I haven’t seen any discussion of the Fair Tax proposal here (granted, it’s kind of difficult to search for), which surprises me. It seems to me that a majority of the prolific political posters here would welcome this reform.
In short, it means that all current taxes (income, gift, estate, capital gains and so forth) are replaced by a single sales tax. Workers keep their entire paychecks and pay their taxes through consumption. The tax is progressive for two reasons: the rich spend more (duh!) and there is a rebate system, so that each person gets a check each month which in effect means that purchases up to a certain point are tax-free.
This means that no-one has to file tax returns, no-one has to calculate anything, there is no need for expensive accountant services and so forth. The taxes pay themselves, automatically. Businesses do tax returns the same way they pay the sales tax today.
Just off the top of my head and not digging too deeply I’d say sending out all those check every month would be a nightmare for the government. As would collecting the sales taxes (which would now be the sole source for government revenew wouldn’t it?) I would think. In other words I think the logistics of the system might actually be worse than what we currently have. However, as I said I haven’t really dug deeply into the fair tax thing…I’ve always favored something more like a flat tax.
We had a longish thread on this a year or so ago. The basic arguements against were that, if you only tax retail, the tax is pretty huge, giving folks a huge disincentive to spend. Also it’s pretty regressive, despite your claim:
Rich people may spend a larger amount of money on purchases in absolute dollars, but they spend a smaller percentage of their total income on purchases (as opposed to savings/investments etc.) while poor people spend almost their entire incomes on purchases.
Yeah, but the rebate would be a larger percentage of the poor person’s total income.
If the rebate if fixed year to year, would it still be regressive?
If the rebate were related to the budget deficit, would voters finally start caring about how thrifty or spendy the politicians they vote into office are?
In a way I think it is great as it would encourge people to save instead of spend. In other ways I think it could crash our ecconmy as it is dependant on the circulation of money, make spending ‘harder’ by taxing it and that circulation will slow down.
A tax is only progressive or regressive to some base. A consumption tax is progressive to consumption and regressive to consumption. The important thing about a consumption tax is that itmight be more fair over a lifetime, since consumtpion is steadier over a lifetime, we tend to smooth our consumption over our lives by borrowing when we are younger, paying off debt and saving as we get older and then living off savings as we are even older. Two people who consume essentially the same over their lifetimes can end up paying considerably differing amounts over their lifetimes in taxes under the current income tax.
This doesn’t carry any moral weight with me. If you admit that we live in a society and that we have a duty to our fellow man at all, then it seems to me the important consideration is how much each person can pay, not whether there’s “fairness” is what someone pays. Because taxes in a society with social programs aren’t based on fairness, they’re based on redistribution of wealth.
Now, one might disagree entirely with having social programs, which I think is morally irresponsible (as well as economically shortsighted), and of course people can draw the line differently on how much is to be spent, but that isn’t the same as deciding who pays.
kanicbird, I believe a federal sales or consumption tax would be unconstitutional because of Art I, Sec. 9 of the Constitution: “No capitation, or other direct Tax, shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” Ergo, capitation or other direct taxes cannot be imposed by the federal government unless the revenues generated would be proportionate to the population of the states. The federal income tax would be in violation of this provision, except that the 16th Amendment was enacted to allow it. However, the 16th A. explicitly authorizes taxes on incomes, not other kinds of taxes. Therefore, the question becomes whether consumption taxes are direct taxes which are prohibited under Sec. 9. This is a very arcane question no one really knows the answer to, but I think they are, because they take money directly from economic actors engaged in the economy. An indirect tax might be some form of federal property tax which doesn’t depend on the actor’s engagement in any economic transaction. Or maybe it refers only to taxes on slaves, which would be paid by a person (the owner) indirectly on behalf of the people (slaves) who incurred the tax liability. Or maybe it’s something else – better men than I have failed to answer that question. But if a consumption tax is a direct tax, a federal one would be unconstitutional. Unless there’s a guarantee that revenue would come in only in proportion to a state’s population, and that would be unworkable to administer.
