A good segue to talk about the FairTax


"An economy that maximizes consumption--ie. one worth a damn--has just the right amount of capital stock, not too much and not too little, and that is the central insight of the Solow growth model. The most observant amongst you will note that this is the exact opposite of what the article claims.

There is a very good reason to not tax savings -- it's very inefficient. Savings can run around easily to avoid tax. Companies can hide profits through depreciation schedules, debt payments, share buy-backs, and a hundred other things taught in first year business school classes. Investors can house money offshore, in various financial instruments, in nonprofit annuity schemes etc. People can simply move savings into things like houses which can be classified as consumption, come with tax breaks, but really are an asset just like anything else. The inefficiency from taxes chasing this money come from 1) the high auditing cost to try and pin this money down and 2) the dead weight loss (economic distortion) that comes from the forgone opportunities that these shenanigans preclude."

It sounds to me like Zimran would be quite in favour of the FairTax, which is a proposed flat consumption tax that would replace Income Tax, Payroll Tax, Estate Tax and Gift Taxes. Instead of taxing productivity (and savings!), the US would tax consumption.

I've done a poor job of keeping everyone up to date on what's happening with the FairTax lately, even though I have been keeping informed. Last week I watched 6 Congressmen speak about it for an hour or so in Congress in a "special order session" (I think that's what it was called) shown live on CSPAN. Bill HR-25 is currently in front of Congress and the Senate. It would kill the IRS and income tax completely. No more tax returns! Consumers would pay a flat national sales tax. Registered households would be sent a rebate each month that works out to the tax that a family living at the poverty line would pay on essentials. This means that the poor would become completely untaxed. I've heard that people at the poverty line don't pay income tax anyway, but they still end up paying taxes because those costs are hidden in all the products they buy, since businesses pass their tax burden to consumers. Businesses would not pay the consumption tax, only consumers.

US companies and people would no longer have to hide in tax havens, so they could repatriate their headquarters and/or residence. If you go to the FairTax web site you can read about the many many ways that replacing the current US current tax code with the FairTax would massively boost the US economy. The Congressmen cited a $1T/year boost.

One other nice side effect is people with undeclared incomes would suddenly have a very hard time avoiding paying taxes. As a Congressman said, right now it only takes one to cheat on taxes, the person who files their return incorrectly (or not at all). Under a consumption tax, another party would have to be an accomplice to the crime, and the number of people willing to go to jail to someone wanting to cheat on their taxes is pretty small. All of a sudden, drug dealers would be paying taxes when they buy their fancy cars, houses, jewelry and eat at fancy restaurants.

My hope is that the US passes the FairTax bill, because it will all but force Canada and many other countries to abolish their income taxes to compete with the new US economy. It would simplify our lives and remove a huge source of waste and drag on the world economy.

Even though I'd like to talk about FairTax for pages and pages more I don't have time at the moment. Hopefully I'll find time soon though.

If you are a US citizen, please go to FairTaxVolunteer.org and read their pages about how you can help. Specifically they really want people to write letters to their representatives right now and constantly for the next three months. If you are not a US citizen, please talk about FairTax on your web site or anywhere else, to spread the word, in hopes that an American citizen will hear about it and feel compelled to act.

Written on May 18, 2004