Wednesday, October 5, 2011

Is the “Fair Tax” Fair?

Herman Cain, the presidential candidate, was interviewed October 2 on “Fox News Sunday” and on “This Week.”As is widely known, Cain (b. 1945) was formerly chairman and CEO of Godfather’s Pizza (1986-96). From 1995 to 1996 he was also chairman of the board of directors of the Federal Reserve Bank of Kansas City.
Candidate Cain, somewhat surprisingly, won the Republican presidential straw poll in Florida last month and according to the new CBS News poll, he is now tied with Mr. Romney for first among the Republican candidates.
In both of Sunday’s television interviews, Mr. Cain was asked about his 9-9-9 tax plan, a bold proposal to replace the current federal income tax with a 9 percent sales tax, a 9 percent income tax, and a 9 percent corporate tax.
Mr. Cain has indicated that he sees the 9-9-9 plan as a precursor to the “fair tax,” which would be a national sales (consumption) tax that would take the place of the federal income tax. He is only one of a number of people actively promoting the “fair tax” idea.
But would the “fair tax” be fair? I think not.
The advocates of this new tax plan consider it fair, because “the more you spend the more you pay.” In addition, it is fair, they say, because everyone is taxed at the same rate.
However, it seems clear to me that the fair tax proposal, as well as the 9-9-9 plan, would tax the lower and middle classes more severely than at present, even with a “prebate.” In addition, unless the wealthy are already avoiding taxes through various loopholes, as many are, it means a huge tax break for them.
(The rather complicated plan for prebates is explained at
Take, for example, a couple with an annual income of $25,000. Most of that income would of course have to be spent on necessities, even though they might receive some prebate. Thus in all likelihood almost all of their income would be subject to the sales (consumption) tax.
But consider a couple with an annual income of, say, $250,000. They no doubt would pay far more taxes, for they would, most surely, spend far more than the first couple. But in all likelihood they would also put a sizable proportion of their income into savings, buying stocks and bonds or making other investments which would most probably increase their wealth in the future.
Thus, the latter would pay a far smaller percentage of their income for taxes while increasing their wealth in years to come. In most cases, the greater one’s income, the smaller the percentage of that income would be used for taxes.
So, the so-called fair tax cannot be called fair for low income people struggling to get by financially. Conversely, it would unfairly favor those with above average incomes.


  1. Good insight. And no good answers.

    We do not need regressive taxes - food, fuel, housing, utilities. We also do not need to discourage productive businesses who hire people (98% of employers are very small businesses - I have been one, and barely made ends meet, especially with anti-business taxation).

    Classical economics addresses both issues. We do need everyone to have a stake and participate at some level - especially those who vote. A simple system which encourages investment and growth is needed. Taxing the "rich" will not solve the problem - our debt is too large and necessitates that almost everyone participate, (plus spending must be significantly cut at the federal level).

    The value of income numbers also varies by where one lives. $25,000 may be livable but tight in Grant City, but certainly possible in Chicago.

    Anyway, 9-9-9 is a good place to start a conversation, and better than some fair taxes I have seen including Europe's huge VAT which doesn't cover their deficits. We do need a better taxation system to accomplish our national needs.

  2. This subject intrigues me, as a knee-jerk liberal who believes strongly in progressive taxation. But I also believe in open borders and that no human is illegal. So one of the attributes of a national sales tax is that persons without social security cards who are paid "under the table" should not be stigmatized as not paying their fair share of taxes. Secondly, from an environmental point of view, we need to reduce our overall consumption and our use of fossil fuels, etc. A higher sales tax would encourage this. Here are two links to more details about the Fair Tax HR25/S13 (with deductions): and in its pure form (no deductions):

    As to Cain's 9-9-9 plan, I think it is both a serious proposal and a marketing gimmick, and his rhetoric about our current tax code being a "21st century version of slavery" is too extreme. But I think it starts a useful conversation:

  3. My esteemed, and faithful, Thinking Friend in Kentucky wrote in an e-mail (given in its entirety):

    "You've assessed it much as I would, Leroy. 'Fair Tax' is a misnomer."

  4. I'm with your friend in Kentucky. Flat taxes are fair only if everybody earns the same amount of income, uses the same amount of services, purchases the same amount of consumer goods. Progressive taxation is fair if you consider that those who earn more income (regardless of the source) are benefiting more from their society than those who earn less. In addition, every major society that has not been built on abject slavery has been financed primarily from the wealthiest.

    Classical economics does address both issues, but classical economics is apparently wrong. It is an abstract theory based on abstracted assumptions that don't hold in the real world. It's like marxism in that sense. Adam Smith, in his classical work The Wealth of Nations, said that free markets would not work if business interests were involved in government. Well, guess what? He also said that the free market would require a "well-governed" society.

    Numerous economists keep pointing out that strong progressive taxes and government regulation of businesses has not prevented all the major developed countries from developing and prospering. If you want to see some really serious taxation and regulation, look closely at the Scandinavian societies, especially Sweden, Norway, and Denmark. And for some weird reason, these countries are consistently rated at the very top of the quality of life index. Hm... How do they do that? And yet we can't?

  5. A local Thinking Friend, who is a retired pastor, wrote in an e-mail message,

    "No, it is not fair. It is another mechanism to further burden what is left of the middle class and to benefit the wealthier. The gap widens!"

  6. And a Thinking Friend in Tennessee wrote this in an e-mail:

    "I agree. Sales taxes hit the poor hardest."

  7. Leroy responded to me: "But I am also leery about the argument that a consumption tax would have much overall effect on consumption. The poor have to spend most of their income on necessities, and the upper-middle and upper classes are going to pretty much get everything they want anyway."

