FairTax (or consumption tax) is criticized for being regressive and providing incentives to engage in consumption overseas.
Flat taxes are criticized for reducing equity without reducing complexity.
Income taxes are criticized for reducing incentives for production.
Are consumption tax and flat tax proposals as crazy as they all sound?
I would be interested to know what percent would be required (for the same total federal revenue) if there was a consistent indiscriminate tax every time money changed hands, no exceptions.
In order to know which one makes the most sense, you need to first ask, what are your goals, and what do you most want to avoid?
How are any of the proposed new tax systems better than the current income tax system?
I’m a huge fan of flat taxes, no exemptions. Ok, scale in the flat tax something like below $20k no tax, 20 to $40k10% tax, $40k+ 20% tax. The last big flat tax movement was around 1980, and it was calculated then that if everyone in the US paid a flat tax it would be IIRC 17%.
Huge advantage is that it is a really simple tax code. Even room for a little social engineering. Eg, can put in some simple tax breaks like for a child or first home as long as the flat tax does not exceed 20%.
Hong Kong & Singapore both have a flat tax system.
It depends on:
The flat tax problem is that it poses a heavier burden on the lower income levels, for whom an extra 10% of income is not affordable. As soon as you stick in levels, as per China Guy, you’re at a graduated tax, which is what the U.S. has now.
Cecil actually tackled this several years ago: http://www.straightdope.com/columns/001201.html My uneducated guess is that the numbers have changed a bit, but otherwise it’s still reasonably descriptive.
Most of Europe has a combination, income tax and consumption/sales tax (VAT.)
Ideally, there would be no income tax, only a sales tax which taxes consumption rather than savings. There could be no tax on food as it is now and/or tax refunds for those at a very low income level.
Next best would be a flat tax no deductions with the tax starting above a certain level adjusted annually for poverty level and inflation.
Having just written a check to the IRS for the amount of a nice new car, I would welcome a large reduction in government spending… perhaps we should stop spending money to kill people in other countries.
The FairTax is progressive. A prebate is built in that is designed to essential “untax” the poor.
Every household, from Bill Gates on down, gets a monthly prebate equal to the amount of taxes they would pay on the basic necessities of life, as defined by the Dept of Health and Human Services poverty level. This is calculated based on the size of the household. For a family of four, that’s about $500 a month.
And there’s the problem; a family of four could not afford to live in a car on $500 in some states.
Some areas do tax food and clothing.
The U.S. tries to implement social policies through the tax code, like not taxing interest on home mortgages but taxing interest on credit purchases. This is not necessarily bad, but it does create a complicate tax code.
The problem with a complicated tax code is that nasty little inequities can be hidden in it.
There are also LOTS of sources of taxes; personal income, business income, property, sales on goods, sales on services, and fees for government services.
No matter what is done, the burden of funding the society will fall on wage-earners, because they do have the money and they don’t have the power.
I think
I favor the FairTax and am constantly battling friends who espouse non-sequiturs or just plain inane statements such as you are making. The $500 is a rebate on the taxes that might be paid on basic necessities. It’s not intended to be your only source of income. Indeed, many poor folk would be much better off since they would have their full income and the $500 while being able to avoid the FairTax almost completely. How? Buy used. With the exception of certain consumables and toothbrushes, many everyday necessities of life can be purchased used and would avoid the tax (think clothing, autos, house, books, tools, etc).
Now, if you want to debate something substantive, such as:
And many more, but no one seems interested in discussing the real questions, only whiny stuff with little thought behind it.
Myself, I’m for a flat tax model, but graduated similarly to what China Guy mentioned. At each level there would be a flat percentage, no exceptions. At the low end people wouldn’t pay taxes (we would use tax revenue to ‘fix’ social problems, not the tax system by giving direct rebates to those who don’t pay taxes or pay very little).
Of course, with such a system, as Cecil pointed out in his article, we would have a short fall in revenue to the government. So they would be forced to spend less and work in a tighter budget.
Got to hate that.
-XT
As one who strives not to let the perfect be the enemy of the good, I would definitely favor a flat tax over the current system. However, you’re not advocating that. What you and China Guy are advocating is the elimination of deductions. That is not the same as a flat tax and has already been tried. Reagan’s tax reform in the early 80s did that (mostly) and we end up right back here. A true flat tax has only one level and one standard deduction, but even that can be fairly easily manipulated by our representatives in Congress. I like the FairTax, not only because it eliminates the IRS (and the extreme invasion of privacy it imposes), but because it is the most difficult to manipulate to our detriment.
