NEW YORK (CNN/Money) -
A bestseller advocating radical tax reform contains a critical flaw that misleads readers, according to a report in the October issue of MONEY Magazine.
The "Fair Tax" movement is based on the idea that most federal taxes, including Social Security and payroll taxes, should be eliminated and replaced instead with a consumption tax on retail goods and services.
Supporters of the Fair Tax plan, which was designed by a group called the Americans for Fair Taxation, maintain that this method of taxation makes saving and investing more attractive and would spur economic growth. They also claim it would simplify the tax code.
"The Fair Tax Book," which argues the benefits of the plan, has been a New York Times bestseller since hitting bookshelves in August. But the book's authors, Republican Congressman John Linder of Georgia and conservative radio host Neal Boortz, make a critical mistake in their supporting argument, according to MONEY.
Boortz and Linder argue that individuals would be better off following a switch from an income-tax structure to a national sales tax in part because they would pocket 100 percent of their paychecks.
While consumers would pay a federal sales tax on purchased items, the authors argue that prices at the store would stay the same. The reason: everyone involved in the process of production would no longer be paying taxes, so they could charge less for their goods and labor.
If true, that would mean a dramatic increase in Americans' purchasing power.
But, according to the MONEY report, the book fails to make clear that, in order for pre-tax prices to fall so sharply, companies would also have to cut wages they pay.
"Sure, you'd get to 'keep 100 percent of your paycheck,' as Boortz and Linder repeatedly write, but it would be a smaller paycheck," MONEY senior editor Pat Regnier writes. "That's kind of a big thing to leave out."
According to the report, Boortz denied that "The Fair Tax Book" intentionally overpromises, but admitted that the matter is confusing and that future printings will include a correction.
A national sales tax proposal is likely to be under consideration by a presidential panel organized to present plans for income tax reform.
The October issue of MONEY will be on newsstands on Sept. 26. Read the full text of MONEY's report.
E-mail Pat Regnier at email@example.com.