Originally published at customerservant.com. You can comment here or there.
by TD of The Right Track
with special thanks to KnightHawk of
Laurence J. Kotlikoff has written an article published by the Federal Reserve
Bank of St. Louis Review in which
he predicted bankruptcy for the United States — unless serious
reforms are put in place to raise revenue or cut spending.
While it’s hard to agree with all of Kotlikoff’s conclusions, one
in particular is worth examining. According to Kotlikoff, his proposed policies
would put America on track to eliminate the nation’s “enormous fiscal gap”
and avert bankruptcy.
Here’s a summary of his plan (page 12 of the PDF file linked above):
The three proposals I recommend cover taxes, Social Security, and healthcare
and are interconnected and interdependent. In particular, tax reform provides the
funding needed to finance Social Security and healthcare reform. It also ensures
that the rich and middle class elderly pay their fair share in resolving our fiscal
And what of the proposed tax reform? What form would it take? Apparently,
Kotlikoff likes the FairTax:
The plan here is to replace the personal income tax, the corporate income
tax, the payroll (FICA) tax, and the estate and gift tax with a federal retail sales
tax plus a rebate. The rebate would be paid monthly to households, based on the
household’s demographic composition, and would be equal to the sales taxes paid,
on average, by households at the federal poverty line with the same demographics.
The proposed sales tax has three highly progressive elements. First, thanks
to the rebate, poor households would pay no sales taxes in net terms. Second, the
reform would eliminate the highly regressive FICA tax, which is levied only on the
first $90,000 of earnings. Third, the sales tax would effectively tax wealth as
well as wages, because when the rich spent their wealth and when workers spent their
wages, they would both pay sales taxes.
The single, flat-rate sales tax would pay for all federal expenditures.
The tax would be highly transparent and efficient. It would save hundreds of billions
of dollars in tax compliance costs. And it would either reduce or significantly
reduce effective marginal taxes facing most Americans when they work and save.
The sales tax would also enhance generational equity by asking rich and
middle class older Americans to pay taxes when they spend their wealth. The poor
elderly, living on Social Security, would end up better off. They would receive
the sales tax rebate even though the purchasing power of their Social Security benefits
would remain unchanged (thanks to the automatic adjustment to the consumer price
index that would raise their Social Security benefits to account for the increase
in the retail-price level).
The sales tax would be levied on all final consumption
goods and services and would be set at 33 percent?high enough to cover the costs
of this New New Deal’s Social Security and healthcare reforms as well as meet
the government?s other spending needs. On a tax-inclusive basis, this is a 25 percent
tax rate, which is a lower or much lower marginal rate than most workers pay on
their labor supply. The marginal tax on saving under the sales tax would be zero,
which is dramatically lower than the effective rate now facing most savers.
While Kotlikoff’s tax-inclusive rate is a couple of percentage points
higher than that currently being proposed in the House and Senate Bills, the method
The arguments for the FairTax just keep coming in. That’s because the
FairTax is the best thing for America with regard to serious tax reform.
Just an FYI, KnightHawk also published the results of a ballot initiative
on the FairTax from three metropolitan Atlanta counties. The question was only on
the Republican ballot (aren’t Dems for the FairTax?), and only in the three
Atlanta-area counties, and it was non-binding. It was meant to gauge reaction to
the FairTax. The results:
Total Votes: 35,755
Yes – 31,068. 86.9% / No – 4,687 13.1%
Total votes: 39,458
Yes – 33,598. 85.15% / No – 5,860. 14.85%
Total votes: 11,517
Yes – 9,828. 85.33% / No – 1,689. 14.67%
An average of 85.79% of the voters in these
three counties favor the FairTax! Senators? Representatives?
Are you listening? Don’t make us shout!
The FairTax Blogburst is jointly produced by Terry of The
Right Track Blog and Jonathan of Publius Rendezvous. If you would like
to host the weekly postings on your blog, please e-mail Terry.
You will be added to our mailing list and blogroll.