The Great “Fair Tax” Debate

The Objective Standard has posted a three-part debate on the “Fair Tax,” a national sales tax intended to replace the income tax.

In my opening salvo, “‘Fair Tax’ Looks Ugly In the Details,” I point out that the “Fair Tax” is still relatively complex, and it would require many Americans to submit the tax. I also discuss the tax’s “prebate” and its potential for corruption. I conclude, “Yes, advocates of liberty should look at strategies to make tax collection less burdensome. But fundamental tax reform, which must include serious cuts in net taxes collected, becomes possible only with significant cuts to federal spending.”

John Keel wrote a lengthy reply, “Concerning ‘Fair Tax Looks Ugly in the Details.'” He argues that the tax is simple, it would impose low compliance costs, and it would reduce rather than expand the black market.

In my reply to Keel, “‘Fair Tax’ Offers Neither Fairness Nor Simplicity,” I expand my criticisms of the tax. I point out that, yes, the tax would require extensive paperwork for compliance. The so-called “prebate” not only adds another layer of bureaucracy, but it poses the risk of expanding into another welfare program. The “Fair Tax” would become easily corrupted, and it would in fact promote an extensive black market. The tax could also lead to a dual system of federal taxation, complimenting rather than replacing the income tax, and it could morph into a Value Added Tax.

However, I point out, if a sales tax actually followed the repeal of the Sixteenth Amendment, that would be a lot better. But still the major goal of the liberty activist should be to reduce federal spending and restore individual rights.

Read the first, second, and third articles in their entirety!

Would Prop. 103 Let Legislature Spend However It Wants?

A couple days ago “Brian” wrote about Proposition 103, “The legislature is under no obligation to spend the money on education. Prop 103 is a law, and it is only valid until it is superseded by another law.” I heard a similar claim yesterday from Justin Everett and the hosts of Grassroots Radio on 560 am.

While I think it’s possible that the legislature could try to overwrite Prop. 103 and redirect the funds to other ends, I think that’s very unlikely.

A couple weeks ago I reviewed Prop. 103 and pointed out its language adding the tax hike to the education budget of 2011-12. So, as written, Prop. 103 definitely increases the budget for education. (The budget might have increased anyway, but probably not nearly as much.)

If the legislature tried to spend the Prop. 103 money on other ends, that would undoubtedly draw a legal challenge, though I doubt Colorado’s absurdly biased courts would welcome it. But the political heat for failing to budget in accordance with Prop. 103 would be overwhelming.

I can’t recall who suggested a more plausible alternative: the money could go to shore up the pensions of those working in government “education” (broadly defined). Prop. 103 says nothing about spending the money on actually teaching children.

It’s not like critics of Prop. 103 need to reach for strained arguments about the legislature “spending the money however it wants”; as it is written the measure is terrible.

As my dad and I wrote recently, “Prop. 103. Would Hurt Working Families, Kill Jobs.”

A new paper from the Independence Institute amplifies these concerns:

The higher tax will reduce job opportunities in Colorado. The total loss in jobs from the Prop 103 tax increase is estimated between 7,400 and 11,600. The higher tax will also reduce the tax base, partially offsetting the revenue generated by the tax. Prop. 103 will exacerbate a $1 billion structural deficit in the state budget.

This is an important argument. By further weakening the Colorado economy, Prop. 103 would reduce the amount of taxes flowing into the rest of the budget. So, while education spending would skyrocket, spending elsewhere would fall relative to where it otherwise would have been.

That Prop. 103 would harm the economy is the first major reason to oppose it; the second is that the tax hike would probably have little to no effect on the actual quality of education. (My dad and I review this point as well.) Yes, the money would go to enrich administrators and the teachers’ unions, but would it actually improve kids’ education? We seriously doubt it.

Further enriching the teachers’ unions and entrenching their power is hardly the way to improve education. Instead, we need to move toward free markets to give educators and families the freedom they need to best educate the children in their care.

Comments

No Guarantee

Ari,

I always appreciate your insight, and read most of your posts. Somehow missed this one.

Sorry about the “after-the-fact” response, but just Googled my name and…To reinforce my statement on the radio, Sen. Rollie Heath admitted in a few debates, there is no guarantee of how the money would be spent. Terry Scanlon of the Colorado Fiscal Policy Institute admitted the same at a debate, and added “If the legislature can get around Amendment 23, a Constitutional Amendment, then they could probably get around this.” Reps. Swalm and Balmer also reinforced this notion at a debate as well after I made this statement. Anything statutory can be changed by both chambers of the legislature with a 50%+1 vote and signed by the governor. With that said, I was relieved and excited when voters killed this tax increase by almost a 2-1 margin.