I make this point every time a ‘Fair Tax’ thread pops up.
When you purchase equities or other funds you are making a ‘purchase’ and therefore should be taxed just as if you’d bought a candy bar at the local 7-11. Everyone tends to shout me down at that point.
But it’s true. If you want the Fair Tax concept to work it needs to hit ALL transfers of wealth for value, whether slurpee or shares.
Isn’t this why we have a variety of taxes: so that taxes that are regressive to some people are offset by taxes that are progressive to those same people. As Cliffy said, the sales tax hits the poor the hardest, since they spend a higher percentage of their income on taxable consumer goods rather than property or investments. But they get compensated for this burden because the rich pay more income tax and the middle class pay more property tax. (again as a percentage of wealth.)
The current system, whatever its faults, speads the burden around. It is far more fair than a flat income tax or a national sales tax.
I won’t shout you down, but that would be an absolutely catastrophic idea. The economy would tank immediately after such a law went into effect.
Imagine that there was a tax of, say, 28 percent on equities, same as on goods and services. Why on earth would anyone EVER purchase an equity if the value of the equity is one-quarter less than the amount paid for it? Even if the stock market averages 7 percent return in an average year (under current circumstances, there’s no way that would happen under a massive tax on equities), it would take five years for the equity to return to the value of the purchase price. I’ll tell you this much: if this tax were enacted, I would never buy stock or mutual funds, ever. My money would be safer in gold coins underneath my bed.
But I’ll give you a question: Why on earth would your proposal not completely wreck Wall Street?
I’m not saying it wouldn’t. I’m saying that the ‘Fair Tax’ immediately causes it’s own set of ‘exemptions’ because of its impact. And therefore we’re right back heading where we are now.
Besides, the American economy is largely consumer driven right now. What makes you believe that adding a 50% tax on consumer items won’t ALSO wreck the economy? If it’s good for the meat citizens it should be good for the corporate citizens.
Ravenman, Jonathan, we all agree that a flat consumption tax sucks. No need to argue about why it sucks, because you’re both right – it sucks becuase it would cripple the economy if it were on consumables and equities, and it sucks because it would both cripple the economy AND be devastatingly felt by the poor if it were on consumables only.
I agree with the posters who think a consumption tax would hurt the poor the most.
I am in favor of a flat tax. It never made sense to me that people who are smart hard working and motivated should be penalized by paying outrageous pecentages of their income in taxes and then hire an accountant to wade through libraries of tax law abd fund the loop holes. If everyone pays 15% or something, then those who earn more pay more because 15% of 50,000 to 100,000 is much more than 15% of 18,000 or 30,000. There should be few deductions, with the possible exception of those in poverty level brackets with kids.
I’m also in favor of luxury taxes. Let’s try to keep the costs of the essentials down but tack on small taxes to luxury items to raise money for education and health care.
How about a quarter on movie rentals, a dollar on cable or satellite TV, etc etc.
Me too. It’s not just abstract fairness or anything, it’s a matter of loopholes and infrastructure. The IRS wouldn’t vanish, but certainly would get far smaller, and it would make the market for financial planning much more dificult and therefore less attractive. Take a flat tax, screw loopholes, and let it ride.
Basically, you’d get the same thing you do now (it **would ** slightly slow business growth, but they wouldn’t have to spend so much on accountants, balancing it out a bit) but the transactions costs for so much of life goes way down.
I fail to see how taking the current tax brackets and stripping out all the “loopholes” (exemptions, deductions, etc.) would be any more costly infrastructure wise then a single bracket. You can fix the current system without moving away from a progressive structure.
No need to argue about why it sucks, because you’re both right – it sucks becuase it would cripple the economy if it were on consumables and equities, and it sucks because it would both cripple the economy AND be devastatingly felt by the poor if it were on consumables only.