Death by Fairness

woman lighting cigarette
photo: Simón Pais-Thomas

Mick at Uncorrelated has another lovely post on the essentially vile character and politics of Mike Huckabee. Toward the end of his remarks he briefly hits Huckabee’s proposed Fair Tax:

…and politically DOA policy planks like the fair tax.

Politically DOA we must hope, because Huckabee’s tax plan would do more than “eliminate the IRS.” It would probably eliminate the US economy along with it.

I should say that it is a source of continuing amazement to me that otherwise very sane and very sensible conservatives and libertarians can become advocates for something as preposterous as the Fair Tax. To summarize it, the Fair Tax is a consumption tax, most prominently advocated by Neal Boortz, that would apply a 23% national sales tax on everything bought and sold in the United States. It is most notably championed by Mike Huckabee, but is also endorsed by many fringe candidates such as Mike Gravel and Ronpaul.

High sales taxes on goods in a global marketplace are nothing new, nor are their effects hard to predict. In Canada, which levels some very high sales taxes on cigarettes (now a staggering $5.55 in total tax per non-premium pack), black market cigarette smuggling from the United States and elsewhere is more profitable than narcotics. And the higher the taxes go, the more smokers opt out for the black market:

According to recent reports in the Cornwall Standard-Freeholder, cigarette smuggling is soaring. It is estimated that in January 2005, 12,153 cartons were brought in illegally. In 2006, that figure was 33,482, and last month the number hit a whopping 54,096, plus 3,656 kilograms of fine cut tobacco. The newspaper estimated that to be nearly 14.5 million cigarettes - or about $1.6 million in seized goods.
(Kingston Whig-Standard)

Canadian politicians aren’t sure how to confront the problem (cutting taxes on cigarettes apparently hasn’t occurred to them despite several years of contemplation), but they won’t have to do anything if the United States enacts a Fair Tax. Should it, everything for sale in Canadian stores instantly becomes at least 23% cheaper than in the United States. One would think that almost anyone (even Huckabee) would be able to apprehend the likely consequences of such a development.

As the cigarette experience makes clear, the most immediate effect would be the creation of the largest and most lucrative smuggling black market in the history of civilization. That’s because such a high rate of sales taxation creates fantastic vehicles for enormous returns in every conceivable product and industry class. It creates a mandate –not just an opportunity– for a black market that could practice organized tax evasion on all goods and services in the economy, not just relatively inexpensive entertainments like cigarettes in Canada (or methamphetamine and marijuana here). It could make you rich overnight as a smuggler and underground distributor of everything from coffee to automobiles.

Another effect is that without export exemptions, the Fair Tax would completely destroy our export markets and almost all domestic production for export, by inflating the prices of all American goods 23% abroad (the only truly healthy aspect of the economy at present we should note). Although Huckabee hasn’t addressed this problem to my knowledge (or perhaps even considered it), we would assume export sales abroad would be exempt in any final bill. Assuming that American goods exported to Canada are not taxed, then the incentive is even more enormous for Americans simply to hop the border and buy their goods there, and reimport their purchases tax-free personally.

Fair Tax would thus imperil almost all preexisting trade agreements, when the government realizes what people will recognize immediately –that the price of retail goods are now vastly cheaper in Canada, Mexico and elsewhere. Lest all retail sales migrate north and south, the government will have to introduce re-importation duties on goods crossing our borders or prohibit them altogether. Something that our trade partners naturally could not tolerate unless they were economically suicidal.

But there’s worse effects yet. The Fair Tax would create a 100% federal regulatory envelope on literally all sales of everything. It would also instantly make the government responsible for one quarter of prices on all goods and services in the entire country, creating incredible opportunities for selective graft, market distortion and abuse. It easily represents the most substantial expansion of federal authority in history.

Because the rate of sales tax must be as high as 23% to support the massive entitlement programs of the welfare state (and Huckabee is no opponent of that, with his love for “social justice” and class warfare rhetoric), Huckabee has proposed to put as much as one-third of the entire country’s households on an automatic welfare entitlement, through a regime of “prebates.” Prebates are pitched by Huckabee as an exemption, but are of course federal checks to allow the poor and lower middle class to pay the federal government its own sales tax, with its own subsidy money. Pause to consider that for a moment, because it is an economic insanity of nearly Soviet proportions.

Huckabee’s plan also fails to repeal the the Sixteenth Amendment, supplying an enduring authority to the federal government to collect income taxes (making it 100% certain that at some point it would be reintroduced on top of the sales tax).

In truth, to project out even further, the trade distortion of the black market might end up socializing the entire economy. That’s because the people who control all retail wealth won’t be Wal-Mart any more, they’ll be true robber-barons of the drug dealer variety. Retailers will not be able to compete with black marketeers when product prices now have an additional 23% of cost on top of them (which actually exceeds the net profit margin on most products in the marketplace).

