Kotlikoff on the Fair Tax
By Arnold Kling
What if Mr. Megabucks sits and counts his money? With a direct wealth tax Mr. Megabucks pays $15 million immediately and is left with $50 million in purchasing power. Under the FairTax, Mr. Megabuck is in the same boat. Retail prices rise by 30 percent and Mr. Megabucks finds that his $65 million can only buy $50 million in real goods and services; Mr. Megabucks has the same number of dollars, but 23 percent less purchasing power.
But the rich miser, under this scenario, pays no taxes under the Fair Tax. He is “in the same boat” because supposedly prices have gone up. It seems to me that Kotlikoff is playing a rhetorical game here.
In fact, the whole op-ed seems to be an exercise in rhetorical games. Kotlikoff makes up stories about wealthy people. Instead, if he were to look at actual figures for income, consumption, and taxation for wealthy people, he would make a more useful argument. But the facts, at least as I gathered them, do not fit Kotlikoff’s story.
I will put my point of view in very simple terms. Looking at the data, the U.S. Federal government gathers a considerable amount of revenue from high-income, high-saving citizens. Under the fair tax, as under any consumption tax, that source of revenue would go down. From my perspective as a libertarian, that would be a good thing, for any number of reasons. But Kotlikoff’s attempt to persuade liberal Democrats that they should like the fair tax strikes me as dishonest.
Pointer from Greg Mankiw.
UPDATE: Daniel L. Vazzana, an econ professor at Georgetown College in Kentucky, emails:
This appears to be a regressive tax as we move from the middle to the top.
He uses information from a recent op-ed by Cox and Alm on average income and consumption for the top fifth, middle fifth, and bottom fifth of households. The top fifth has $150 K of income and $69 K of consumption. The middle fifth has $45 K and $34 K. The bottom fifth has $10 K and $18 K. The “prebate” of the Fair Tax would help keep the tax rate of the average household in the bottom fifth down to 7.5 percent. But the middle fifth would have a rate of 12.6 percent, compared with 10.8 percent for the top fifth.
A couple of points about Vazzana’s calculations. First, note that all of the tax rates are suspiciously low. Remember, this tax is supposed to replace all personal taxes. It is not going to generate the same revenue as our current taxes–a point that William Gale and others have made.
Second, there are arguments to be made on both sides as to whether progressivity of the tax system should be measured relative to consumption or relative to income. Left-leaning economists argue for using income, in which case these calculations hold sway. But a case could be made for using consumption, in which case the Fair Tax would not be regressive.