Medicine for the Achilles Heel of Our Democracy?

Wednesday, April 22, 2009

By: Ken Hoagland

Intergenerational Theft and the FairTax

The massive amounts of money we are borrowing and spending today to save our economy—and satisfy powerful interests--comes, in truth, from the future earnings of generations of Americans yet to be born. It is nothing less than intergenerational theft on a scale that would even make Bernie Madoff blush. This destructive path is both irresponsible and immoral and is only accepted by the public because our system of taxation has so effectively divorced our perception of government spending from the truth of where that wealth comes from--us. No recovery effort can fully overcome the inevitable damage that such practices create.

To be fair, the economic tools at hand and our recent economic history almost require this of modern American politicians. President Obama, Members of Congress and financial experts on the national stage have become sophisticated in the magician’s art of misdirection. Little wonder. To admit that we are borrowing trillions of dollars against the earnings of unborn generations and then printing so much money that both foreign debt and our own purchasing power is devalued would both invite voter scorn and undermine the faith of foreign lenders whom we now count upon to finance our budgets.

The most compelling virtue of the FairTax, the national retail sales tax designed to replace the income tax system, may be that it turns every consumer in the United States into a "stakeholder" who will finally pressure politicians to limit irresponsible spending. The nation desperately needs this perspective because our politicians can't help themselves when it comes to spending our money. It is the surest path to election.

Advocates for FairTax legislation--which Washington loves to hate--rail against the destructive effects and unfair application of the income tax system. They point to trillions of dollars investment that is expected to flow into the United States with elimination of corporate and capital gains taxes. They love the idea of illegal immigrants and the entire underground economy joining the tax base. And they like the idea of a simple, visible tax on consumption that makes April 15th just another day and which frees desperately needed economic activity from the destructive effects of taxation.

But it is the medicine for the Achilles Heel of our democracy that may prove the most compelling strength of the FairTax. Thomas Jefferson and others warned that when, in a democracy, the public discovers that it can vote itself wealth from the public treasury, self-government may destroy the economic foundation of the nation. Many would argue that cynically ambitious candidates and elected officials have been buying votes with the public treasury for years.

Under the FairTax, every retail purchase of new goods and services is subject to federal taxation. The tax paid at the cash register is visible, unlike taxes that are now hidden in payroll withholding and embedded within the price of goods and services. Connecting government spending--however worthwhile--with what comes out of our paychecks is the currently missing "check and balance" that allows those who create wealth to fairly judge how government spends some of that wealth. If, as one wild example demonstrates, our leaders decide that colonization of the moon requires increasing the FairTax rate from it's current revenue neutral rate of 23% to 25% on all purchases, every consumer will demand a word about that. Today, by contrast, massive spending for entitlements, stimulus projects, pet projects and every other government program seems like “free money” to most voters. One need only look at the courting of the powerful senior citizen’s block of voters, or the growth of “earmarks” to understand the siren song of such promises both to elected officials and to the body politic.

The effect is destructive as politicians from both parties have taken us down a path of unsustainable spending. Some economists, like Laurence Kotlikoff of Boston University, cite current and obligated future government debt at the local, state and federal level as so large that it threatens the “full faith and credit” of the United States. Others wonder if we are approaching the point when foreign creditors no longer believe that we can ever satisfy such debt—the definition of national bankruptcy.

Our collective answer to such worries has been to spend more by borrowing more from foreign creditors—both to assuage public fears and to address real problems. We are now spending the earnings of our children and grandchildren on both the challenges of a modern society and the politically popular wishes of entrenched interest groups across the political spectrum. The other answer from national leaders has been to collect less by legislating tax cuts in the legitimate hope that such cuts will spur investment and growth. If we were not already in such deep debt, the debate between the two sides might make sense and a rational middle ground might be achieved. But with more than $11 trillion of national debt, another $50-60 trillion in obligated entitlement spending almost upon us and another $40-60 trillion of debt at the state and local level, this argument begins to look a lot like ideologues endlessly arguing over whether to bake bread or grow wheat while standing in the middle of a long-parched desert.

Last year we borrowed about $160 billion from foreign lenders to send stimulus checks to taxpayers to spark consumption here. In the months leading up to April 15th, however, Americans paradoxically spent an estimated $300 billion on tax preparation costs. The FairTax eliminates these wasted tax system costs, spurs massive private investment and, perhaps most importantly, makes clear to every American the real cost of government promises and programs. In this, the FairTax may prove not to just be a better national tax system but the best way to both save our economy and provide badly needed medicine for our Republic.