Wednesday, December 13, 2006

Walter E Williams vs. The Fair Tax

So I'm talking to a friend the other day and he asks me who my favorite economist is. I say Milton Friedman. He then asks for favorite living economist (ouch, didn't Friedman just pass away?). That one was easy: Walter E Williams. I don't know if he's the "best" economist. I don't even know how you would measure such a thing. I do know that he's entertaining and I've learned a lot from reading his works and listening to him when he occasionally fills in for radio talk show hosts.

There's been some talk about the Fair Tax during the recent elections. For those who don't know, the Fair Tax is a national sales tax on items not neccessary to day-to-day life. The Fair Tax is meant to replace out current Federal income tax system. Radio talk show host Neal Boortz is probably the Fair Tax's biggest supporter but the idea had gained some limited traction in the House of Representatives. Williams is in thoery a fan of the idea but has serious concerns about any possible real life implementation. I happen to share many of his concerns.

The linked article is his most recent on the subject. It's largely a rehash of an earlier piece from Capitalism Magazine. I also include the Capitalism Magazine link because it contains some background info the Town Hall piece only glosses over:

Before we look at whether a national sales tax is a good idea, how about a little Economics 101 just to convince you that government spending, not government taxation, is the true measure of governmental impact on our lives?

Keeping the numbers small, suppose the annual value of what Americans produce, our gross domestic product, is $100. If government spends $40 of it, of necessity the government must force us to spend $40 less. There are several ways this can be done. Government could tax us $40. Government could borrow, thereby driving up interest rates and reducing private spending. Government could simply print money, which would cause inflation and reduce our purchasing power. Finally, government could employ some combination of the three.


He did a piece as a guest host on Limbaugh one time that greatly expounded on this concept. He went on to argue that our current inconme taxation system is really just a thinly veiled income redistribution scheme. I wish I could find a transcript of that.

Back to the main point, Williams argues that the Fair Tax could be as good as any revenue-neutral tax system but has some serious conditions that would need to be met before he would endorse it. But most importantly, Willaims points out the irrelevancy of the tax system and provides a real permanent solution to the government's financial situation:

My solution is an amendment limiting federal spending to a fixed percentage, say, 10 percent of the gross domestic product.


Taxation is important but spending is more important.

16 comments:

Fishplate said...

I read Williams' coumn, he makes sense, especially on repeal of the 16th Amendment. Without that protection, we ~will~ get stuck with both.

BTW, Thomas Sowell is another economist with his feet firmly on the ground.

patsbrother said...

Pardon my I'm-so-lazy-I'm-not-going-to-check-Wikipedia, but I thought Thomas Sowell was a columnist (whose columns I rather enjoy reading, and whose book, White Liberals, Black Rednecks, I look for in places that do not command much money). Is he really an economist too? Or his he merely a remarkably cogent columnist with an elucidated opinion on economics?

Concerning the Fair Tax, all the pieces about it that I have read (excluding this post) have put forth the shamlessly conclusory statement that the Fair Tax will reduce taxes we pay and yet magically reap the same, if not better, funds for the running of our many government programs. I do not mean to say this alchemy is impossible; however, no one has yet attempted to posit a direct, accessible, and clear explanation of this projected phenomenon. (I will admit, I refuse to read propoganda in order to understand the ends to which that propoganda strives; thus, I have not read and do not intend to read Bortz's book on the subject. It may contain a spectacular explanation. If it does, I expect those that have read the thing can summarize.)

As to the name, I am at wit's end with chatchy and kvetchy titles that contain biased or erroneous adjectives to define the thing entitled. The "Fair" Tax is a subjective conclusion, and thus misleading when compared with the objectively entitled "income tax". Why not all the thing "sale tax deluxe" or "super sales tax", as both are pretty objective when comparing the thing to current sales taxes (assuming you live somewhere with a sales tax). Like the USA Patriot Act (with which good patriots can, and very likely should, take issue), we should strive for objective titles, so people are not unnecessarily confused into thinking something is what it is not, and so when we make decisions as a polity we are unimpeded by misleading titles from making sound decisions on the merits of the programs themselves, and so politicians might actually have to explain to voters what some bill contains or program does instead of just throwing out some chechy moniker to make someone else look bad for voting against it.

Dante said...

