Considering the “FairTax”

Until recently, I wasn’t aware that “progressive” had an opposite. Surely, many Democrats would prefer that Republican or conservative were seen as opposites of progressive, but they’re not. “Regressive,” I now know, actually is the opposite of progressive, at least in taxes. (And in hindsight, I feel dumb for not having thought of that.)

Fairtax advertisementThis is a distinction I didn’t know would ever matter, and perhaps it never will. Nonetheless, it’s useful as at least a few presidential candidates–mostly Republicans, and none of the frontrunners–are promoting wholesale tax reform, like the “FairTax.”

Before we go too far, a brief introduction. In the simplest terms, taxes can be progressive, proportional, or regressive. Income tax in America is progressive, in that the more you earn, the more you (theoretically) pay–both in pure cash value and in proportion to income.

A proportional tax is something like conventional sales tax, in which all citizens pay the same percentage. That means that regardless of income, all citizens are effectively charged the same tax for their purchases (this fluctuates geographically, but that’s a separate issue.)

Thankfully their are no widespread and regressive taxes that I can use as an example. The rate of a regressive tax decreases as income increases. Which means that, if assessed on income, hedge fund manager are taxed less than their secretaries. This is currently true, but it is generally considered a problem with the tax-code rather than good policy.

Instinctively, I think most Americans would feel that progressive taxes are ideal, fixed taxes reasonable depending on circumstances, and regressive taxes barbaric. Our tax code usually supports this idea, though some interesting issues crop up when one looks critically at these distinctions.

The sales tax as it currently exists could be considered regressive. After all, on goods bought under the tax, the extremely poor and the extremely wealthy have to buy similar quantities of essentials–food, toiletries, clothes. Yet, in relation to income (or wealth), richer people pay a lower proportion or their net worth than the poor.

This distinction can be made to seem erroneous if one remember that sales tax is a tax on consumption not income. But if it were to become the sole tax administered in the country, the distinction would become a much more important one.

The FairTax, supported most prominently by Mike Huckabee and Ron Paul, is effectively a flat national sales tax. In order to abolish the IRS (which seems to be the basis for most of the plan’s support), FairTax legislation would mandate a flat tax (of 23%) be assessed against all retail sales. This means that against income, the tax would be far more regressive than America’s current income tax structure.

In order to “assure” that this tax is the good progressive kind, the program would entitle all people to a “prebate.” This rebate would assure that there would be effectively no tax paid on “necessities” (calculated from the federal poverty line). This sounds good, but what about those living below the poverty line who fail to receive the prebate? In the situation of the homeless, there seems a dangerous possibility that the FairTax might be regressive. But I have to admit it’s an admirable plan–far more so than I originally saw (see below).

EDIT (11/30/07): This piece contained a factual error, pointed out by Alejandro Gonzalez, regarding the rebate of the FairTax. I had mistakenly believed it to be a rebate only for those below they poverty level; it’s truly a “prebate”–paid in advance–to all citizens to subsidize the price of “necessities.” The final paragraph has been amended to correct the error.

, ,

9 responses to “Considering the “FairTax””

  1. Ron Paul does not support the Fair Tax. He has said he would consider voting for it if the 16th Amendment were repealed first.

    Quoting the man:

    Many conservatives have touted the Fair Tax proposal as an issue in the upcoming election. A pure consumption tax like the Fair Tax would be better than the current system only if we truly did away with the income tax by repealing the 16th amendment. Otherwise, we could end up with both the income tax and a national sales tax. A consumption tax also provides more transparency and less complexity. But the real issue is total spending by government, not tax reform. In other words, why change the tax structure if spending stays the same? Once we accept that the federal government needs $2.7 trillion from us – and more each year – the only question left is from whom it will be collected. Until the federal government is held to its proper constitutionally limited functions, tax reform will remain a mirage.

