The FairTax would already increase the revenue stream over and above what it would have been under a continuation of the current system. The reason is that it would stimulate the economy or, more precisely, that it would increase the rate of GDP growth. Almost all the economic studies show GDP increases during the early years of 10% (or slightly more) higher than it would have been under a continuation of the current system. That means that if GDP growth would have been 4% under the old system (which is currently considered rapid economic growth), then it would be 14% or more during the first year after implementing the FairTax.
Think about that number for a minute – 14% GDP growth. We have some senior Americans on this list, but none of us has ever lived through a year in which the US economy grew by double digits. This is Chinese type of growth in an economy that is 3 times the size of China’s. Of course, that rate of growth would gradually decline over the years as our economy adjusts to the FairTax (and other nations would almost undoubtedly copy), but the growth rate under the FairTax would never be less than it would have been under a continuation of the old system and therefore the gap between the size of the economy under the FairTax and where it would have been under a continuation would be permanent. Some economists have estimated that by the time the growth rate differential levelled off to less than a percentage point (in about 10 years), the US economy would be 1/3 to 1/4 larger than it other wise would have been and this difference would be permanent.
Some of you may be asking yourselves how can we say that the FairTax will raise more revenue than the current system while at the same time also saying that it is revenue neutral? Please remember that the revenue neutral calculation is based on a static analysis, while the revenue gains must be looked at from a dynamic perspective. A static analysis looks at a snapshot in time, while a dynamic analysis considers a broader time perspective and factors in the changes to the economy that are likely as a result of the policy proposal itself.
There has been a fierce debate raging in congress for some time relative to the proper way to score tax bills – static vs dynamic. That debate has gone on completely independent of the FairTax. However, it is a critically important concept to understand relative to the FairTax simply because no other policy change would have such a profound effect on our economy.
With respect to the deficit, it is instructive to look back to the 90s when we had budget surpluses and forecasts of surpluses “as far as the eye can see”. What happened during this past decade to change those surpluses into deficits and more forecasted deficits?
1. Spending has gone up enormously, much faster than the rate of inflation or economic growth, and
2. While the economy was growing at a rate of 4% (or slightly above) during the latter part of the 90s, that growth rate has slowed to less than half that (on average) during the last decade.
Conservatives have a tendency to focus solely on #1, but it is clear that spending cuts alone will not be enough to address the current magnitude of the deficits we face. Clearly, we have to do something to increase the rate of economic growth without spending more money at the federal level. This is where the FairTax comes in.
The FairTax would increase the rate of economic growth primarily for the following three reasons:
1. It would cause prices shifts in US produced goods that would increase demand in both foreign and our own domestic market,
2. It would facilitate the repatriation of much of the estimated $13 trillion stranded offshore by the current tax system, and
3. It would eliminate several hundred billion dollars annually in wasted compliance costs.
Last, as to concerns about raising the rate as a means of raising revenues under the FairTax, I would suggest that is always a risk if we citizens are not vigilent. However, I believe it is less a risk under the FairTax than under the current system, which facilitates the political games that politicians like to play in which they increase taxes on some groups in order to bestow favors on favored groups. One of the founders said it better than I can:
“It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ‘in political arithmetic, two and two do not always make four.’ If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.”
Alexander Hamilton in Federalist #21