With the recent surge in the polls of Republican presidential candidate Mike Huckabee, the FairTax is a hot topic these days. The FairTax, which would replace the current income, payroll, estate and corporate income taxes with a national retail sales tax, has a large following of grassroots supporters, as well as many members of Congress (Senate and House). There are some academic economists who also favor it. On the other hand, it also has its critics and those who question the claims made by FairTax supporters.
The Tax Foundation recently conducted a podcast interview with one of the FairTax's biggest critics, Bruce Bartlett. Bartlett, once an adviser to President Reagan, has recently drawn the attention of many in policy circles following the release of his book Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, which is critical of the economic policies of the Bush administration.
Last year, the Tax Foundation conducted a podcast with a FairTax supporter, Laurence Kotlikoff, who is a well-respected public finance economist from Boston University and the leading proponent of the FairTax in academic circles.
For more on the FairTax, both pro and con, here are some recommended articles, as well as a video link to an AEI event held earlier this year on the issue:
General information on the FairTax:
The FairTax Book by Neal Boortz and John Linder (Amazon page)
Legislation from Library of Congress (includes text of legislation, status, CRS Summary, cosponsors, etc.)
The FairTax (description from Fairtax.org)
National Retail Sales Tax (President's Tax Reform Panel chapter on a NRST)
Articles by Laurence Kotlikoff on the FairTax:
The Case for the FairTax (Kotlikoff op-ed in The Wall Street Journal)
Taxing Sales Under the FairTax: What Rate Works? (article in Tax Analysts discussing issues concerning the FairTax rate)
Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax
Articles by Brookings economist Bill Gale on the FairTax (mostly questioning the claims of FairTax supporters regarding required rate):
The National Retail Sales Tax: What Would the Rate Have To Be?
A Note on the Required Tax Rate in a National Retail Sales Tax: Preliminary Estimates for 2005-2014
Video of AEI panel discussion (including Kotlikoff and Gale) on what rate works under the FairTax
Although it is likely that Congress will pass an AMT patch today and send it to President Bush for signature, it is still an interesting question to ask what the economic ramifications would be if the patch wasn't passed versus its passing.
The main downside to a patch from an economic efficiency perspective is that a patch for 2007 tax law would not change economic behavior (for the better) for 2007 as it has already been done. Because of this, there is little, if any, Laffer curve effect from the patch either, meaning the static revenue score will be the same as the dynamic score. Here are some of the other economic ramifications of a patch for 2007 tax law:
(1) Keynesian View
--Short-run economic boost from the patch when tax refund checks are sent out versus people having to write huge checks to the IRS this spring. Could have significant effects given higher probability of a recession next year than the past five years.(2) Optimal Tax Theory View
--No patch for 2007 may lower people's expectations of a patch being passed for 2008, thereby increasing their expected marginal tax rates for 2008, and thereby reducing economic efficiency. This is very similar to the economic effects of a windfall profits tax on past profits, which would have no harmful economic effect (in terms of reduced future investment) if there was somehow a guarantee that no such tax would be passed in the future.(3) Deficit-Hawk View
--The deficit-financing of the AMT patch will have to be paid somehow, whether in the form of higher taxes or lower spending in the future.(4) Public choice view
--To the extent that a deficit-financed AMT patch is able to "starve the beast" and prevent excessive future growth in government spending beyond social welfare maximizing levels, it can enhance social welfare, exceeding the harm done in #3.
From an economist's perspective, one must also look at the opportunity cost of a $50 billion patch for AMT in 2007. In other words, what else could we have done with that $50 billion and is it better than a 2007 patch for AMT? In my opinion, the answer is yes. I can think of about 10 tax cuts that would likely be better than patching AMT from an economic efficiency perspective and my own normative view of what is good tax policy, including what is fair. However, fairness is in the eye of the beholder. And most politicians see the AMT as putting an unfair burden on AMT taxpayers, despite the fact that these are the same people that often benefit from the myriad of deductions and exemptions that are in the tax code to begin with, while those outside of AMT that don't benefit from such provisions pay even more than these AMT payers, as explained for some typical families here.
We've already written extensively on Maryland's recent tax hikes: income, sales, and cigarette tax rates will go up next month. Governor O'Malley's original plan would have also extend the state sales tax to "luxury" services, including real estate management, landscaping, tanning, massage therapy, auto repairs, and health club memberships.
Lobbyists for each of those industries got the tax on them thrown out, but the computer services industry wasn't so lucky. Those services will be hit with the new 6 percent tax starting July 1, 2008.
Transparent wouldn't be the word to use in describing how the tax came about:
[T]he Budget and Taxation Committee...added the computer services tax to the package in the middle of the 21-day session without holding a hearing on the measure, citing time pressure.
The "lunch bunch" consists of senior members of Currie's committee, who often meet privately before presenting proposals to other members of the panel. None of those interviewed would publicly identify the senator who suggested the computer services tax, which was included in a long menu of possibilities distributed by legislative aides.
Sen. Richard S. Madaleno Jr. (D-Montgomery), a freshman on the budget committee, said he did not know exactly how the tax came about. "You'd have to talk to someone who was in the backroom," he said.
Executives from computer services companies said the episode has been a wake-up call to the ways of Annapolis, and several are now talking about trying to hire some of the state's more powerful lobbyists before the session starts next month.
Nine states tax computer services, but litigation has arisen in several states over the difficulty of separating "computer services" from other types of services. The Maryland version covers web design, facilities management, custom computer programming, data center support, systems integration, installation, and maintenance, but not Internet access, computer training, and data entry.
That doesn't shed too much light on the difference between services that will pay a 6 percent tax and services that will pay no tax, and there's also ambiguity over whether Maryland residents hiring an out-of-state company will pay the tax or not. At least one company is already considering packing up and leaving the state:
[Stanley Klein, a principal of Open Secure Energy Control Systems LLC] said he and other executives at the Silver Spring developer of electric utility automation software are considering reorganizing or moving the company.
"This takes economic development into reverse," he said.
The federal government's immunity from state taxes does not extend to its contractors and subcontractors, which will force prime contractors to move out of state, Klein said.
Other states, such as Pennsylvania and Florida, have repealed the tax after finding it confusing to implement.
Singling out one politically unconnected service for taxation is poor tax policy, and the non-transparent manner in which it was passed makes it even worse. Now, lobbyists for the computer services industry are seeking to repeal the tax before it starts, but Maryland politicians will be reluctant, since it means foregoing $200 million a year in projected revenue:
"I think we'd be willing to look, but without overwhelming new data or evidence, I doubt we'd be willing to change," said Sen. Ulysses Currie, the Prince George's County Democrat who chairs the Budget and Taxation Committee.
More on Maryland's tax hikes here.
No comments:
Post a Comment