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Sent to: Noam Chomsky
Subject: The FairTax dramatically weakens the inverse relation between government size and economic competitiveness, thus making “big government” politically viable.
Dear Noam Chomsky,
The FairTax proposal aims to entirely replace all direct taxes with a flat-rate sales tax and redistribute a part of revenues evenly to all citizens through a universal monthly check. I am writing to underline an issue that, although economic in nature, has far-reaching political consequences:
Switching from an income tax system to a sales tax system (such as the FairTax) greatly upgrades the ability of “big government” to compete in a global economy with free-moving capitals, simply because, unlike the income tax, the sales tax does not discriminate against domestic producers (it either applies equally to both domestic and foreign products, or to neither of them). The FairTax would thus break the link between the size of government and a country’s economic competitiveness, eliminating the benefit of moving capitals abroad when taxes increase, and therefore undermining the main mechanism that forces big government to scale back. In conclusion, switching to the FairTax would make social democracy economically sustainable and therefore politically viable. It seems this consequence is currently flying well under the radar.
What follows just expands (adds details to) the above paragraph.
Direct taxes undermine the economy’s competitiveness by discriminating against domestic products (in favor of foreign ones): whether they compete abroad or internally, direct taxes increase ONLY the price of domestic products, thus putting them at a disadvantage. This creates an unnecessary link between the size of government revenues and the burden local businesses have to overcome to stay competitive. Such link in turn automatically drives away capitals whenever the government tries to increase revenues, ultimately forcing the state to scale back. Basically, direct taxes and the global, free-capital market (together) determine a race to the bottom in terms of government revenues as % of GDP.
This economic mechanism is fundamentally undemocratic because it forces an outcome (“small government”) independently of the nation’s political choice. A nation should be able to choose freely between left and right, without any extraneous economic pressure from the global market.
The FairTax ends this mechanism by breaking the above link. The sales tax does not discriminate against domestic products (because it either applies to both foreign and domestic products if they compete internally, or to neither of them if they compete abroad) and therefore it doesn’t allow government revenues to be a direct burden on the competitiveness of the economy.
If social democracy is the political choice of a nation, then capitalism and the global market should not be in the way. The FairTax is a clever, practical way to solve this problem. Thank you for your attention and any support you might lend to the FairTax effort. I will assume you allow posting any answer to FairtaxWW.org (FairTax WorldWide).
With no enmity whatsoever :)
Democracy should make the monthly check (“sales tax prebate”) extremely difficult to undo (since it will be very hard for politicians to get elected on a “I will discontinue your monthly check” campaign message). On the contrary should be constant pressure to increase it. It is therefore quite surprising that the Democrats are the ones more skeptical of such reform. Thanks again for your attention, I felt strongly this is a point worth making.