Best,
Justin Everett
December 16, 2011

Income Tax Stinks, but the “Fair Tax” Doesn’t Look Much Better

The Objective Standard published my latest article, “‘Fair Tax’ Looks Ugly in the Details.”

I point out that, not only would the “Fair Tax” (a type of national sales tax) increase the cost of items by (at least) 30 percent, but it would also tax consumable services. While usually sellers must remit the tax, sometimes consumers must do so. The worst possible outcome is a sales tax added to the income tax.

I argue:

To a large degree, the debate over the sales tax versus the income tax misses the more fundamental issue of spending levels. How the federal government collects our money matters, but how much the government forcibly confiscates matters far more. So long as the federal government spends massive amounts of the citizens’ wealth on “bailouts,” corporate welfare, and handouts to individuals, any resulting tax necessarily grows onerous.

Check out the entire article!

Prop. 103. Would Hurt Working Families, Kill Jobs

The following article by Linn and Ari Armstrong originally was published September 30 by Grand Junction Free Press.

They’re ba-a-ck, and they want to raise your taxes, again. They always do. Yes, it’s “for the children.” It usually is.

But Proposition 103, the tax hike brought to this fall’s ballot by Boulder Democrat Rollie Heath and the teachers’ unions, is really about taking more money out of the pockets of working families to enrich those unions. Throwing more tax dollars at government-run schools hardly would improve the quality of education.

If you really want to help “the children” (and everyone else), you will vote no on the job killer Prop. 103. Taking even more money out of the voluntary economy would only make it harder for working families to put food on the table and afford other necessities.

Perhaps you’ve noticed that the economy remains weak, with unemployment nationally hovering at around nine percent and Colorado not far behind. The mortgage bust and the bipartisan political bungling that followed hit Grand Junction especially hard. Politicians have already burdened the economy with myriad taxes and reams of controls — how much more can it take?

Taking more money from working families for taxes would dry up private-sector jobs. While the cost of the tax hike would depend on the state of the economy, Legislative Council estimates the measure would suck around $2.9 billion out of the voluntary economy by raising sales and income taxes for five years. Think about how many salaries that represents.

Prop. 103 devotes the money to “public education” from preschool through college, taking the 2011-12 budget as the base level. Legislative Council estimates that base at about $4.3 billion (which includes only state funding, not local and federal). Thus, the added taxes would raise state spending by around 12 to 15 percent per year. Of course, how the legislature would adjust education spending absent the tax hike remains anybody’s guess.

Even those who want to raise taxes may question a hike specifically for education. If you think state government should spend relatively more on roads and criminal investigations instead, you may not like Prop. 103 so much. On the other hand, those with particular ideas about how the state should fund education may not see the measure as specific enough.

We think state legislators should prioritize better, cut spending, and lower tax rates so people can keep more of the money they earn. Then people could spend their own money on what they find most important, whether education, a new business, health care, or whatever.

Would spending more tax dollars on education even improve the quality of education? We think not. The Joint Budget Committee notes total Colorado spending on education has jumped from just over $5 billion in 2004-05 to $7.2 billion in 2011-12, a 44 percent increase, while student enrollment has climbed 10 percent. Has education gotten proportionately better over that period? Hardly.

Taking a longer view, Ben DeGrow of the Independence Institute notes, “Since 1970 per-pupil spending in Colorado and the U.S. have more than doubled after counting inflationary changes — even given the real modest freezes and cuts many Colorado K-12 schools have experienced over the past two years.” (Note: Ari has written for the Institute, in one case on a contract basis.)

Coloradans already spend tons of money on education. The NEA recently estimated per-pupil spending here at over $9,500. Education spending already consumes around 37 percent of the state’s total operating budget of $19.6 billion, dwarfing spending for corrections and transportation combined.

What do we get for all that spending? “Adding more tax dollars to K-12 systems on a large scale has no connection to improving academic results,” DeGrow summarizes. As Andrew Coulson reviews for the Cato Institute, as U.S. per-pupil funding has skyrocketed over the last few decades, reading, math, and science scores have virtually flatlined.

Rather than throw more tax dollars at the teachers’ unions and the political cronies they finance, we need to instead find better value for our education dollars. Schools need greater ability to fire dud teachers without incurring union lawsuits. Most districts can get by with fewer administrative paper-shufflers. Schools should stop following the latest expensive fads and get back to teaching the basics.