In order to fight the black market and prevent retail suppliers from closing their doors, you may have a push by Huckabee or the congress to start price controls which will price goods at or below recovery cost, and/or to subsidize retailers who would otherwise fold. That never works of course and your critical consumer goods markets will start to fail as supplies are exhausted. Historically when that happens, the government starts nationalizing industries to keep them afloat, because letting things like electricity, food and gasoline disappear (what happens when the prices are set below market price, or firms are allowed to run at a loss through government subsidy), would result in total collapse of the country.

Let’s not even get into the problems that eliminating all deductions would present for small business formation and expansion, by making all capital purchases taxable, or the destruction of the incentive for consumer spending (leading to currency deflation and macroeconomic contraction in a structurally incentivized savings market), or the gutting of the e-commerce industry (one of our fastest growing sectors), by pricing online sales higher than retail sales (through taxing them for the first time, and then adding shipping to their price).

DOA. Let’s hope.

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16 Responses to “Death by Fairness”

  1. on 11 Feb 2008 at 10:50 am ChrisB

    Dig it:

  2. on 11 Feb 2008 at 11:16 am John C. Randolph

    You are misinformed on many points, but I’ll just hit the highlights here.

    First, Ron Paul has not advocated this proposal, since he prefers to not only eliminate the IRS, but also to reduce federal spending enough to remove the need for any replacement to the income tax. Ron Paul has said that he’d probably vote for it if it came up for a vote in the congress, and that’s about the extent of his remarks about it.

    Secondly, your claim that our exports would be crippled by this tax shows that you haven’t actually read the proposal. It does not apply to exports, but only to goods and services at the retail level within the united states, and only once: used goods, for example, can be resold without tax being due.

    Thirdly, your statement about federal involvement in the collection is also incorrect. Again, read the bill. The bill requires the states to collect the sales tax, and remit it to the Federal government. States that already have a sales tax would have very little work to do to implement this, and states that don’t already have sales taxes would be paid the costs of collecting the tax.

    For the rest of your misapprehensions, I suggest you read The FairTax Book, by Boortz and Linder, ISBN 0060875410

    Nice try on the spin, better luck next time.


  3. on 11 Feb 2008 at 12:01 pm Lee

    First, Ron Paul has not advocated this proposal

    What I said was that he has endorsed it and he has. He said this, as posted on Neal Boortz’s website (since you’re fond of his work): “I’ll vote for the FairTax if it comes up.” Any google search can turn up numerous other instances where he has reaffirmed this endorsement.

    Secondly, your claim that our exports would be crippled by this tax …

    The assumption above is that outbound exports would not be taxed, which would either a) create a sanctioned market for legal nontaxable reimportation or b) enforce tax recovery on reimport by duty. You’ve ignored the point. In the current version of the bill, it specifies duties for recovery of the tax on reimportation (edit: actually that’s not true, it specifies remit in the current version). But of course, this is dealt with above. Smuggling will develop on a vast scale in either case, unless the border is turned into the DMZ, just as it does for cigarettes, drugs, guns and other items today.

    The bill requires the states to collect the sales tax, and remit it to the Federal government.

    Agency for collection is irrelvant in the context of this criticism, it’s the federal government that would establish the price of all goods in the United States and subject the market to defacto regulatory oversight. Barnum & Bailey could be charged with collecting the taxes and it would not change this essential characteristic, which is the point of the criticism.

  4. on 11 Feb 2008 at 4:56 pm John C. Randolph

    “the federal government that would establish the price of all goods”

    Nonsense. An excise tax of a given percentage does not impose a requirement for a particular underlying price.


  5. on 11 Feb 2008 at 7:09 pm Lee

    Nonsense. An excise tax of a given percentage does not impose a requirement for a particular underlying price.

    The underlying price? Do you mean a price that the consumer can elect to pay without paying the actual retail price that’s been established by the federal government? If not, then the “underlying” supplier cost is irrelevant to the consumer market, the retail price is what must be paid, and that is entirely what we are talking about here. One-quarter of that price will indeed be established by the federal government.

  6. on 11 Feb 2008 at 9:53 pm A Second Hand Conjecture » Into the Fair Tax Black Market

    [...] of the 23% national sales tax championed by Mike Huckabee (many more were discussed this morning here). As consumers are forced into the black market to escape artificially inflated government pricing, [...]

  7. on 12 Feb 2008 at 10:22 am jkhutz

    Solid analysis on the Black Market and Capital impacts of the Fair Tax Fiasco, and I agree on all points there.

    But IMHO you are missing the most critical of the UNANTICIPATED problems — the “PREBATE” concept and the dramatic power this would give the Federal Government.

