Tweet to add your voice to this opinion request:
Sent to: Warren Buffett
Date: 01/18/15
Subject: Request to evaluate the FairTax proposal and publicly express your opinion.
Dear Mr Warren Buffett,
Your outstanding intellect is a matter of luck, but I really admire the way you chose to use it. Applying your investing skills to build a fortune that you will ultimately donate… is inspiring (especially limiting your personal consumption in order to maximize the end amount). Keeping the capital invested in stocks and donating 4% annually should result in a growing perpetuity, for a total $ contribution to society perhaps unrivaled in history. You are brilliantly using exploitation (capital gains) to combat exploitation, and this inspired a farmland based variant*.
What you do is important so I try to be reasonably brief: Mr Buffett, please invest effort in evaluating the FairTax reform and express your opinion. Your support would carry weight with reasonable people, and society would get a great return on your investment (smiley face goes here).
Simply put, the FairTax is a fiscal reform with two components: replace the progressive income tax with a flat 30% sales tax; and send a monthly check to every citizen (about 200$/month). These 2 numbers are ultimately a political choice, so I think it’s better to focus instead on the ideas/principles behind the FairTax (which are not).
A quick point: at a 4% discount rate, the present value of the future monthly checks Americans will receive under the FairTax is almost $200 trillions. That’s maybe 1000 times your estimated donation upon retirement! Society would need 1000 Warren Buffett to match the scale of the FairTax prebate.
The main story about the FairTax (which perhaps many fail to fully grasp) is that it greatly upgrades the ability of “big government” to compete in a global economy with free moving capitals. Unlike the income tax (which inflates the price of domestic products but not the price of foreign ones) the sales tax does not discriminate against domestic products. Because it either applies to both (when they compete internally) or to neither (when they compete abroad). Thus, the FairTax breaks the link between the size of government and the economy’s (lack of) competitiveness, which link is at the core of the mechanism that forces “big government” to scale back. Ending discrimination makes the FairTax’s social component (the monthly check) economically sustainable. Such check will represent for the individual a tangible proof that society cares, strengthening social cohesion. No politician will ever be able to democratically reverse it, on the contrary it will gradually increase ultimately leading to a friendlier society and a simpler, more relaxed life for its members.
More info is available at fairtax.org (Americans for Fair Taxation), fairtaxWW.org (FairTax worldwide, my website), or you can find a summary at the end of this email.
I’m writing because your FairTax opinion is hard to locate on the net. The little I found (“the Buffett rule”) is misguidedly** used by Whitehouse.gov against the FairTax (which is both sad and frustrating). This reform will be regarded as a milestone and will be credited with setting society on an irreversible path to civilization. The public deserves your opinion Mr Buffett.
Best regards,
Julian
PS
This email will be posted on fairtaxWW.org/emails.html
Summary of the main issues about the FairTax reform
Simply put the FairTax is a fiscal reform with two components: replace the progressive income tax with a flat 30% sales tax and send a monthly check to every citizen (about 200$/month). The 30% tax rate is "exclusive", meaning the rate to be applied on the net price, the "inclusive" rate is 23%. Disregarding the actual numbers makes it easier to focus on the underlying ideas.
The FairTax is ultimately a very clever tax on luxury. Some obvious characteristics: it is simple (get a snack from a vending machine and… you just paid your taxes) and has an intuitive justification (earned income is a measure of how useful one is to society, consumption is a measure of how useful society is to the individual).
The case for the FairTax improving economic competitiveness and generating growth is consistent. The main point is that the income tax discriminates against domestic producers (in favor of foreign ones) while the sales tax does not. The income tax exclusively inflates the price of domestic products (it has no effect on the price of foreign ones), in other words it discriminates. The sales tax, on the other hand, either applies to both domestic and foreign products (when they compete internally) or to neither (when they compete abroad). This is not related to the object of taxation (consumption versus income) but rather to the mechanics of each tax: the income tax builds up across multiple production stages and is levied from a multitude of economic players, while the sales tax is simply levied one time, from one person. One crucial implication: it makes it possible to exempt exports and tax imports.
Proponents of the FairTax might be a bit overoptimistic when assessing growth implications (in the sense that a swift appreciation of the local currency should quickly offset most of the gains in competitiveness) but the case is nevertheless consistent. But I personally feel economic growth is overrated (Americans could be twice as happy with half the GDP), so what really fuels my enthusiasm is not the FairTax’s effect on growth, but rather its potential to transform society in a positive, irreversible way.
