The Fair Tax idea is worthy of debate

Lanny Davis Former Special Counsel to President Bill Clinton
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OK, everyone — time to take a breath and consider a new idea. Well, not really a new idea. It is called the Fair Tax plan and was conceived in 1998 by a nonpartisan group out of Houston called Americans for Fair Taxation.

The simple proposal: Apply a 23 percent consumption tax paid once at the point of purchase of all new retail goods and services, while eliminating all other taxes in America — that’s right, all. That means no more income tax, personal or corporate; Social Security or Medicare payroll tax; dividends or capital gains tax; gift taxes; the estate tax or the Alternative Minimum Tax.

The Fair Tax plan reduces some of the regressive effect of a consumption tax by paying those who live at or below the poverty level a Family Consumption Allowance, or “pre-bate,” on purchases of “basic necessities.” One expert on the Fair Tax wrote me that a family of four at or below the poverty level would receive a $565 pre-bate payment the first of each month.

The 23 percent consumption tax level is set in order to keep federal revenues neutral — meaning the revenues estimated to be generated by a 23 percent consumption tax would be about equal to current revenues generated by the income tax and all other taxes. That’s the theory, anyway. Proponents also argue that the prices of goods and services will not go up because the 23 percent consumption tax is about the same as the 22 percent tax “embedded” in all goods and services as a result of current taxes.

Proponents claim a national consumption tax would:

— Encourage saving and investment (since income is not taxed);

— Eliminate an estimated $300-450 billion per year spent by Americans on tax compliance;

— Cause the repatriation of an estimated $12-15 trillion that is hidden in offshore accounts in order to avoid or escape U.S. taxation. Once returned home, that money would cause interest rates to fall as more capital became available for investments;

— Result in increased job creation — given the higher levels of investment from the greater available capital;

— Provide a sustainable and stable source of revenue for Social Security and Medicare, since there will always be 300 million-plus consumers purchasing at least necessities every month; and

— Have positive environmental effects because it leaves untaxed old and used goods, encouraging people to use and re-use things rather than consume natural resources to create new things.

Critics cite such disadvantages as the loss of the hundreds of thousands of tax-related jobs (such as IRS employees, income tax preparers, tax software vendors and — yes! — tax-break lobbyists). Eliminating the popular mortgage interest deduction will also be controversial (i.e., no income tax, thus, no need to deduct anything). But some economists claim reduced interest rates under the Fair Tax will more than offset the loss of mortgage interest deductibility.

Look, I’m skeptical — especially with the notion that retail prices will drop 23 percent dollar-for-dollar due to the absence of the “embedded” taxes, so that prices won’t go up when a 23 percent consumption tax is added; or that interest rates will drop enough to offset the loss of the mortgage interest deductibility. I am also skeptical because — full disclosure — I have relied for much of this column on the often unreliable Wikipedia Fair Tax write-up and material found on the not-objective Fair Tax website.

My biggest problem with the Fair Tax idea is the fact that it is revenue-neutral. Yes, it’s interesting to examine the possible positive social and economic effects of eliminating all taxation based on income. But my focus remains on the need for liberals and conservatives to join hands and raise taxes and cut spending at the same time — as Bill Clinton bravely did in 1994 — and begin to balance our budgets and pay down the more than $13 trillion national debt.

Next week I will begin a series of columns on the Bowles-Simpson Commission proposal — and why I believe it represents the best, and only, hope for stopping the credit card addiction that immorally, in my judgment, leaves our children and grandchildren to pay for our lack of fiscal discipline.

Lanny Davis is the principal in the Washington, D.C., law firm of Lanny J. Davis & Associates, which specializes in strategic crisis management and is a partner with Josh Block in the strategic communications and public affairs company Davis-Block. He served as President Clinton’s Special Counsel in 1996-98 and as a member of President Bush’s Privacy and Civil Liberties Oversight Board in 2006-07. He is the author of “Scandal: How ‘Gotcha’ Politics Is Destroying America” (Palgrave Macmillan, 2006).