    Imagine Hillary’s “Health Insuarance” fiasco. She would not need to “confiscate” money from people’s paychecks (how’s she gonna do THAT to the self-employed? We have NO paychecks to garnish).

    But with a “prebate” she could simply authorize via executive order that they should “automatically enroll and subtract” the dollars from anyone’s “prebate” payment every month.

    And this would (soon enough) expand to ALL levels of government… You got a speeding ticket? Have unpaid Parking Tickets? Didn’t pay your property tax? Get fined in some other way? Simple — the local government unit puts in a “digital application” to the Federal “prebate” administration and they DEDUCT and transfer the amount from the “check” (or more likely digital deposit) they would otherwise make.

    Do something else “nasty” that the government might not like? Well, you may just find that your “prebate” payments have been temporarily “suspended” pending an “administrative inquiry” — no conviction or jury trial necessary. No warrant or seizure order needed, just a few clicks in a database, and instantly you will be bereft of a significant amount of previously “guaranteed” income.

    What percentage of the middle-class population even could survive with the loss of such a significant part of their income month after month?

    This is a plan that would have virtually EVERYONE by the proverbial “short hairs” — it would be a way to TRULY control and “whip” the population into obedience on ANY issue they want. (Only those who live in the countryside and completely off-grid raising their own food like the Amish communities will be immune.)

  8. on 12 Feb 2008 at 3:48 pm Josh

    The quote they have for Ron Paul is “I’ll vote for the FairTax if it comes up because I have made a promise that I will do anything to get rid of the income tax and the IRS, and repeal the 16th amendment and that FairTax certainly moves it in that direction.” (
    Does that mean he supports it? No. In fact, if you look on the Fair Tax website’s Congressional scorecard, it says he does not support it ( Seems like a case of doublespeak on their part. He does not support it, and like he said, he would only vote for it because it moves in the direction of reforming the tax code. Ultimately he would prefer to have neither a Fair Tax or an income tax, because up until Woodrow Wilson’s progressivism and interventionism, our government didn’t need the money that the income tax (or a Fair Tax) would supply.

  9. on 12 Feb 2008 at 4:07 pm ChrisB

    I’m having hard time figuring out how voting for something isn’t supporting it. Now it’s obvious he’s not championing it, but he says if the decision was his, he would enact it.

  10. on 12 Feb 2008 at 4:18 pm PogueMahone

    Chris, ask your fellow bloggers about that with the Thompson supporting campaign finance reform thingie… ’bout made as much sense.


  11. on 12 Feb 2008 at 4:38 pm ChrisB

    I don’t understand. Are you trying to say Thompson didn’t support campaign finance reform or that anyone here has argued that he didn’t? Both of those are false as far as I know.

  12. on 12 Feb 2008 at 5:47 pm Lee

    I think you’ve added another good concern jkhutz. The evolution of the system over time is a whole other area. As we know from our experience with the income tax, what goes on the books on day one, cannot and will not remain unchanged when you have a permanently seated legislature whose sole job is to make new laws and regulations. I would simply say that if in an unchanged form the immediate likely consequences are catastrophic, what comes down the line in the future will probably be even worse.

    The problem isn’t the FairTax or the income tax, it’s the welfare state. It’s an unaffordable economic sinkhole and any way you try to finance it is going to cause problems for your economy. The FairTax will just represent a more severe problem than what we already have.

  13. on 12 Feb 2008 at 5:56 pm Lee

    I’m having hard time figuring out how voting for something isn’t supporting it.

    Because our assessment is negative and Ronpaul is mentioned. Had we praised the FairTax and mentioned Ronpaul, you’d have Ronpaulists on here talking about the great wisdom of the policy.

  14. on 12 Feb 2008 at 8:18 pm Lance

    Double speak on their part? He says he doesn’t support it, but he will vote for it? Pot calling the kettle black. Yes, Ron Paul wishes we had a minimal state, thus no tax of either type is preferred. However, he does support the Fair Tax being enacted at this point. End of story.

  15. on 05 Mar 2008 at 5:36 am fleem

    Voting for the lesser of two evils, when there is no third option on the ballot, is ALWAYS better than not voting at all. This is because by not voting at all there is a higher probability the greater evil will prevail. Yes, its true a message can be sent by not voting, however it really boils down to how loud that message is compared to how much more evil one option is from the other. In this case, Paul is saying that he believes pushing for the lesser evil will be more effective in the long run than making a statement by not voting–and thus allowing the greater evil to prevail. There’s nothing wrong with disagreeing with Paul on this; however, it is illogical to conclude Paul is “for” the FairTax. Who here has NEVER voted for the lesser of two evils when there was no third option?

  16. on 05 Mar 2008 at 3:16 pm ChrisB

    fleem, I believe the argument is that the fair tax is NOT the lesser of two “evils” but the greater.

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