Please consider the monthly check. For each individual, this check will be a tangible/undeniable proof that society cares, and should therefore improve social cohesiveness (and maybe reduce criminality). Besides, society must provide a bare-minimum support to all citizens if it wants to be fundamentally different from a jungle. The FairTax does just that, in the most straightforward way possible.
Of course, the problem with any such social measure has always been that it increases the size of government. And it’s well known that the free movement of capitals in a global market will apply pressure and ultimately force “big government” to scale back. Well, the main story about the FairTax is that such mechanism will not work under a sales tax system!
The income tax is the very reason why, in a global market with free moving capitals, social democracy is economically uncompetitive and therefore not viable. By discriminating against domestic producers the income tax creates a direct link between the size of government and the economy’s (lack of) competitiveness. This link is at the heart of the mechanism that forces “big government” to scale back (higher tax revenues => lower competitiveness => capital flight => need to revert to lower taxes and cut spending). The sales tax breaks this link by simply ending income tax’s discrimination against the domestic economy. By doing so the FairTax greatly upgrades the ability of “big government” to compete in a global market with free moving capitals.
Basically, the FairTax has the potential to make social democracy economically competitive and therefore politically sustainable (which is a good thing, since a nation should be able to freely choose between left and right, without such decision being forced onto it by the global capital market).
Returning to the monthly check: without pressure from the market, no politician will ever be able to democratically scale it back. On the contrary, there will be pressure to gradually increase it. Such trend will be irreversible and will transform society in a way that allows for a simpler, more relaxed life for all citizens, without the de-humanizing effects of cut-throat competition.
It looks like many people are yet to fully grasp the true scale of the potential impact of the FairTax. I am surprised that the Democrats are the ones who hesitate the most about it since, in my opinion, the FairTax could achieve for the left what the Trojan horse achieved for the Greeks.
Two more notable issues:
1) One country adopting the FairTax will force all other countries to do same. The jump in competitiveness will be highly visible due to a sudden currency appreciation (which will offset the gain in competitiveness). The competition to attract capital will drive this “domino effect”.
2) The monthly check redistributes wealth from big spenders to the thrifty, which in turn will shift economic resources from pointless luxury to basic necessities. This will lower perceptions of what constitutes a “modest but decent” living standard, while at the same time making such living standard more widely accessible.
A clarification: the sales tax does discriminate too, but not against domestic capitals, instead against domestic consumers (which are much less mobile than capitals). This is appropriate, as the domestic consumer is the ultimate beneficiary of government, and should therefore be the one who pays for it.
Other concrete advantages of the FairTax (compared to an income tax system)
1. Simplicity and intuitive rationale.
2. Lower compliance and administration costs.
3. Lower capital requirements to start/grow a business.
4. Avoids transferring risk from the state to the economy.
5. More attractive business environment (especially for foreign capitals and entrepreneurs).
6. Marginally better for growing the economy, clearly better for improving it.
7. Tax evasion becomes more challenging.
8. Under inflation accounting can dramatically distort/overstate real income.
9. Income tax puts entrepreneurs at a disadvantage relative to established corporations.
Please find the supporting math/logic at fairtaxWW.org/_all.html#adv_fnd.
* – Farmland based idea to defeat exploitation of poor farmers
In some regions of the Philippines, poor farmers must give half their crop to an inactive landowner just to be allowed to farm and feed their family. This is exploitation.
A tiny not-for-profit idea / initiative could use this exploitation reality to ultimately undo it: purchase some agricultural land, divide it in small lots, and rent them for free to ANYONE willing to farm. If not enough lots are available assign them randomly, but ask for a voluntary contribution (10% of the crop) and use it to purchase more land and make more lots available in the future. The bylaws of the foundation should state that the land will be used for this sole purpose in perpetuity. The process should allow for land expansion until anyone can farm for free.
Two main differences: 1) capital is invested in land instead of stocks; and 2) outlay is in the form of a rent discount (10% instead of 50%). The benefit is tangible and made available to anyone, yet it still allows for capital growth (expansion of farmland available), which theoretically enables (in time) a complete solution. The idea does use exploitation (which is what makes farmers willing to contribute the 10%) in order to ultimately undo it (free farmland for all in the end).
I wanted to share this idea with you (since your approach inspired it), but please be certain that I do not seek any funding or endorsement of any kind! If anything, I should be the one considering adding my money to your donated capital, when and if you set it up in a way that allows others to contribute (which seems a very good idea). I am not after any benefit here (I don’t even seek an answer to this email)… just please evaluate and comment on the FairTax.
** – About Whitehouse.org using “the Buffett rule” against the FairTax (as per their response to a FairTax petition on their website)
This is new to me (I just found out) and I should think more about it. But I will rush to make a few points and think about it some more later (smiley face goes here).
