MacroeconomicAnalysisofFairTax - A MACROECONOMIC ANALYSIS...

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A MACROECONOMIC ANALYSIS OF THE FAIRTAX PROPOSAL July 2006 ©2006 Arduin, Laffer & Moore Econometrics. All rights reserved. No portion of this report may be reproduced in any form without prior consent. The information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its correctness. Opinions are presented without guarantee.
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A Macroeconomic Analysis of the FairTax Proposal Arduin, Laffer & Moore Econometrics A MACROECONOMIC ANALYSIS OF THE FAIRTAX PROPOSAL Incentives drive all economic behavior. Taxes are a negative incentive. People do not work, invest, or engage in entrepreneurial activities in order to pay taxes. They engage in such economic activities in order to earn after-tax income. When the government increases its share of the income earned by its citizens, the incentive to engage in growth-enhancing economic activities falls; alternatively, the disincentive to these activities rises. The higher the tax on the next dollar earned (the marginal tax rate) the larger the disincentive. However, without taxes the government cannot operate. From an economic efficiency perspective, the appropriate goal for tax policy is to establish a tax system that minimizes the tax disincentives on economic activities, given the revenue needs of the government. 1 Costs of the Current Tax System Based on this criterion, the current tax code is an abysmal failure. First, the compliance costs are too large. Studies estimate the costs of compliance with the current tax system to be around $200 billion annually. 2 And, compliance costs are only one of the current system’s difficulties. More importantly, decisions to invest, save, and consume are all distorted due to the complexity, numerous loopholes, exemptions, and social engineering prevalent throughout our current tax code. The $200 billion figure does not even begin to address these costs. In a recent GAO study, the literature examining these efficiency costs were reviewed, finding that, “Although none of these studies, either individually or in the aggregate, provide a basis for estimating the total efficiency cost of the tax system, they do indicate that those total costs are likely to be large. The two most comprehensive studies we found show costs on the order of magnitude of 2 to 5 percent of GDP each year (as of the mid-1990s).” 3 Furthermore, as a direct result of these inefficiencies, our current tax code imposes a marginal tax rate that is far higher than necessary, providing larger than necessary economic disincentives. High and invasive taxes also induce people to employ greater attempts to minimize their tax burdens, wasting valuable productive resources in the process. In response to these ills, Americans For Fair Taxation ( has created the FairTax
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MacroeconomicAnalysisofFairTax - A MACROECONOMIC ANALYSIS...

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