H.R. 25, the legislative proposal inappropriately named the FairTax, would eliminate the Federal income tax and replace it with a national sales tax. It is axiomatic that if enacted, those individuals who have saved money during their lives would be faced with double taxation. (Under the Fairtax, someone who earned $1000 and paid income taxes of say, $250, would find his remaining $750 subject to a 30% sales tax on all retail purchases.)
Generally, when commentators have pointed out the above fact, they have been met with either personal attacks or nonsensical economic gobbledegook. Recently, Bruce Bartlett, a former deputy assistant secretary for economic policy in the George H.W. Bush administration wrote a treatise entitled “Why the FairTax Won’t Work” in a noted tax publication. In that same publication, a week later, Laurence Kotlikoff, who appears to be the lead economist speaking for Americans for Fair Taxation, responded. Mr. Bartlett’s statement with respect to double taxation and Mr. Kotiloff’s response are as follows:
(The Fairtax) penalizes those late in life who have saved for their retirement during an era when saving was heavily penalized by the income tax. But rather than being able to spend their savings tax-free, as they anticipated, they will now have to pay sales taxes on everything they buy, including health care. It will be hard for them to avoid seeing this as a double tax.
Bartlett suggests that it would be unfair to force wealth holders to pay extra taxes when they spend their wealth (principal). He might have added in his defense of the rich that most of the rich are older and that we should tread lightly with respect to the elderly.
Well rich members of today’s older generations may be a concern of Bartlett. They aren’t a concern of mine. Our country has spent the past five decades transferring ever greater sums from young workers to contemporaneous older generations, including extremely wealthy members of older generations. The most recent example his the introduction of Medicare Part D’s prescription drug benefit. This transfer to current and near-term elderly has a present value cost of some $10 trillion.
The above confirms that supporters of the FairTax understand and acknowledge that the Fairtax would cause anyone that has saved money during their lifetimes to face double taxation. (Mr. Kotlikoff’s extensive prior writings are consistent with his above paragraphs. Perhaps his most interesting paper is his short presentation in 2001 entitled: “The Case For a Tax Hike”.)