Being “rich” is not about how much money one makes (income) but rather about how much money one spends (consumption). So, assuming that taxing “the rich” more heavily is desirable (I am totally for it), then the focus should be not on how taxes relate to their income, but rather on how taxes relate to how much they spend! This might be difficult for some people to internalize, because relating taxes to income has been around forever and is deeply ingrained in peoples minds (with barely any supporting rationale in my view).
How taxes relate to income… should be irrelevant, and the focus should be entirely on how they relate to consumption. Not just because being “rich” is really a matter of how much one spends (instead of how much one makes), but more importantly because consumption is a good proxy for how much one benefits from the high standards of living the state helps create. The one who benefits should be the one who pays so… the reasonable/just way is for people to pay taxes in proportion to their consumption.
If we imagine that financing the state by taxing income is an inescapable constraint (which in reality is not), then the “Buffett rule” is indeed sensible, reasonable, wise. I imagine you devised it assuming income is what the government is bent on taxing. But nobody forces a country to finance itself by taxing income and taxing consumption makes a lot more sense. If consumption is what the government wants to tax then the “Buffett rule” is outside of the applicability domain it was designed for and should therefore become more of a guideline (after all income is well correlated with consumption). I believe Whitehouse.org is well-intentioned but misguided in using the “Buffett rule” against the FairTax. It would be great if you would dispel their misunderstanding.
Consider two individuals: guy number 1 works extremely hard (and therefore earns much money, let’s say $1M/year) while spending very little (say $20K/year); guy number 2 doesn’t work at all, has a billion stashed under the mattress (so his total income is $0/year) but spends huge amounts on a luxurious lifestyle (say $1M/year). It is obvious that the “Buffett rule” would greatly benefit guy number 2 while punishing guy number 1. This is not desirable and I am confident is not what the “Buffett rule” was designed for.
My general view is that earned income shouldn’t be taxed at all (since it reflects an effort aimed at serving society), while capital gains (which are the result of exploitation) should be made downright illegal or taxed at 100%. But taxing capital gains is simply not feasible in a global market with free moving capitals (at least for the time being), such reality must be acknowledged, accepted and taken into account when evaluating the FairTax. Consumption is what’s justifiably taxable and… (luckily!) is also what’s feasible to tax, because the simplicity of the sales tax allows what the income tax cannot: exempt exports and tax imports. This critically important action (exempting exports but not imports) cannot possibly be done under the income tax for purely technical reasons: you don’t know who to reimburse for the tax embedded in the price of exports, and you can’t capture the tax from foreign producers because they are outside your jurisdiction.
Whitehouse.org makes the point that the FairTax “would produce a major increase in taxes for middle class families, while slashing taxes for the wealthiest Americans.” This indeed appears to be the case and as a FairTax supporter I have absolutely no qualms admitting it. At the proposed rates (30% sales tax and $200 monthly check) the FairTax might indeed raise taxes for the middle class. That’s because the middle class (not the poor!) are the greatest beneficiaries of income tax’s progressivity. Easy to see this by defining income tax’s social component as the discount to the top rate, applied to actual income: the highest incomes get zero $, middle incomes get a few thousand $, and the really low incomes… also get zero $! The preferential treatment the middle class gets under the income tax might be a consequence of their political clout under democracy. But all this doesn’t really weaken the case for the FairTax, certainly not in principle (which should be at the forefront of the debate, to avoid running around in circles).
Besides… if it’s desirable to make the FairTax convenient to the middle class, then this can be EASILY achieved by significantly increasing the sales tax rate and allocating the extra revenues toward a higher monthly check (prebate). By calibrating the rates appropriately one can design a FairTax that would fully exempt the middle class, just as the current form of the FairTax fully exempts consumption up to the poverty level. This exercise shows that Whitehouse.org using the “Buffett rule” argument against the FairTax is misguided (and in a sense incoherent).
Mr Buffett, please do help Whitehouse.org understand. It is critical to clarify your position on this matter, since the reasonable (under the income tax!) rule you provided is being misinterpreted by the government and actually used against a great system, which operates outside the domain/constraint (income tax system world) the “Buffett rule” was designed for.
About me
I have a couple degrees, and I am borderline financially independent (by spending very little). I’ve been thinking about the FairTax for almost two decades now. I am trying to promote the FairTax worldwide (outside the US, with a focus on the EU) and, for this purpose, I set up fairtaxWW.org.
I apologize for not succeeding to be brief (I do get carried away by this and I also believe it fully deserves attention) and thank you for your kind attention.