Over the longer term, we should look at ways to reduce political involvement in education, not expand it. We are heartened by the success of various charter schools throughout the state. Ultimately we’d like to see real choice in education. We prefer universal tax credits over vouchers. Eventually we’d like to see truly free markets emerge in education, with parents, educators, and voluntary charities assuming the basic responsibility for organizing and financing education. Get politicians and bureaucrats out of it.

This fall, though, we face an immediate choice. Should we divert even more money from the hard-pressed voluntary economy to the teachers’ unions, or should we demand greater accountability and better prioritization for the tax dollars we already turn over? Only the latter option comports with economic sanity and your liberty to spend your money as you choose.

Pajamas Reply to Elizabeth Warren

Pajamas Media has published my latest article, “Elizabeth Warren’s ‘Social Contract’ an Ideological Fantasy.” (The editors picked the great title.)

The article replies to a popular video of Warren in which she argues the “social contract” justifies hefty taxes on the wealthy.

I decimate her arguments, if I do say so. First, I point out, “Productive business leaders create the wealth that enables us to thrive, seek employment, and on the side pay for governmental services.” Then I argue the proper function of government is to protect people’s rights. I conclude:

The notion that the likes of Nancy Pelosi can spend the money of Amazon’s Jeff Bezos better than Bezos can is laughable on its face.

Warren contends “there is nobody in this country who got rich on his own.” In a sense she’s right: people get rich by providing enormously valuable goods and services to others who willingly pay for them. Warren and other politicians should not be able to dictate what “hunk” of the earnings of others they forcibly seize. …[L]egitimate government does not loot “the rich” (or anyone else) but instead protects people’s rights, including their rights to their earnings.

Check out the entire piece!

Let’s Eliminate the Sales Tax

As my dad and I argued last year, Colorado should eliminate the sales tax (along with the use tax) even if done in a revenue-neutral way by increasing the income tax rate.

Consider a few of the many problems with the tax:

Interstate commerce has created huge problems for collecting and administering sales and use taxes.

* Paying the sales tax over small-scale intrastate commerce is incredibly difficult. For example, I can directly sell my book, Values of Harry Potter,practically anywhere in the world, but I cannot afford the paperwork nightmare of selling it directly in Colorado. (You can still buy it on Amazon!) In my experience, many small businesses simply ignore the sales tax laws.

Paying the use tax is an absolute nightmare, and the fact that hardly anybody does it turns most Coloradans into criminals.

* Sales taxes disadvantage local stores, yet forcing out-of-state businesses to collect sales taxes would create “as many as 15,000 tax rates to administer” — a bureaucratic nightmare.

The obvious solution to all these problems is to simply eliminate the sales tax.

Thankfully, the Joint Budget Committee has placed the Colorado budgetonline starting with 2004-05. Looking at the budget for fiscal year 2011-12, we can learn what eliminating the sales tax would mean.

Page 6 of that document reveals that total “excise taxes” (sales, use, and related taxes) bring in $2,184,400,000 (let’s say $2.2 billion). Income taxes bring in $4,692,200,000 (let’s say $4.7 billion). So, very roughly, eliminating the sales tax in a revenue-neutral way would require an increase in the income tax of somewhere less than fifty percent. Of course I’d rather see net taxes decline, but I could live with a revenue-neutral shift in order to get rid of the onerous sales tax.

Prop. 103 and Fungibility

Proposition 103 is the sole state-wide measure, a tax hike, for the November 1 Colorado ballot. I will have more to say about this elsewhere. For now, I want to investigate one particular aspect of the measure; the potential fungibility of funds under it.

Here’s an analogy to introduce the fungibility issue. Let’s say your daughter has $100. She wants to go to a concert, but she doesn’t want to spend the $30 on a ticket. She also wants to buy a $30 book to help her get into college, and she wants to spend the other $70 on a trip to the mall. She comes to you and says, “Mom, I really, REALLY need this $30 book, because it’s really REALLY important for me to get into college. Can, I can I, can I have $30 for the book, please please PLEASE?! I promise I’ll use that $30 only for the book.”

You say sure. So she spends $30 on the book, $30 on a ticket, and $70 at the mall. Otherwise, she would have forgone the concert ticket and spent $100 total. True to her promise, she spent your $30 on the book. But that’s where the fungibility issue comes up: your gift allowed her to divert another $30 to the concert ticket. So even though you officially gave her the money for the book, you might as well have given it to her for the concert ticket. The result is the same.

