Monday, January 7, 2008

Progressive Fiscal Stimulus and the Fair Tax

Brenda has argued in comments here that any fiscal stimulus should target the poor. Lawrence Summers appears to agree:

fiscal stimulus only works if it is spent so it must be targeted . Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.

And now Pat Regnier wants us to believe that Mike Huckabee and other Fair Tax fanatics are progressives.

Critics, including conservative commentator Bruce Bartlett, have argued that people generally think of sales taxes in terms of mark-ups - that's how state sales taxes are expressed - and that FairTaxers are just trying to come up with the lowest possible number to make their idea easier to sell. A 30% tax on food and medicine would be hard on the poor, wouldn't it? If that's all there was to the plan, yes. On its own, a national sales tax would be extremely regressive - that is, it would tax everyone who spent everything they earned (and that's a lot of us) at 23% of their income, while those who made enough money to set some aside would, in effect, pay a lower overall rate. But the sales tax plan would partly offset this effect by sending every household in America, from the family of a poor single mother to Warren Buffett, a check to cover the taxes on their spending up to the poverty level. Factor in that cash from the government, and each family's net tax burden goes down, so that the Fair Tax looks more progressive.

Bruce Bartlett and others have argued that the 30% tax would fall short of covering even current government spending even if these checks were never sent out. And yet Mr. Regnier fails to miss the massive fiscal stimulus (or was that irresponsibility) of the Fair Tax replacement plus more transfer payments. As progressive as the Fair tax crowd wish to dress this pig up, this is not a serious policy proposal.

Hat tip to Mark Thoma for his coverage of the latest from Lawrence Summers.


Anonymous said...

If they save it, then the bank lends it out and somebody else spends it.

reason said...

I guess political spam will become a fact of life for a while (sigh).

Shane Taylor said...

Bruce Bartlett explained the bait-and-switch of Fair Tax distribution claims:

One problem with analyzing the distributional consequences of the FairTax is that its supporters sometimes argue that after-tax incomes will rise by enough to pay the higher prices for goods and services once the 23 percent is added to the prices people pay today. At other times, they argue that prices will fall once income taxes currently embedded in prices are removed, implying a free lunch in which everyone is better off and no one is worse off. Actually, it’s a double free lunch because not only do you get to keep all the taxes currently withheld and pay no more for goods and services now, but you get the rebate as well.

Free lunch and a pony no one has to pay for. Assuming wages are not sticky. *cough*

The tax is sold as neutral for current revenue, but a rebate means it is not spending neutral. Current revenue includes a personal exemption, the Fair Tax does not. Hence the rebate.

Bartlett goes on to explain the inducement for states to shirk, the baiting Americans to cheat, and just how credulous an outlier such a tax would be. The Fair Tax is a rancid onion. When you remove one rotten layer another bogus conceit is revealed.

Anonymous said...

I love the rancid onion analogy. Very poetic. It's new to me. And it describes the smoke screen of rhetoric sorrounding the (Not so) Fair Tax. Why Huckabee's opponents don't start beating on his head about it is only understood when one realizes just how regressive any form of a genral value added tax is for the general public. Note that none of the supporting arguments ever discusses the fact that those whose earning are in the multiple hundred thousand and up range will pay no tax on a very large portion of that income. Such high income recipients are likely to spend les of their total incomes each year as they accumulate goods i n the early years of their earning.

If one earns money as a benefit of participating in our poliltical economy why should there be an objection to paying income tax in order to support the continuation of that society?

Myrtle Blackwood said...

Regarding Lawrence Summers and his proposal for a $75 billion tax cut for the poor.

First, I think that hedge fund folks, along with those who oversaw the development of this financial crisis, should taken with a grain of salt. Summers fits both criteria.

Second, $75 billion isn't going to go very far. Especially in the context of a pathetic multiplier effect. Dollars flowing to big monopoly corporations paying low wages and low taxes. Dollars that are most likey going to someplace other than where the dollars are spent in any case.

Or, OTOH, many of the dollars from the tax cut may be simply diverted to paying off debt. [This would suit hedge fund guys the most because they so heavily involved in the sale of credit insurance -by way of credit default swaps- and therefor praying hard for less debt defaults.]

I've read: "30 to 40 trillion dollars (or more) value of credit default swaps (CDS) outstanding"

Ken Houghton said...

The comment from Ian is spam, and should be deleted. (See the discussion of the same comment at Eat Our Brains.)

For one thing, it almost kept me from g/e/t/t/i/n/g/ t/o/ reading Brenda's comment.

Anonymous said...


Always good to have an exchange of ideas, even if these ideas are shared elsewhere (yes, I researched and wrote them, posting where pertinent). Don't know that censorship does anything but aid tyranny. You might want to rethink your knee-jerk comment and decide to engage the ideas expressed.

More on Bartlett's prejudiced thought here, and again, here - not to mention the thrashing he received in response to his "Scientological beginnings of FairTax" at The New Republic.

Shane Taylor said...

Ian, where does the money for the monthly rebate come from? What taxes do you want raised? What spending do you want gutted?

Kevin Carson said...

The FT is just another example of the Republican obsession with taking taxes off of returns on property, and shifting them onto returns on labor? To hear them talk, labor is just another "factor of production," no different morally from land or capital. So why is a consumption tax that falls disproportionately on wage income pretty much OK, while a tax on investment income is flaming red ruin on wheels?

With the rebate, I concede the working poor might break even or possibly a little better, and the destitute might actually come out ahead. But the majority of the working class and the upper middle class will come out far worse. The main beneficiaries will be the upper brackets, who will make out like bandits.

