February 10, 2008

In For A Penny…: Book Review of “FairTax: The Truth – Answering the Critics”

(The following book review originally appeared in the February 10, 2008 edition of the New York Post).

Mike Huckabee’s success on Super Tuesday was a godsend for a new book by talk-show host Neil Boortz and Rep. John Linder of Georgia, “FairTax: The Truth.”

This sequel to their 2005 bestseller, “The FairTax Book,” once again urges the nation to repeal most federal taxes in favor of a national retail sales tax. Huckabee is the one major candidate who has embraced the idea and the new book claims that zealous FairTax supporters helped him win the Iowa caucus. He also won the primary in Georgia where Boortz and Linder are based and where support for the FairTax is strongest.

Like many movie sequels, the new offering spends too much time repeating the original. It’s subtitled “Answering the Critics” and is written in Q&A form. But if Huckabee remains on the national stage, these arguments will soon graduate from tax journals to TV, so it doesn’t hurt to hear the pros and cons in this format.

Boortz’s talk-radio style makes for a fast read. But with it come exaggerations. The IRS could be abolished, the authors say, and they snidely assign the nation’s tax collectors one final duty: “The IRS should be expected to stick around until it has completed its one remaining mandate: collecting taxes still due from the era of the income tax. Passage of the FairTax should not be viewed as an amnesty for past tax cheats.”

And there are some personal accusations too: that the critics are just lobbyists or income tax scholars trying to protect their “natural habitat,” that is, the inside-the-beltway environment where tax gurus manipulate peoples’ income taxes for their own gain.

Boortz and Linder see themselves as having grabbed a tiger by the tail. No mere policy proposal to them, the FairTax is a movement that’s opening the eyes of thousands of people every day, proving how much damage the federal tax system is doing to our economy, our privacy and our government.

The four taxes they aim to replace are the two income taxes, personal and corporate, plus the payroll tax and the estate tax. That’s $2.5 trillion this year, which is no paltry sum to raise with a sales tax. But the current tax code sets such a low bar for the FairTax to clear that Boortz and Linder are able to tee off on its obvious flaws:

n Complexity and cronyism. Individuals and companies with identical incomes often owe dramatically different amounts of tax because of the credits, exemptions and deductions that litter the tax code. Lobbyists keep it that way.

n Economic waste. Economists have long believed that taxing people when they spend – not when they earn – is a better way for the government to raise money, so these “consumption taxes” like the FairTax have an economic advantage.

n Privacy. The IRS must intrude to enforce an income tax, but a payer of sales tax is anonymous.

Yet despite the dreadful status quo, there are serious criticisms of the Fair Tax. Economist William Gale at the left-leaning Brookings Institution took the lead with an assault on the published FairTax rate, 23 percent on almost all goods and services, asserting that it’s unrealistically low. And from the right, President Bush’s 2005 Tax Reform Commission explicitly rejected the FairTax for similar reasons.

Free-market economist Bruce Bartlett recently chimed in with an across-the-board denunciation, including an allegation that the FairTax movement was started by Scientologists.

Boortz and Linder dismiss Bartlett’s claim out of hand, and they do an excellent job of skewering Rudy Giuliani’s claim that we should preserve the income tax for the sake of its most popular loophole, the mortgage interest deduction.

To the common charge that people could easily evade the FairTax, Boortz and Linder say that large retailers would go along: “In America, 3.6 percent of all companies – 92,334 firms – collectively make 85.7 percent of all sales. It’s more important for the owners of those companies to stay in business and out of jail than it is to help you avoid paying the FairTax.”

Boortz and Linder, though, spend the bulk of the book rebutting charges that the FairTax would shift the tax burden down the income scale. The reading gets more academic here, as the authors lean heavily on the writings of Boston University economist Lawrence Kotlikoff, the FairTax’s most prominent academic defender.

Would the FairTax hurt the poor by taking away income tax credits? No, Boortz and Linder brag, the FairTax system is better for the poor because it includes a monthly check for all expenses up to the poverty level, which they call a “prebate.”

Won’t taxing services fail, as it has in some states? Isn’t it nonsensical to tax government purchases? Won’t the “prebate” be a massive, corrupt government check-writing program?

The criticisms are numerous, and some of the answers are too glib. But the need for fundamental tax reform is undeniable, and the FairTaxers are committed to this worthy cause. If Huckabee’s star continues to ascend, we’re all going to need to know a little about the fundamental tax reform plan that he claims can turn the economy around.

William Ahern is communications director for the Tax Foundation.