Loath to disagree with Austrians
Auschip's link to:
http://www.mises.org/story/1768
Is a very solid piece, but suffers from the fact that it addresses numerous ideas for a consumption tax, as opposed to directly addressing the "Fair Tax" national sales tax. I recommend reading it. Those unfamilair with Austrian economics will likely run into a few difficulties.
The argument that Rothbard presents specifically against a national sales tax, such as the "Fair Tax" is incorrect, in my opinion, however, given the reputation of Rothbard I am open to criticism of my analysis here.
The major section where I feel the argument makes an error is here:
Consider: all prices are determined by the interaction of supply, the stock of goods available to be sold, and by the demand schedule for that good. If the government levies a general 20 percent tax on all retail sales, it is true that retailers will now incur an additional 20 percent cost on all sales. But how can they raise prices to cover these costs? Prices, at all times, tend to be set at the maximum net revenue point for each seller. If the sellers can simply pass the 20 percent increase in costs onto the consumers, why did they have to wait until a sales tax to raise prices? Prices are already at highest net income levels for each firm. Any increase in cost, therefore, will have to be absorbed by the firm; it cannot be passed forward to the consumers. Put another way: the levy of a sales tax has not changed the stock already available to the consumers; that stock has already been produced. Demand curves have not changed, and there is no reason for them to do so. Since supply and demand have not changed, neither will price. Or, looking at the situation from the point of the demand and supply of money, which help determine general price levels, the supply of money has remained as given, and there is also no reason to assume a change in the demand for cash balances either. Hence, prices will remain the same.
The analysis incorrectly fails to take into account that incomes *would* rise (owing the the absence of FICA and income taxes), and therefore prices would be subject to raising as well. Further, the analysis fails to take into account the manner in which businesses pass on expenses incurred from the present system to customers. The removal of the present hodgepodge of laws should allow manufacturers, wholesalers, and retailers to absorb cost cuts in the ultimate price on the product that would, in the very least, partially compensate for the increased cost due to the sales tax.
The major criticism in Rothbard's article is that we worry too much about "how we pluck the goose" rather than how much is plucked from the goose. This criticism is answered in a few ways:
First, the easy reduction in government expenditure by the reduction in scope of the IRS.
Second, the hidden costs of the present system are eliminated. These costs include significatly: poor business decisions made for their tax implications, and the cost of compliance (record keeping, accountants, legal fees).
Third, and most "fuzzy", making the total federal government cost visible to the public may make shrinking the size of the federal governement easier politically. This could also be accomplished by stopping income withholding as Rothbard suggersts in the article.
I am not wholly convinced on the "Fair Tax" but for the most part it sounds good to me. My principle hold-out is that it sounds entirely too good to be true
That and the oft mentioned (in this thread) unfeasability of it politically. I noticed on their website that they have not found a single Democrat to sponsor the bill, this is discouraging.
-Morgan