Come to think of it, the rebate functions pretty much like our current welfare system. Because of the income distortions under capitalist privilege, there is underconsumption by the working majority and overaccumulation by the propertied minority. The state steps in to mitigate the destabilizing tendencies. It returns a small fraction, out of the total amount stolen from the working majority, and give just enough to the most destitute to prevent an absolute collapse of purchasing power or politically destabilizing levels of hunger and homelessness. The state's enforcement of privilege results in a majority of the population receiving less than its labor product, while the welfare state help's only the underclass and lumpenproles. From the standpoint of the propertied classes, it's a pretty good deal: they give back a tiny fraction of what they stole, as a kind of political insurance.

The Democrats aren't much better. While the Republicans favor "across the board" tax cuts that go almost entirely to the rich, the Democrats (Crolyites to the core) favor targeted tax credits for social engineering purposes.

The best thing would be a populist tax cut, based on taking people off the income tax rolls from the bottom up. Any president who eliminates all direct corporate welfare spending, and uses the savings to raise the personal income tax deduction to $30,000, will guarantee himself a second term. What we need is a non-capitalist free market agenda of cutting taxes and spending: cutting taxes from the bottom up, and welfare from the top down.

Anonymous said...

uh, ian, a monthly 'prebate' for working poor on day by day, week to week budgets will not cut it unless the 'big idea' is a means to further stress and take more from those with the least, and please please don't tell me that charitable contributions take care of that.

why, exactly, is this so-called 'fair tax' needed; what is it imagined to overcome or mitigate?

Anonymous said...

Brenda, if you're registered with the Financial Times, take a look at:

Give up now? Citi sees "terminal decline" for banksl modern business model

Aside from that, hedge funds have been popping; guess that only the largest make the news though.

Anonymous said...

Shane, I meant to preface that last entry with the idea that I'd leave specific tax cuts to others to discuss; that what I'm interested in has to do with the manner in which taxes are extracted.

juan, good question! My answer would be that FairTax does several important things:

• Permits us to pay for government in the process of meeting our personal and family needs, on our schedule of purchases

• Captures past wealth, as well as current earnings; thus, if grandpa doesn't spend it, the inheritors will.

• Ends hiding increased consumer tax load in higher prices, or stressing businesses in tightly competitive markets

• Ends tax embeds in export prices; ends letting imports "off the hook"

• Visitors, illegals pay the full 23% (no prebates); most citizens will pay significantly less than the 23% because of the prebates

• Puts government on the supportive side of entrepreneurial activity, aligning revenues to economic growth using a robust GDP as the base

• Places tax collections closer to the source (states), while reducing points of collection to retail businesses; this additionally sets up innovation where the gargantuan IRS lumbers under gross inefficiences, while the tax gap grows

• Acts to provide a citizen-only, universal "negative income" to alleviate fear and suffering by wage-earning, non-business-only families that the current system engenders both from the private sector, and the government (thus, the ubiquitous "Taxmasters" and "J. K. Harris" commericials)

• Most importantly, restores the foundational idea of We, the People - intended to be "the Sovereign" but, in practice, lost much of that with the passage of the Federal Reserve and Income Tax Acts in 1913 (which is why direct taxation without apportionment was originally prohibited by our wise Founding Fathers).

Myrtle Blackwood said...

Thanks for the Financial Times link Juan.

Last time I heard hedge funds could (opaquely) delay the day of reckoning by adding more derivatives when the cash flows prove a problem.

I wonder if there is a way to keep track of all derivative trade? Whether anyone has stepped in to regulate the hedge funds yet?

Anonymous said...

combine global electronic markets,
competing national jurisdictions,
potential regulators who are
financially illiterate relative
to those to be regulated
and meaningful regulation of hedge funds is only a slogan.

they are i believe now in process of being regulated by their own success and deteriorating real and financial conditions that cannot be so easily hedged against.

To which I should add that the fund universe is not homogeneous and, at least be label, disaggregates into many types of strategies, e.g. dedicated short bias, emerging market, managed futures, market neutral, etc etc, that along with performance figures can be found at
(left side and "Click here for Sub-Indices details")

Bank for International Settlements (BIS), , trys to keep track of the derivatives trade which involves more than hedge funds.

Shane Taylor said...

A federal sales tax, which would add 30% to the price of every sale, is only revenue neutral by extracting current federal spending as revenue. Add about half trillion dollars worth of rebates, and the only growth we can expect will be in government debt. Massive tax hikes and/or severe spending cuts are the only viable options with a federal sales tax.

Without a rebate, the federal sales tax is a gift to the richest fifth paid for by the rest of America. Without tax hikes or spending cuts or increasing debt-to-GDP, there is no rebate.

But while a 30% federal sales tax is too low for a rebate, it is too high to survive the extreme inducement to evade. This is especially true considering the frailty and warped incentives built into the federal sales tax from the start.

Bruce Bartlett has taken your federal sales tax to the cleaners, Ian. You are not answering what he actually wrote in Tax Analysts. The Fair Tax is such an administrative abomination that it makes the IRS look like an oasis of efficiency.

Anonymous said...

Juan said: "Bank for International Settlements (BIS), , trys to keep track of the derivatives trade which involves more than hedge funds."

Here's the latest:

"According to the Bank for International Settlements (BIS), CDS (Credit Default Swaps) totaling $43 trillion were outstanding at year end 2007, more than half the size of the entire asset base of the global banking system. Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks...

Bill Gross Reality Check