I heard on some radio program a couple of weeks ago that the needed rate would be 1%. I can’t confirm that elsewhere, though the person said it had been looked at by the Cato Institute and confirmed by them. I checked the Cato website and couldn’t find any mention of it, though admittedly I didn’t spend much time on it.
It sounds good, but I wonder about the complexity of such a system. How much accounting would be involved, or is it any more than what we have to deal with now? If it abolished the IRS, eliminated all other federal taxes, and compliance wasn’t overly onerous, then I might consider it even over the FairTax.
The hazard of a consumption tax is that the money flow falls off dramatically in a recession. Just when everybody is having a rough time, you run out of money to help the poor and run the schools.
I know a retired Michigan schoolteacher who seriously fears for her pension.
First of all, I have to respond to ivylass’s comment that the fair tax isn’t regressive because of the prebate. That’s just absolute nonsense. For those who live at the poverty level, it is conceptually possible that they would continue to pay no taxes (though I suspect that there’s quite a few people at the poverty level who benefit from the EITC so they are currently getting a negative income tax, meaning that paying no taxes is a tax increase).
But consumption increases as wealth goes up, at least up to a point, at which investment grows. So, those above the poverty line up through the middle classes consume more and more as a percentage of their income. The super-rich invest a lot more of their money, meaning that as a percentage of income, they are not as consumption heavy as the middle class. I maintain that using percentage of income taxable under the fair tax program, wealthy make out far better than middle- to lower-middle incomes. That’s pretty much the definition of regressive.
But on to my main point: every fair tax advocate I have ever talked to paints a rosy scenario in which people’s incomes do not react to the implementation of a fair tax. I find this impossible to believe. I think there would be a deflationary pressure on wages as the burden of tax compliance is shifted from a system that essentially taxes work (the income tax) into one that taxes consumption.
So the idea that people would take home every cent that they make would be technically true, but as companies adjust prices to take into account the shedding of the “hidden income tax” on products (to use the terminology of fair tax advocates), employers are also going to make adjustments to offset the loss of revenues due to the competitive pressure to lower prices. (Some fair tax advocates actually advertise that goods and services would become cheaper, so I’m not making this up.)
The most obvious cut to business outlays is personnel, and that means reaching a new equilibrium between what is paid to employees against the deflating wholesale price of goods and services. Wages would have to come down, but by how much is an open question. But as I said before, the working classes would be paying either the same or slightly more in federal taxes, but with a period of deflationary pressure on wages.
In short, I think the fair tax is unfair to everyone but the very poor and very wealthy, and the transition would be painful for everyone.
To save everyone the hassle of dealing with the soundbite arguments made in favor of the Fair Tax, here are a couple of the debates dealing specifically with it.
As you’ll see, the reason(s) we’re against it aren’t because we don’t understand it. In fact, we understand it better than most of its proponents. Hmm, sounds like the Patriot Act. The more you learn, the less you like.
This is untrue, according to FairTax.org:
Also, isn’t your schoolteacher friend’s pension funded by the state of Michigan? What does that have to do with the FairTax?
I am a flat taxer, mainly due to the influence of the work done by Hall and Rabushka at the Hoover Institution:
Their entire book is online. Their original proposal required a 19% flat rate, with a deduction for the first bit of income (letting the poor pay no taxes).
I’m glad you brought up the PCE. Since none of the proponents are going to show actual numbers, I guess I will. For the year 2006:
PCE
8,044,100,000,000
Let’s add 30% to that, since prices would increase by that amount to cover the tax.
10,457,330,000,000
Now the government gets to take its piece of the pie, which is 23%.
2,405,185,900,000
Rebates for children under 18 - 78 million of them
62,400,000,000
Rebates for adults - 222 million of them
521,700,000,000
Total Rebates
584,100,000,000
Total Receipts - Government’s take minus total rebates
1,821,085,900,000
Budget Outlay (warning: PDF)
2,613,000,000,000
Looks like we’re short a little under a trillion dollars. Who pays the difference?
ETA: By the way, with all of this talk about doing this instead of what we’re doing now, does someone want to prove that the FairTax actually requires elimination of the IRS?