Tuesday, December 11, 2007

Since When Is Congress Fair

Over at Balloon Juice we have this post, attempting (unsuccessfully) to defend the FairTax proposal against an onslaught of liberal commenters.

As a jumping off point let's grab one of many comments:
I haven’t been following these posts, so forgive me if this has been brought up before, but the fatal flaw I see in this scheme is the assumption that big business would pass any savings realized under it on to the consumer, instead of taking it as profits.

In my considerable years on the planet, I’ve found it to be a rare occurence. In fact, off the top of my head, I can’t think of a single time it’s happened. Seems to me, they’ve sold corporate dereg on the same premise in the past.

Dereg of the cable industry was supposed to lower our cable bills. Anybody ever get a reduction in rates? Same with electricity. Competition was supposed to lower rates and they were supposed to use their profits to upgrade the grids. Didn’t happen. Why should anyone believe it would happen here?


Not exactly a model of political discourse but it serves my purpose. In discussions like this, where a government action potentially reduces the costs of producing a product, people often either state that the costs will all be passed down to the consumer, or will all be kept by the company. Both are gross oversimplifications. If a market is competitive, competition drives prices downward until firms decide it's not profitable to sell, and consumers reap benefits from any increase in supply-side efficiency. In more monopolistic situations (complete monopolies are a myth, as is perfect competition, but some markets are more competitive / less monopolistic than others), producers don't end up lowering prices as much when their costs go down because consumers will pay anyway.

The point of the above is not to imply anything about the FairTax's progressivity or lack thereof; my point is this: even if FairTax results in prices and taxes collected staying roughly the same throughout the economy, the effect will not be the same throughout every industry. And not just because of differences in the level of competition; items whose production is more labor intensive than others will see a greater cost reduction from the elimination of the income tax.

There will be winners and losers, and you can bet the losing industries will make a big stink - if they don't go out of business entirely. The losers will be big losers, because this will be a massive transition. To paraphrase Lone Star from Spaceballs, this isn't about money; it's about a shitload of money.

For a "libertarian" proposal, the FairTax displays a remarkable amount of faith in the legislative process. It presumes that our current Congress, if given the chance to recreate a tax which collects dollars numbered in the TRILLIONS, won't end up giving all sorts of exemptions and favors to politically connected industries. It presumes that all the industries adversely affected by the seismic shift in tax collection won't lobby for exemptions. It presumes that a massive national consumption tax won't get tweaked for purposes of social manipulation - i.e., increasing the taxes on cigarettes or SUVs or abortions, or decreasing the tax on condoms or corn or miniature American flags.

But let's assume that, by some miracle, the FairTax that passes initially imposes exactly the same tax on every good and service. That's how it's written up according to fairtax.org; the "pre-bate" is just a function of whether you're filing jointly and how many kids you have.

Our present tax system didn't come about all at once; it's not like we all started filling out 1040s and saving our charity receipts as soon as the 16th amendment passed. There will still be a massive incentive to tweak the tax code after the initial FairTax is passed, and even if it starts off the same for all goods and services, it won't stay that way for long. The political fallout from the massive, uneven transition will only increase the pressure to tweak the system.

Our tax system isn't complicated and corrupt because we tax income instead of consumption; it's complicated and corrupt because it involves a shitload of money. That's not going to change unless we implement ACTUAL libertarian ideas about social and military spending, as opposed to shell games like the FairTax. In other words, it's not going to change period.

This might sound like whiny obstructionism; we can't do anything because Congress will just screw it up! That's a fair objection in some cases, but FairTax is an attempt to swat a fly with a sledgehammer. Want to simplify the tax code? Simplify the tax code. Eliminate deductions and complications, one by one. Don't build a brand new trillion dollar institution from scratch on the reasoning that if it works perfectly well we'll all benefit. Talk about big government.

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