Bruce Bartlett hammered the Fair Tax plan in an op-ed in Saturday's WSJ. I am not a Fair Tax supporter (I prefer the Hall-Rabuska flat tax), but I think Bartlett is unduly harsh in his criticism. Take this passage:

FairTax [sponsors] assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

Quoting the Fair Tax rate as a tax-inclusive rate makes it comparable to the current income tax which is a tax-inclusive rate. If someone pays $20,000 in tax out of an income of $100,000 we say his tax rate is 20% (=20,/100k) not 25% (=20k/80k where 80k is the 100k income less the 20k in tax). Quoting the Fair Tax as a tax-exclusive rate while thinking of the current regime in tax-inclusive terms would bias the discussion against the Fair Tax.

Bartlett also ignores the effect of eliminating the current tax system on retail prices. The economic (as opposed to statutory) incidence of business taxes is tricky, but it's possible that some of the burden of those taxes (e.g., the corporate income tax) is passed along to consumers in the form of higher prices. If so, items that cost $1 in the current system would cost less than $1 (pre-tax) under the Fair Tax plan.

I think Bartlett is on sounder ground when he objects to the Fair Tax's rebate/personal allowance scheme (a public choice nightmare?) and to the administrative and enforcement difficulties of the Fair Tax. While proponents tout the abolition of the IRS, a 23% (or 30% if thinking in tax-exclusive terms) tax rate will provide a strong incentive for cheating and will require an intrusive enforcement agency even if has different initials.

Of course the real problem isn't so much form of the tax system as the bloated government and the pols' fondness for using the tax code for social engineering. Any tax system hauling in over $2 trillion per year is going to be obnoxious.