    I think I agree, now that I think about it. When one is bitten by the consumer bug, one merely calculates what is the total cost and buys it, whether it is a car or iPad, whatever. By the same token, however, doesn't the heavy tax on cigarettes encourage people to quit or not start? And the proposed carbon tax — wouldn't it discourage burn
    ing fossil fuels and make solar and wind more competitive?

  8. If one removes the sales tax from food, fuel, utilities (regressive), and remembers that we are already paying 7.65% FICA (which is included in the 9% personal income tax), this plan does begin to look fair. I assume internet sales will be taxed. (I would also assume that as the sales tax goes up, the underground market will also thrive.)

    But I am not sure this would balance the budget. There will still need to be very significant cuts in federal expenditures, including everyone's pets. As Paul Johnson stated: There are only three things which a country must maintain - external defense, internal order, honest currency. Those three must be sufficient, but not extravagant. And the Church MUST seriously re-enter its mandated social service role.

  9. The following are comments by Thinking Friend Scott Lakin (and posted with his permission). Scott is a former State Representative (33rd District); he recently graduated from the Bloch School of Business Executive MBA program.

    I was glad to learn about the Missouri Budget Project, for which Scott serves as treasurer.

    "Thanks Leroy. I did a paper on this in my EMBA days. I'm also on the Board of the Missouri Budget Project and they have done extensive work on this issue. Might want to check out that organization.

    "You are right on target on this!"

  10. The following are comments from an esteemed Thinking Friend who knows far much more about economics than I do.

    "As usual you are right. Here's another approach.

    "Although all identical items (such as dollars) are of equal objective value, they are NOT of equal value when one possesses more, compared to those who possess fewer. To understand this idea, consider what you do when you buy a package of M & M's candy. At first, you eat several fairly rapidly. As your supply is diminished, you eat them less rapidly. When there are only a few left, you eat them still less frequently. In other words, the more you have, the less just one is worth to you. Economists call this subject valuation 'marginal utility.' It is a concept recognized by Jesus in his parable of the widow who donated her mite to the church. Jesus said she had given more than those who gave large sums. And indeed she had, in terms of the value of the mite to her, relative of the value of a similar sum to the wealthy. Thus the 'fairness' of a progressive income tax."

  11. A brief response to Phil Rhoads second comments above: I think probably a carbon tax would have the intended result on rational companies, but I am afraid that while heavy taxes on cigarettes might have a good effect on some people, for many of the poorer, more uneducated people in society the effect would be simply an additional expense that they would go ahead and pay, at least as long as they could.

  12. A carbon tax would also be passed on to the consumer, thus making it regressive as well, since a high portion of the budget goes to utilities and fuel the less one makes. And those who make more can better afford the alternatives which can reduce energy consumption costs for long-term savings.

  13. 1sojourner's point is well taken.

  14. One hidden value of taxation is to keep money flowing. An apparent side show in our current malaise is that trillions of dollars are sitting idle in China, Japan, our corporations, and other places. Meanwhile, the Main Street economy is starving from a lack of cash flow. We have excess workers, resources, factories, and needs. The one thing that is missing is cash flow. Tax recapture is one of the tools historically used to keep cash in the general economy. Look at the maximum tax rates from the 1940s through the 1970s and you will see how anemic our current tax rates are. And those were far healthier economic times than we have today.

    Look also at what is happening in Greece. To simply cut spending in hopes of balancing a budget just leads to a collapsing economy, because it reduces the cash flow rather than increasing it. If a country fails to find a way to recover the cash being extracted by excess wealth accumulation, then it must borrow or print to create cash flow. Otherwise, eventually, all the cash ends up in the bank accounts of the wealthy, and the general economy simply dies.

    People know this, and so countries being crushed by economic collapse are in turmoil. And, even as we discuss this, Occupy Wall Street is reminding us that this can happen here, too.

    Now some might object that some countries, such as Zimbabwe or the Weimar Republic in Germany, managed to have severe economic distress even as they had run-away inflation. Well, just as your blood pressure can be either too high or too low, it is possible to have too much cash flow, as well as too little. What is important is to remember that the primary function of money is to facilitate the primary economy that once ran on barter. That is where to manage the money in circulation. Having said that, good cash flow is a necessary, but not sufficient condition for a healthy economy. Economic health, like personal health, is a complex process.

  15. As always, I very much appreciate Craig's thoughtful, and thought-provoking, comments.

  16. This blog posting was edited slightly and posted, at their initiative, on The link

    The following is a response to that posting by a man in Iowa who published church and world news. He wrote,

    "In your Fair Tax article you seem to want to make us believe that there is no form of a fair tax thinkable that will be fair.

    "You might be right, of course, but I must say that your article by itself has not convinced me.

    "It has made me interested, though, in studying the subject.

    "Of course, I will now first of all listen to the proponents, so that I get a clearer idea of what they advocate than what you gave me in your article."

  17. Here is the response I sent to the man in Iowa:

    Thanks for writing. I appreciate you reading, and then responding, to my brief article on the “fair tax” proposal. Of course you need more information about that proposal than I could give in my article; that is why I included the link to

    "I didn’t say that a fair tax is not 'thinkable'; I just indicated that what Herman Cain is advocating, beginning with his 9-9-9 plan and going on to the 'fair tax' idea he supports, is not fair to the middle and lower classes. Any plan that lowers taxes (in absolute dollars or in percentages) on the wealthy and increases taxes on the poorer people of society is not fair, in my opinion.

    "A truly fair tax would have to eliminate all the tax loopholes and exceptions that now make it possible for very wealthy people, and profitable corporations, to pay very low (as percent of income), or even no, taxes. And, as Warren Buffet has admirably stated, a fair tax system ought to require him and people in his income bracket to pay as at least as much in taxes (by percentage) as his secretaries and others in their tax bracket."