Sowell is an econimist. He just writes about other stuff, too. He has a pretty thorough economics education. Williams tends to stick to economic issues (and the occasional brief nod to George Mason University where he teaches, especially during the last NCAA basketball tournament). To be honest, I like Sowell's other works but don't often read his material that is specific to economics.

Dante said...

"Concerning the Fair Tax, all the pieces about it that I have read (excluding this post) have put forth the shamlessly conclusory statement that the Fair Tax will reduce taxes we pay and yet magically reap the same, if not better, funds for the running of our many government programs."

It just depends on what you mean by reducing taxes. If you mean the total amount you pay, that would almost certainly go up. If you mean raised as a percentage of your income spent paying taxes, the idea is that it will go down. According to Fair Tax logic, you'll make a lot more (since the invisible taxes that work their way into your paycheck will no longer exist) and in turn you'll use that money on something. The idea is very similar to the idea of lowering taxes to increase government tax revenue. You keep more so you spend more and that fuels the economy. Lower income tax rates seems to work in practice but given that meaningful tax cuts always seem to happen at the same point in an economic cycle, there's no way to isolate the impact of the lower tax rates.

Personally, I like transparent taxation. The Fair Tax (or Super Sales Tax [SST] if you prefer) is one way to achieve that. I prefer the SST to our current tax system but would be open to other systems that make transparent exactly how much money the government is taking out of our pockets each year (and where they're spending it which the SST does not address).

Fishplate said...

"Pardon my I'm-so-lazy-I'm-not-going-to-check-Wikipedia ... Is he really an economist too?"

Here, let me help

Ph.D. from University of Chicago, where he studied under Nobel Prize winner George Stigler. Dr. Sowell has writen several textbooks on economics, including some for a more general audience.

But he has opinions on other things, too.

Fishplate said...

"I will admit, I refuse to read propoganda in order to understand the ends to which that propoganda strives"

I find this statement disturbing. How do you differentiate advocacy from propaganda? And if there is no difference, what do you read that does not take a position?

patsbrother said...

If it's written by a commentator, my bet is it's propoganda. Limbaugh, O'Reily, Cavuto, Franklin, Coulter: all A-grade propogandists (or so the assumption goes). I may read these authors' books for laughs someday, but I'm certainly not going to do so to glean anything substantive. As for advocates, I must rely on the similarly conclusory and thoroughly unenlightening explanation that I'll know one when I see one. To go for the easy one: Ralph Nader. No one spends thirty years of their lives crusading for auto safety and for greater consumer clarity hoping one day to hock a book. There may be but a thin strange line between him and those others already mentioned, but the line exists nevertheless.

And thanks, Dante, about the Sowell info. My best guess would have been sociologist (though it would make sense for a good economist to be a sometimes sociologist, come to think of it).

Dante said...

So near as I can tell, it's propaganda if you don't agree?

And while Ralph Nader probably didn't use his auto crusade to get a book deal, it certainly paid the bills.

patsbrother said...

Sorry. I meant Franken instead of Franklin.

And dante, first: I don't think propoganda is necessarily bad. (See The Federalist Papers and Common Sense.) However, when I talk about things on this blog I generally refer to them in their present incarnation. Propoganda has fallen to such a poor sifting of facts and to such an advanced level of spin, there really is no good reason to read any of it. Michael Moore is one example. The commentators whose names I listed (which I had intended to include Franken) appear to whip up new publications as frequently as the rest of us defecate, and with roughly the same end product as well. I trust Al Gore. I trust Thomas Sowell. I trust Ralph Nader. I trust these men to be extremely well versed in their chosen subjects and, regardless how subjectively they present their arguments, to present the facts objectively. I do not so trust Michale Moore or Bill O'Reilly, or any of those political trashtalkers, smear merchants, and spinmeisters. (Aside: don't you love how all of O'Reilly's favority slurs all best describe himself?)

Perhaps I drew to stark a line. Perhaps a better definition of a good advocate is one who uses propoganda responsibly and fairly. Either way, the shlock out there that represents the vast bulk of modern propoganda dosen't cut it.

patsbrother said...

And damnit. I apologize for the copious typos in that last comment and in the comments I have left over the past few days. I promise I speak English good.

Patrick Armstrong said...

RE Mr. Semantic's Typos: What seems very funny is that he starts making typos as soon as he visits New Orleans.

RE Fair Tax & Government Spending:

My first and most important rule concerning the Fair Tax is that any negotiation concerning the Fair Tax include negotiation for Universal Health Care. IMHO, we get both or we get none.

