Chuck Moulton: An Open Letter to Gary Johnson about the Fair Tax

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Governor Johnson called me on Wednesday to ask for my support as a LP convention delegate in Las Vegas. We spoke for 5 minutes about problems with the Fair Tax before I had to leave to teach a class. Later that day I wanted to follow up with more information in written form. Unfortunately Governor Johnson does not post his direct email address on his website, so I called him back at the number that called me leaving a voicemail with my phone number and email address. He didn’t get back to me, so I’m posting these concerns as an open letter instead.

My hope is the timing of this letter will facilitate an airing of these concerns with Gary Johnson and Jeffrey Miron on the video chat scheduled for Monday February 13. I believe Jeffrey Miron will find many of these concerns to be very legitimate — and that might knock some sense into Governor Johnson.

-Chuck Moulton

Chuck Moulton: An Open Letter to Gary Johnson about the Fair Tax

Governor Johnson,

I will be a LP convention delegate from VA. We spoke on the phone at 11:20 am EST Wednesday.

I mentioned to you that many libertarians are not fans of the Fair Tax. The purpose of this email is to give you more information on that so you can better position yourself to libertarians in general and Libertarian Party national convention delegates in particular.

I see that your economics adviser Jeffrey Miron advocates a flat consumption tax, but I can’t find any writings or videos where he has advocated the Fair Tax in particular. I agree with him that a flat consumption tax would be preferable to our current tax code. But I have several strong objections to the Fair Tax.

The devil is in the details.

Main libertarian objections to the Fair Tax:
1. The prebate would start a new welfare entitlement.
2. The transition would redistribute from savers to borrowers.
3. There is a danger of getting BOTH an income AND a consumption tax.
4. Advocates disingenuously quote a 23% rate when it is actually 30%.
5. Advocates use protectionist rhetoric to sway populists.

I will elaborate on all of these objections. I’d encourage you to consult your economics adviser Professor Miron to see if he agrees with me. Also current LNC treasurer and ballot access guru Bill Redpath has strong opinions against the Fair Tax.

First, when people start receiving a government checks in the mail it will create a new political constituency that will vote in favor of keeping and raising the checks. When a new entitlement is put in place it becomes politically very difficult to remove that entitlement due to the public choice theory of motivated, self-interested voters and special interest political contributions driving political decisions. Indeed it is far more likely (given ample historical precedent) that politicians will keep raising the check higher to get votes. Many libertarians fear this will be the camel’s nose under the tent that paves the way for socialist income redistribution.

Second, seniors that have worked their whole lives and have now retired to live on their savings (right when the Fair Tax is implemented) will see that savings taxed twice: once as income and once as consumption. In actuality this isn’t a cost, but merely a redistribution because conversely people who have ran up a credit card debt buying things before implementation of the Fair Tax and will subsequently earn money to pay off that debt will never be taxed. So during the transition period any consumption tax replacing an income tax will redistribute money from savers to borrowers. Any transition from one tax to another will have a redistribution effect, so this should not necessarily be a deal breaker. However, consumption tax advocates should be aware of this effect because failure to admit it will seem like the politician is trying to pull one over on people.

Third, libertarians are worried about supporting any tax because historical experience shows that government will tax as much as it can by any method it can. The current incarnation of the Fair Tax contains a Title IV which sunsets it if the 16th amendment is not repealed. From 1999 to 2007 the Fair Tax bill introduced in Congress did not include that sunset provision. It was included in the 2009 and 2011 versions. Many libertarians researched the Fair Tax before 2009 when the plain text of the bill left open the possibility of getting both the income tax and Fair Tax together — especially given a government running large deficits. Passing legislation is messy and unpredictable. In the course of passing the Fair Tax, that sunset provision could be taken out by amendment during negotiations. Another small technical point: even if the 16th amendment is repealed, the federal government can still impose an income tax as long as that tax is apportioned among the states proportionally to the number of people in each state. Additionally other taxes (like the corporate tax, capital gains tax, etc.) may be re-imposed by Congress after the Fair Tax is implemented.

Fourth, if the Fair Tax is quoted like any normal sales tax, then people will pay 30% of their purchases. If you give the Fair Tax pitch to a normal voter then ask him what his sales tax rate will be at the register, most will say 23%. Deliberately leading people to the wrong conclusion (even if not explicitly saying anything false) in order to sell a proposal is a red flag showing the proposal isn’t good enough to be embraced on its own merits. Libertarians familiar with the Fair Tax see advocates quoting a 23% rate as either misunderstanding the Fair Tax or lying to the public.

http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#47

Fifth, I’ve heard you claim that the Fair Tax will make America more competitive because American companies will not have to disadvantageously pay the corporate tax while foreign companies don’t. The logic is the Fair Tax will make imports relatively more expensive than before implementation and make exports relatively cheaper than before implementation, which will stimulate production. As an adjunct professor of International Economics, I cringe whenever I hear that. Unfortunately the rhetoric misses the fact that consumers in America are worse off because foreign goods are more expensive and producers in foreign countries are worse off because American goods are cheaper. The same competitive effects could be realized by imposing an export subsidy on American goods and an import tariff on foreign goods. Both the export subsidy and the import tariff would lead to a deadweight loss for the world as the costs exceed the benefits. Production is just a means to an end, not an end in itself (utility in the form of consumption and leisure is the real goal), so production should not be a loftier goal than consumption and sacrificing consumption for production with a net loss is very misguided. Similar rhetoric to yours about the Fair Tax’s effect on American competitiveness is used to justify protectionist tariffs. Practically all libertarians are for free trade, and many libertarians have an ear for economics. While populist protectionist rhetoric may play well with the general public, it turns off libertarians.

Finally there is a contingent of radical libertarians who will be turned off by any advocacy of any tax — even a tax that is lower or more efficient or fairer than a current tax. They are far more excited about Ron Paul’s plan to eliminate the income tax and replace it with nothing. There’s no pleasing everyone. Most pragmatist libertarians will support transition policies that move the ball down the field to lower, more efficient, fairer taxes… but the Fair Tax isn’t even a good incremental policy.

For the reasons above, in my opinion you would win over more libertarians by advocating for the general concept of a consumption tax replacing all other federal taxes (without a prebate, but with constitutional amendments prohibiting all other taxes) than you will advocating for the Fair Tax in particular. At a minimum you should be familiar with the Fair Tax’s deficiencies and present them honestly to libertarians so you won’t be seen as a shifty politician trying to put lipstick on a pig.

There are a number of your other positions that libertarians are worried about (e.g., Guantanamo Bay detainees, entangling alliance with Israel, not pardoning non-violent drug offenders while governor), but the Fair Tax is the big one.

Thanks for your time reading my concerns.

-Chuck Moulton


Biography:

Chuck Moulton has held numerous leadership positions in the Libertarian Party at the national, state, and local level including vice-chair of the Libertarian National Committee, chair of the Libertarian Party of Pennsylvania, at-large member of the Libertarian Party of California executive committee, and 10th congressional district chair on the Libertarian Party of Virginia state central committee. He ran for U.S. Congress as a Libertarian in 2004. Chuck is an ABD economics Ph.D. student at George Mason University with research interests in free banking. He is also an attorney licensed to practice law in Pennsylvania, New Jersey, and California and a professional registered parliamentarian who currently serves on the LP’s bylaws committee. Chuck has taught undergraduate courses in Money & Banking, Mathematical Economics, and International Economics.

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