    I apply a very simple test to any proposal to overhaul the tax code: Does it reduce or eliminate an existing tax? If not, then it amounts to nothing more than a political shell game that pits taxpayers against each other in a lobbying scramble to make sure the other guy pays. True tax reform is as simple as cutting or eliminating taxes. No studies, panels, committees, or hearings are needed. When reform proposals seem complicated, they almost certainly don’t cut taxes. Congress should simply focus on cutting existing taxes and reducing spending, instead of complicated overhauls of the system.

    The question to ask yourself is this: What would I do with the money withheld from my paycheck each month? The answer is simple: you would spend, save, or invest the money, all of which do more for the economy and society than sending it to Washington. Thanks to the deception of income tax withholding, however, some people actually look forward to tax time and a much-anticipated refund. Imagine how quickly Americans would demand lower taxes and spending if they had to write the federal government a check each month!

    Tax relief is important, but members of Congress need to back up tax cuts with spending cuts – and they need to vote NO on every wasteful appropriations bill until we start over with the federal budget. True fiscal conservatism combines both low taxes and low spending.

  2. Tex, the FairTax proposal I’m addressing would repeal the 16th amendment (income tax). I don’t think anyone anywhere has advocated for the tax while trying to keep income tax in place.

    And if you look at the link to the “FairTax” group, they have video of Ron Paul saying (on CSPAN) that he’d support it.

  3. Trust me, if there is one thing the poor know how to do really well in this country it is how to fill out paperwork to get money from the government.

  4. Warren, there is now way I would ever trust you on that. You speak of the idea like a man who’s never been poor or known poor people, and your claim to know how they would act as a group is both demeaning and inane.

  5. Sorry you feel that way. I have been poor and even now that I have reached some level of success in my life I deal with people on the government dole all the time.

    There are very few people that would not register as the “head of household” if they had a chance to receive a check each month.

    I am a fairtax supporter so if that disqualifies me I understand since I have more understanding of the Fairtax than maybe your normal visitor would.

  6. Warren, your knowledge of the FairTax doesn’t disqualify you, but I don’t think–whether you know a lot about the program or a little–you can speak for all people who might be adversely affected by it. It is presumptuous for anyone to claim to be able to do that.

    I’m personally concerned about, for example, the implications of such a structure for the homeless. They’d pay the same heavy sales tax as everyone else, but would be unlikely to apply for or receive the “prebate.”

    Beyond that, I’ve heard of no analysis that finds that all people eligible for government money and subsidies regularly take them. Some are too proud, some don’t know about the programs. Surely there are people utilizing the programs, but that doesn’t mean all the eligible are or would. The implications of that would be more troubling with the FairTax in place.

  7. There is no reasonable equity of distribution under the current INCOME tax system. What’s more, the income tax code has become a tinkerer’s paradise for 53% of the lobbyists who game it in Washington DC. It’s a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (a hidden tax which is incomprehensible to the average working person).

    Prices AFTER FairTax would look SIMILAR to prices BEFORE FairTax – NOT 30% HIGHER – as opponents contend; competition would see to it. The FairTax rate on new items would be 29.9% (on the new, reduced cost of items because business isn’t taxed under FairTax – thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag – this is the way INCOME TAX is figured (parts of the total dollar).

    The effective tax rate percentages, that different income groups would pay under a FairTax consumption tax, are calculated by crediting the monthly “prebate” (rebate of tax on necessities) against all likely monthly spending of citizen families (1 member, and greater based on figures established by the Dept. of HHS – a single person receiving ~$200/mo. A family of four receiving ~$500, in addition to family earners receiving their WHOLE paycheck). Prof.’s Kotlikoff and Rapson (10/06) have concluded,

    (From study: ) “…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

    “Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”


    (From study: ) “…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

    It’s well past time to scrap the tax code ( ) and pay for government the way that America’s working men and women are paid – when something is sold.

    (Permission is granted to reproduce in whole or part. – Ian)