That being said, the second thing concerning the Fair Tax (and by virtue of that, Universal Health Care), I absolutely agree with Dante (and Williams & Fishplate) that in order to make the Fair Tax work, we would have to repeal the 16th Amendment.

But I do have serious reservations with the simplicity with which the 'government spending as GDP percentage' is discussed. First of all, the idea that, if the GDP is $100, and the government spends $40, meaning we only get $60 - is an oversimplification worthy of satire. The first problem with that is that it assumes that government spending in relation to GDP is a zero-sum game. It does not take into account deficit spending or public debt. Second, it does not include savings on the GDP or inflationary effects on that $100. Third, it skews the numbers to make it look like the big bad government is taking $40 of our $100, and ignoring that probably $50 of that is also going to high dollar investors and great fortune holders. You can't address the 'big bad government taking our cash' scenario if you're going to use it as a straw man and not include 'big bad oligarchs taking our cash too.'

(If any part of the argument is propaganda, that oversimplification and omission could qualify)

Thirdly, what the argument is also about, but this column and even the Boortz book, are far too short to include, is the debate over what government spends money on, is it worth it to us, and who will oppose it if we turn off the tap.

Or, more succinctly put, what is the cost-benefit relationship vs. percentage of GDP of the following items government (Federal) should be spending money on:

Defense - and I think we just broke 10% of the GDP there, but the list goes on...(in no particular order)

Infrastructure
Debt
Social Security/Medicare
Education
Health Care
Law Enforcement
Taxation Enforcement
Subsidies to various industries
Environmental Monitoring & Cleanup
Retirement
Disaster Relief
Bureaucracy
Congressional & Staff Salaries for three or four day work weeks (depending on the Party in Power)

Now, if all that together is only 40% of the GDP, than our GDP must be knocking the ball pretty far out of the park.

And let's not forget the new thing that would arrive on this list, should we ever get the Fair Tax; Universal Health Care (though I think UHC would replace up to five of the above 'what we spend money on' list, so it, like Fair Tax, is also 'revenue neutral'.)

Fourth: Williams says that "if 10% is good enough for the Baptist Church, it should be good enough for government." Again, an oversimplification worthy of satire.

Fifth: The idea that the tax scheme is just a large wealth redistribution scheme: I would absolutely agree with that, except he does not go on to say who is getting the wealth redistributed to them. The answer to that question is also very telling.

Anonymous said...

I am a big fan of Williams althoug I never thought of having a favorite economist. I agree with him completely on the Fair Tax issue.

More importantly, it is spending that it the problem. We wouldn't need the high taxes without the high spending. Americans have come to expect too much from government. We want government to compensate for our every short coming as did the characters in The Wizard of Ox.

Anonymous said...

Wizard of OZ, that is.

Dante said...

"My first and most important rule concerning the Fair Tax is that any negotiation concerning the Fair Tax include negotiation for Universal Health Care. IMHO, we get both or we get none."

It seems to me like if you want to play hostage negotiation, you should at least choose two somewhat related topics.

"The first problem with that is that it assumes that government spending in relation to GDP is a zero-sum game. It does not take into account deficit spending or public debt."

The only way the government gets the funding to contribute to the GDP is to either take it in taxes or borrow it. If they take it in taxes, they are directly stifling the GDP in one area (private spending) to contribute to the GDP in another area (public spending). The other method is to borrow. In the case of deficit spending and public debt, the additional money spent by the government has a very real opportunity cost in the private sector that would otherwise be spent. I'd argue that it is a zero sum game.

"Second, it does not include savings on the GDP or inflationary effects on that $100."

I don't really understand what you're trying to say here.

"Third, it skews the numbers to make it look like the big bad government is taking $40 of our $100, and ignoring that probably $50 of that is also going to high dollar investors and great fortune holders."

When's the last time one of those high dollar investors or great fortune holders forcibly took money from your pocket? "Big bad government" takes your money. You give it freely to the great fortune holders. That gives the wealth holders a limit. The government's only limit is the entire GDP.

"I am a big fan of Williams although I never thought of having a favorite economist."

To be fair, in the original conversation that sparked my first paragraph in this piece I said something about "economists say" and the friend in question called me out on it by saying, "You don't know any economists. Name your favorite economist." That takes us to the first few sentences of this post. It was more of a challenge to me than a sincere question.