So the question is, even though Prop. 103 raises taxes “to be spent only to fund public education,” does that really mean it will require the legislature to spend more on education that it would have done otherwise?

The answer is yes. Consider the change to the statutory language, which is the primary thing that matters in court; see page 10 of the Blue Book.(I’d like to thank Carolyn Kampman of the Joint Budget Committee and Chris Ward of the Legislative Council for helping me understand this.)

All revenues raised by the increase in taxes imposed pursuant to this measure… shall be appropriated by the general assembly only for the costs of public education from preschool through twelfth grade and public postsecondary education and shall be in addition to and not a substitute for moneys otherwise appropriated by the general assembly for the costs of public education from preschool through twelfth grade and public postsecondary education the amount of which appropriation shall be not less than the amount appropriated for such purposes for fiscal year 2011-12.

The key line is the last one, which requires that the legislature spend whatever it spends in 2011-12, plus the proceeds of the tax hike. Legislative Council estimates that will be about $515 million the first year and progressively more after that, for a five-year total of $2.9 billion.

The question, though, is what the legislature otherwise would spend on education. If it otherwise would spend (say) $500 million more on education, and the tax hike brings in $600 million, then the legislature has $500 million to devote to other purposes.

Based on my conversations with Kampman and Ward, I conclude it is basically impossible to predict how the legislature otherwise would act, though I confess the intricacies of school finance surpass my mastery. It seems reasonable to assume, though, that Prop. 103 would add substantially to the education budget for the five-year period.

I think Prop. 103 is nevertheless a really horrible idea, but I’ll present the reasoning for that conclusion elsewhere.

Polis Promotes, Decries Tax Loopholes

Yes, I’m used to members of Congress talking nonsense; that’s practically their job description. But a comment that just came through from Jared Polis is so ludicrous it’s worth a mention:

In this session, I have sponsored bills to help create jobs by encouraging private investment in critical sectors through tax incentives. I also strongly support tax reform to eliminate special interest loopholes, which will help balance the budget while reducing tax rates for families who don’t have high-paid Washington lobbyists rigging the tax code in their favor.

The bit about “tax incentives” links to a release about waving certain taxes for private real-estate investments “in high foreclosure areas.”

So, in the same paragraph, and apparently written with a straight face, Polis simultaneously says he wants “special interest loopholes” for some, but he wants to eliminate “tax incentives” for others, depending on who has the most political sway for the moment. Only he switched the euphemisms around to fit his purposes.

Unfortunately, Polis’s remark typifies the state of the American political discourse.

The Winds of Force and Taxes

The Associated Press released a (remarkably inept) article about “a 29 megawatt wind project near Pueblo” half-owned by Black Hills Energy. But at least the AP’s article tipped me off to the Black Hills release, which includes more relevant details.

The company’s Christopher Burke explained the real reason for the wind farm: “This approval of our wind project by the PUC is an important milestone as our utility continues to put assets and programs in place to meet the requirements of Colorado’s Renewable Energy Standard…”

In other words, this project has absolutely nothing to do with economically meeting the needs of Colorado’s energy consumers, and everything to do with pandering to the environmentalist fantasy of widespread wind energy.

Moreover, “The project, planned for completion in late 2012, is expected to qualify for the U.S. Department of Treasury’s section 1603 cash grant program,” the release states. I’d never heard of the “1603 cash grant program” before; it’s part of the so-called “Recovery Act.”

In other words, the U.S. government will steal wealth from wage earners across the country to subsidize an overprised wind farm boondoggle in Colorado.

And yet, given the widespread use of such force and taxes, some people still wonder why the economy is struggling.

***

Anonymous commented on August 9, 2011 at 10:54 AM:
I have been searching for some breakdown of what goes into wind power and what comes out. Is there any net gain? Don’t forget to add in the loss from all the traffic jams caused by transporting the long blades. Jeff

Anonymous commented August 9, 2011 at 3:05 PM:
Maybe windfarms are the cause of man-made global warming, not that I believe in man-made warming. This article thinks the wind-farm build up will change climate!http://www.livescience.com/74-windmills-change-local-global-climates.html
Jeff

Corporations Aren’t People, So Stop Taxing Them

The following article by Linn and Ari Armstrong originally was published August 5, 2011, by Grand Junction Free Press.

Imagine if you and your spouse individually paid income tax, then you had to pay a separate tax on the same income as a family unit. That would be insanely unjust double-taxation, right?

