Yep. The proponents will point out the prebate, which is nice. It means that someone making below the poverty level income will get either a small bonus or pay 0% (it's reasonably safe to assume most people at that income don't have, unless they're a dependent, much ability to save). It helps. However, once you start getting to middle incomes and upper incomes it quickly becomes regressive, like all sales tax-based proposals. People earning $1 million a year aren't spending $1 million a year, or would be able to spend or invest it on things that this tax doesn't cover. A family with $100k/year gross income would find themselves paying a higher percentage than that millionaire.
This narrative that it hurts the poor is just not true. You get a prebate for basic consumption. It only hurts the poor who spend beyond their means on luxury goods, which is a hopeless situation anyways. (hurts is a poor term, because the cost of goods might not go up at all even with the tax included due to reasons stated elsewhere)
If anything, it allows the poor to pay less tax and save more of their paycheck if desired. It puts the choice in their hands.
Before it is claimed that the poor don't pay tax now anyways - that is only true if you consider gross income to be representative of financial status. You can make an above U.S. average salary and still be poor depending on where you live. This system does not discriminate based on gross income. It's like a no-limit IRA that you can withdraw from at any time.
Probably. I only meant that it helped for this tax to make it slightly progressive (the very low end) because they’re emote likely to spend everything and so the prebate has a major impact on their effective tax rate.
I didn’t do the math to see how it compares to the present system overall.
You're assuming they give a prebate. Most people I know just want a flat sales tax, without any prebate. Which does harm the poor.
> This system does not discriminate based on gross income.
But it does. It still impacts those who make less more. It costs more of what little income they do get to keep after bills, and applies it to all necessities. It's a horrible idea.
According to that graphic, the FairTax taxes consumption, not income. A broad consumption tax is regressive pretty much by design, since poor people spend far more of their income, percentage-wise, on taxed goods than rich people do. I don't see the prebate making a significant dent in this. Yes, it will help to an extent, but you'll still have middle-class people paying far more taxes, as a percentage of their income, than wealthy people.
Cain's failure was basing so much of his plan on sales tax, which is basically impossible to make progressive.
The "prebate" is supposed to compensate for that, so that the burden doesn't fall on poor people.
But it still means that the middle class and wealthy are paying the same flat rate, rather than the current progressive system. So the effect is to shift the tax burden from the wealthy to the middle class.
That's before taking into account the fact that the very wealthy don't spend a majority of their wealth on consumables, so are unlikely to be taxed. That makes it even more regressive.
It's a terrible plan that sounds good if you don't think about it too much. It would be equally trivial to have a flat income tax, and only trivially more complicated to have a progressive income tax. It's not progressiveness that makes the tax system complicated. The complications come from the many different things that can constitute "income" and all of the things we want to exempt as beneficial "expenses".
None of that goes away when you shift the numbers to the consumption side. You want sales taxes on stocks? Houses? Carried interest? What makes those transfers of money for goods and services different from sales at stores? You'll end up with an equally thick book of rules.
It's the kind of plan you come up with when you have no idea why the current system is the way it is, so you just wipe it out and leave others to re-invent all of the complexities that don't show up in a system that has never faced the real world. And it gets promoted by the kind of people who are well aware that it shifts the burden to the middle class and away from the wealthy.
Consumption might go up between the monthly prebate and the lack of income tax deductions from paychecks. Although this would be a one-time boost, it would be a pretty significant one. A 23% sales tax isn't as awful as all that; the average rate of VAT in Europe is about 20%, on top of income tax.
I've been rather skeptical of the fair tax proposals before, but I wasn't aware of the prebate concept which is the old idea of a guaranteed basic income under a new name, and somewhat reflective of the existing incentives. This bears further consideration and I'll spend some time this weekend playing with the numbers. It's interesting to me that it's engineered to be progressive, which a flat tax most certainly is not. I also think the mind-numbing complexity and warped incentives of the existing tax code create a huge drag on the economy. It's monstrously inefficient.
But that 35% sales tax is a huge increase for everyone at the bottom, that’s the point. The bottom 50% pay “no income tax”, spend roughly 100% of their income, and would have their taxes go up by XX * 35% in taxes under this scheme (where XX depends on what you put in the exemption bucket or not). There’s probably data from Washington state or similar on the distribution of purchases, but you can’t just stop at “35% would work” since you have to exempt more things if you goal is not to be regressive.
