax is preferable since it would tax consumption, not income, and eliminate the IRS.

After the debate concluded, the audience voted on which plan they preferred. The vote was very close, but the FairTax won, according to the moderator, “by a nose.”

More on the FairTax vs. Flat Tax debate:

FairTax Facts – Wall Street Journal editorial by Leo Linbeck (pro-FairTax)

What’s Foul About the FairTax – Boston Globe editorial by Bruce Bartlett (anti-FairTax)

Un-FairTax – Washington Post editorial (anti-FairTax)

Huckabee’s Flat Tax is a Fair Tax – editorial in The Fergus Daily Journal (pro-FairTax)

And read the Tax Foundation’s statement on tax reform proposals here.

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