Tuesday, August 07, 2007

Dishonest Tax Rhetoric, Part 2 of 3

Yesterday, I began a three-part series about dishonesty in tax discussions. If I were committed to the notion of a Top Five All Time list, as in the great movie and book "High Fidelity," or to something like David Letterman's Top Ten list, it would be easy to fill any such list with tax dishonesties. Therefore, it is best to view this list as my excuse to vent about a small subset of the dishonest arguments that are made in the area of tax. (For my critique of conservatives' recent attempts to distort the notion of progressivity in taxes, see "Big Tax Lies" on this blog and my most recent guest column on FindLaw.)

Of course, the biggest dishonesty of all is the idea that taxes are bad, really bad, truly terribly bad all the time, which then leads to the idea that any particular tax that we are thinking about on a given day should be cut or eliminated. As one of the comments on yesterday's post also pointed out, the distributional effects of tax cuts are always ignored. (Bringing up distribution is "class warfare," another wonderfully Orwellian bit of dishonest tax rhetoric. But I digress.)

The silver medal goes to the claim that the proposed national sales tax (which, in what should really be a surprise to no one, its backers have inaccurately labeled the Fair Tax) can be imposed at a 23% rate and be revenue neutral.

Even though the proponents of this tax system have been pushing their plan for some time, this issue is actually somewhat timely, because half of the Republican candidates have apparently committed to signing the plan into law if Congress passes it. There is obvious wiggle room there, but that's beside the point. (On the Democratic side, if you consider Mike Gravel to be a candidate for president and not someone who keeps wandering on stage at inappropriate moments, it's worth noting that he is a huge fan of this tax plan.)

If you buy an item that costs $100 pre-tax under this proposal, the federal tax would be $30, for a total cost of $130. How is this not a 30% tax? Because $30 divided by $130 is 23%. This point has been hashed out in many places, but it's obvious that this is a deliberate intent to deceive. Yes, there are taxes that are measured on a tax-inclusive basis; but sales taxes have always been expressed as tax-exclusive rates. Anyone saying that this is a 23% tax has to know that listeners (and voters) will think that such a tax would add $23 to a $100 item, not $30.

This tax plan also comes with its own set of related dishonesties, including the claim that it will eliminate the IRS (which one can easily do by renaming the tax collection agency anything you like, such as the No Longer the IRS Tax Enforcement Department). There is also the small matter that the 30% rate (or the 23% rate, if you prefer) is only revenue neutral if you tax every item of consumption, including the federal government's own consumption. Yes, that's right. The federal government will charge itself sales tax on its consumption and then include that as part of its annual revenue.

Despite all of that, this example of tax dishonesty does not win the gold because the 23% number has at least some basis in reality. It is the difference between lying and intent to deceive. This should not be a meaningful difference, but it is enough of a difference to clear the way for tomorrow's big winner.