It is equally unjust to tax corporations. If governments must resort to taxation (and frankly we’re not even persuaded on that point), they should tax only individuals, not groups. Notably, eliminating corporate taxes would jumpstart the struggling economy, something none of Obama’s tax-and-spend interventions has done.

We readily concede the left’s tireless mantra: “Corporations aren’t people.” Families aren’t people, either. However, both are composed of people, of individuals with rights.

In a family, two adults voluntarily agree to live together (usually), join their resources (at least partly), support each other, and possibly raise children. In a corporation, many individuals voluntarily pool some of their resources for some productive venture. You don’t lose your rights (or gain new ones) by joining a corporation any more than you do by getting married.

Ironically, it is the left that actually tends to treat corporations as though they were people. According to the typical leftist smears, a corporation is some soulless monster, a will unto its own, symbolized by a sinister cigar-smoking exploiter in a black hat. The left reifies the corporation — treats it as a concrete entity under its own motive power.

In reality, a corporation is an abstraction describing an organization of people who come together for a specific purpose. Within a business corporation, many individuals invest in a large-scale operation and hire directors to run it.

Here our focus is on the competitive business corporation. There are many other sorts of corporations; for example, the City of Grand Junction is a type of corporation. Historically, English law granted corporations the political power to forcibly block competitors, but that’s not the common meaning today.

Obviously we oppose all political favoritism that lets corporations (or individuals) forcibly damage competitors, gain tax subsidies and “bailouts,” or otherwise violate individual rights. (We’re talking about real rights, not the made-up “rights” promoted by the left to seize or control other people’s resources.)

With that background, we can turn to matters of taxation. Title 39, Article 22 of the Colorado statutes imposes a 4.63 percent tax on “C corporations,” the most common type. And the federal government imposes taxes as high as 35 percent, “the world’s highest corporate-tax rate,” Cato’s Richard Rahn recently lamented.

Among the many benefits that would result from eliminating all corporate income taxes, the most important would be to spur the American economy. Chris Edwards, another writer for Cato, summarizes, “A lower corporate rate would boost domestic investment, which in turn would generate more jobs and higher wages and incomes.”

Why? Without burdensome taxes, businesses would flock to the United States and pour more money into the economy. Today U.S. politicians drive companies offshore, then demonize them for fleeing political oppression. Without politicians siphoning off their profits, businesses would invest more in building up and expanding their productive capabilities, creating more and better jobs.

And consider the resources saved in compliance costs. Today, corporations must navigate the conflicting and inherently ambiguous state tax laws, then hire lobbyists to try to protect themselves from federal tax abuse. Through so-called “loopholes,” different businesses pay different net tax rates. The result is massive productive potential squandered appeasing and dodging politicians and tax bureaucrats.

Eliminating taxes on groups would hardly eliminate them on the individuals in those groups. Corporate executives would still pay income tax on their earnings, as would all the individual employees of the business and all shareholders earning dividends. The difference is they wouldn’t be subject to unjust and economically damaging double-taxation.

Another benefit to eliminating corporate taxes would be to end the social engineering of the Internal Revenue Service. Today, politically favored corporations pay no income taxes. They’re called 501(C)(3) corporations, or nonprofits. The problem is that politicians and tax bureaucrats get to decide which groups qualify and which do not.

The result is the absurd spectacle of partisan “nonprofit” groups, including many churches and think-tanks, pretending to be “nonpartisan” for tax purposes. The tax code promotes rampant dishonesty and political gaming within the nonprofit world. Much better would be to tax individual employees of all groups at the same rates.

The government should not be in the businesses of punishing some groups more than others with higher tax burdens. Instead, the government should treat all individuals, and all groups of individuals, equally under the law. Eliminating corporate taxes would substantially promote that goal.

Corporations aren’t people. Politicians should stop taxing them as if they were. Eliminate corporate taxes to promote economic growth and basic legal fairness.

***

Anonymous commented January 25, 2012 at 4:40 PM:
This is a very nice article. I would add, as an example of unfairness, the fact that some health insurance organizations, such as Blue-Cross/Blue-Shield are treated as non-profits, while others are treated as for-profits when there is scarcely a hairs width of difference between them. The result is that BCBS has been very successful in dominating the insurance marketplace, reducing choice and competition.
— Darrell

Ari Armstrong commented January 25, 2012 at 4:42 PM:
The entire distinction between “profit” and “nonprofit” is largely a creation of the federal income tax. In a free market, there could be a nonprofit designation, but that would be a contract between an organization’s leaders and its contributors. There would be no artificial political favoritism of some organizations over others.