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.
Costs of the Current Tax System
Based on this criterion, the current tax code is an abysmal failure.
First, the compliance costs are
Studies estimate the costs of compliance with the current tax system to be around
$200 billion annually.
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
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).”
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 (FairTax.org) has created the FairTax