Now I think I get it.
Back a few months, I read the back and forth between Neal Boortz and Bruce Bartlett regarding the the FairTax. The former, you may know, is a radio talk show host who co-authored a book on the subject with prime proponent in the House of Representatives, John Linder of Georgia. The latter is a columnist who has served as deputy assistant secretary for economic policy at the U.S. Treasury Department (1988 - 1993) and executive director of the Joint Economic Committee of Congress before that. Bartlett, no doubt, felt compelled to study and comment on the FairTax in, given the unexpectedly strong finish by former Arkansas governor Mike Huckabee in the Ames Straw Poll of candidates for the republican nomination for president. Huckabee's support for the FairTax is arguably one of his signature issues. Even though a flat tax is my preferred form of tax reform (simpler, does not require the repeal of a Constitutional amendment), I want to understand the FairTax.
One of Bartlett's main critiques, as written in The Wall Street Journal, was that it would actually be a 30% tax on all goods and services. Many others have made this claim, too. For example, if you buy a home for $100,000, it would actually end up costing $130,000. So naturally, Boortz felt compelled to write an entry on his blog Neal's Nuze (http://boortz.com/nuze/index.html) in an effort to clarify. To use our home example (Boortz actually used a $100 lamp, which changed to a $100 griddle for another clarification op-ed yesterday), he said the tax was already figured into the price of the house. Essentially, it's a $77,000 house with a $23,000 tax added. Hence, the $100,000 final price tag. I don't know about you, but I've always assumed that the FairTax is basically a national sales tax. Therefore, I saw a $23,000 tax on a $77,000 home. Living in Texas, I know sales taxes are computed on products bought. Using that logic, I came to, voila, a 30% tax.
So far, no good. I was confused and not being anymore swayed from the flat tax.
So I emailed him. I agree with much of what Boortz says and admire the passion and assertiveness with which he opines and explains. But, at least on this issue, the resulting clarity of his attempted explanations did not match his flabbergastedness over the fact that some people still don't get it. If someone with a graduate degree in economics and a big interest in serious tax reform/simplification still doesn't quite understand it, I'm betting more than a few other people don't get it either.
Alas, I get it now, thanks to another effort by him (http://www.townhall.com/columnists/NealBoortz/2007/11/27/the_fairtax_--_the_truth) to explain it in response to another critique, this time by Hank Adler of Townhall.com (Give him credit for continually being up to the challenge of trying to explain this issue. It finally helped at least one person understand it). One word and one phrase helped me see the light: embedded and "sales tax". The part that stumped me was the fact that the FairTax is often taken as synonymous with a sales tax. Again, living in Texas all my life, I'm sure I'm not the only one who understands that a sales tax of, say, 8% is added to the cost of a $1.29 soda, thereby making it $1.39. The way the final price of a good is figured out using the embedded FairTax is to divide the final cost of the product by 77%.
In the same way people need to unlearn what they've been told/taught with regard to tax cuts draining and tax hikes raising federal revenue, FairTax proponents need to clarify that it is not a sales tax. I almost flipped my lid last night while watching the CNN/YouTube GOP Presidential debate, when the I-Want-You animated Uncle Sam character came on asking if any of the candidates supported the "FairTax...sales tax"! Almost a quarter of the electoral votes needed to win the presidency reside in states that employ a sales tax rather than a personal income tax, and those states (Texas, Florida and Nevada) are 3 of the fastest growing states in the union. That share could possible approach a 1/3 by the time the 2012 Presidential election rolls around. So this is a clarification that needs to occur if there is any chance that the FairTax ever becomes a reality.
The part of his defense of a couple months ago I sufficiently understood was the fact that the tax is embedded in the price of a product (A $23 tax within the $100 cost of a lamp). It made sense to me that part of the cost of a good is the income tax that company pays, the payroll taxes it pays, the income taxes paid by the employees of the company, etc. The first bit of protest a person would lodge against this theory is "What makes you so sure a company would lower it's price by something close to the 22% currently estimated to be embedded in products?" I've heard similar doubts with regard to salaries increasing when companies no long have less of an incentive to offer/provide health insurance than a person has to buy it on his/her own. The answer I offer is basically the same one I give whenever someone, in a temporary bout of insanity, says "The big oil & gas companies are conspiring the keep gas prices high." If a company, after having been relieved of the burden of myriad taxes, still charges what it did before, some enterprising individual will figure it out and enter the market to sell that product at a lower price. If that individual, in the interests of making as much as he/she can, doesn't quite come down as much as possible (say, 15% of the estimated 22%), another one will come along and drop the price further, and so on and so on.
The only problem with that is the current American psyche that has to have everything right now! True, in the short run, where unfortunately too many Americans live these days, there might very well be a producer surplus, where prices are slow adjust and come down once the FairTax is enacted. But they will, and eventually that producer surplus will become a consumer surplus. One need look no further for an example than the price of televisions over the years. Perhaps you've noticed that the price of flat-panels t.v.'s, whether LCD or plasma, has dropped drastically in the last few years. Even though this is more the result of supply-side economics, the similarity is that other producers saw opportunity and started offering their t.v.'s for lower prices. The same would inevitably happen when adjusting to a new, more efficient tax scheme. That's the beauty of the dynamism of our free-market economy.