Patrick Armstrong said...

1: Fair Tax + Universal Health Care is not 'hostage negotiation,' it is negotiation pure and simple. You have two ideas that would fundamentally change the way America does business and runs on a day to day basis. If you want to get rid of the income tax, be my guest. The only way I will support such a thing is if one of the things the Fair Tax pays for is Universal Health Care. Linking the two issues is the only way to get each opposite side speaking about either in a rational way IMHO. I figure that by saying "if you want one, you got to get the other to work with it" is a way to either table each idea indefinitely (their current status) or to get each side actually looking past the flash points and getting some work done.

2. Taxes = Zero sum game: I phrased that badly. In additon to public debt and deficit spending (that, in themselves may not truly reflect economic zero-sum, based on paying debts back during inflationary periods, etc), what one must consider is that, when the government takes the 40% of the GDP, is what they are doing with it truly equal to 40% of the GDP? I would argue that things like our nuclear stockpile and military, while perhaps costing 20-30% of the GDP, are actually worth 100% of the GDP because they allow the GDP to exist. Interstate highway maintenance may cost 5% of the GDP, but actually create 10% of next year's GDP because the infrastructure improvements increase commerce, thus increasing GDP, thus justifying cost, etc.

That's why I don't think William's example truly takes into account that percentage spending of GDP is a non-zero-sum game.

3: Inflation on the $100 GDP model; during inflationary periods, the GDP is worth more, but the $100 is worth less. During deflationary periods, the $100 is worth far more as GDP contracts. During 'stagflation' the GDP loses value while the currency ($100) also loses value. None of the 10% of GDP examples take this into account, and neither would an amendment to the Constitution regulating spending.

4. The Big Bad Moneymakers: It isn't that the Big Bad Moneymakers are taking my money unwillingly, it is that they control a huge percentage of the GDP. The government, as an instrument of the people and the several states, is at least nominally collecting the $40 and spending it for the good of all people - the little guy and the big dogs. The $50 controlled by others is controlled by others, and I don't have any say in how that part of the GDP is spent.

Also, and this goes back to the 'public debt' situation: who do you think loans the government the money to spend over their $40? The guys who make more money, meaning they also control the debt. Meaning my taxes are going to the owners of the $50 share, and they are taking it from the government, who takes it from me.

Complex stuff, all of it. The question comes down to the very basic thing that DADvocate pointed out: do Americans expect too much from government? The whole crux of William's argument centers around that question.

Dante said...

The reason I specifically call it hostage negotiation is that the two topics are so unrelated. That leads to a situation where 99 different people have 99 different unrelated crusades they all want addressed before they will talk about your issue. It sounds reasonable to ask for Fair Tax in exchange for universal health care but it soon turns into Fair Tax for universal health care, a withdraw from Iraq, a bridge to nowhere in Alaska, an amendment to the NFL antitrust expemption, ... (and there are an awful lot of .s)

"who do you think loans the government the money to spend over their $40? The guys who make more money, meaning they also control the debt."

While the big time investors are certainly beneficiaries of public debt, they hardly have control over it. They have as much control as any other non-voting investment option. They reap the benefits and the dangers without having a true say in what happens. The return on investment and more importantly the stability of the government in this case make the investment worth it.

And when's the last time there was a deflationary period? There have been times where inflation is slower and even a few times when inflation was brought to a dead crawl but aside from Japan in the late 80's I can't think of any major national economy that went through a period of true deflation. Assuming inflation will occur is almost as safe a bet as assuming the federal government will be around to repay the money you loaned them.

"The government, as an instrument of the people and the several states, is at least nominally collecting the $40 and spending it for the good of all people - the little guy and the big dogs. The $50 controlled by others is controlled by others, and I don't have any say in how that part of the GDP is spent."

You have just as much a say in how private investors acquire their money. You fuel the economy they thrive on. You don't have direct control on how they spend it but if you're unhappy about how they're spending it you could always keep them from acquiring it in the first place. From what I see of their actions, the return they give me on my investment is more than worth the wealth the acquire.

"do Americans expect too much from government? The whole crux of William's argument centers around that question."

No, the 10% figure is based on that question but the big picture idea of how best to control federal spending has little to do with that. If Americans were expecting the right amount from government, the solution would be to raise the percentage of the GDP being spent. I really wish Williams hadn't included that 10% figure because he has introduced a lot of extra baggage to a purely economic argument.