P.S. I don’t think when people call for “just sales tax” they also mean “oh and sure plus capital gains” (besides, this would just shift back towards dividends).
> The "prebate" is supposed to compensate for that, so that the burden doesn't fall on poor people.
The prebate for a family of four is about the same as the Child Tax Credit for a family with two children., so at zero income they’d have about the same net taxes with “fairtax” giving a effectiv marginal rate on additional work income (given near unity marginal spending) greater than status quo payroll taxes (they would face 0 or negative net income taxes under the status quo because of standard/dependent exemptions and EITC.)
So, the burden still falls on the poor, particularly the working poor.
> So the effect is to shift the tax burden from the wealthy to the middle class.
No, it shifts it from the middle class (or, rather, high-income wage earners) who pay the highest rates under the current system (not capital income recipients, which is the dominant income mode of the truly wealthy) to the poor, who pay taxes at lower income levels and higher marginal rates without significantly greater initial refundable credits.
That's even before considering that marginal propensity to consume drops with income (and is near 100% for the poor), and effective marginal rate under fairtax is the nominal rate times marginal propensity to consume.
The “fairtax” is “fair” to people who see the poor as “lucky duckies” [0] successfully executing a devious tax avoidance strategy.
Yes, typically a sales (consumption tax) does effect to poor more than the rich, because the poor tend to consume 100% of their earnings to survive, whereas the rich only consume a very small portion of their overall earnings.
The Fair Tax attempts to address this via 2 mechanisms- first, it does not tax used goods. Poorer people are more likely to buy used goods than new ones.
Second, the Prebate. Under the Fair Tax, the a prebate is given, based on the Federal Poverty Line, and the amount of tax that would be paid if a family spent up to the federal poverty line. Families that are spending less than the Federal Poverty line actually would pay negative taxes, and those spending more, would progressively be taxed more.
As written, some analysts of the Fair Tax have criticized it for putting the squeeze on the middle class- because many spend everything/most of what they earn, but earn well over the poverty line. Whereas the wealthy still consume very little of their overall income, and the poorest of the poor pay negative taxes.
I would tweak the prebate a little from this model, requiring the legislature to specify the prebate level each year as a part of their budget. This means they can't hide behind tweaking the way the poverty line is calculated- they have to make the decision directly, and be held accountable for it. I would also require the legislature to set the actual tax rate annually or at some other regular interval.
The biggest argument against it is that it is incredibly regressive. Poor people generally spend higher percentages of their income on stuff where rich people save higher percentages of their incomes. So for example, Joe makes 51k/year but spends 50k/year. At the 23% tax rate that FairTax proposes, he pays $11.5k - a $2.5k "prebate". This works out to an effective tax rate of ~18% (with today's tax plan Joe's effective rate would likely be about 7.5% for income taxes and 7.5% for Social Security and Medicare. I.e. a lower tax burden.)
Compare that to a rich person. Susan makes 250k per year but only spends 150k/year and saves the other 100k. She pays 23% on the 150k = 34.5k minus the 2.5k prebate which makes for an effective tax rate of 12.8%. I.e. Susan makes more each year but pays a lower rate of taxes. These numbers get even more insane when you have 10 million in income but only spend 1 million a year. We basically are subsidizing investing and rich people are the biggest investors.
I think this is fundamentally a regressive idea. Currently the very poor pay zero (or effectively zero) income taxes. No matter how you structure the sales tax, you cannot go below zero. (I think negative sales tax is not actually realistic, nor particularly progressive.)
A system that only taxes spending fundamentally has problems in that the richer people can afford to save and invest.
it's probably a bad idea for a lot of reasons, but it's not a "regressive" tax. lower income families tend to have more children, so this tax setup would shift tax burden higher up the income ladder. it would hurt some low income individuals, but it would help low income families as a group.
Totally agree! A consumption tax with a tax prebate (aka basic income guarantee) makes it progressive.
To head off the argument that it's regressive because wealthier people spend a smaller fraction of their income: true for a snapshot in time, but not over the course of their lives. Spending a fraction of your income = saving = spending later. So in retirement they could have an effective >100% income tax rate. Also, switching to this program would be a one-time double-tax on savings which will disproportionately affect those who've saved more; i.e. "progressive". I'm still not positive about intergenerational wealth transfers - that could be a way to avoid paying taxes, but maybe if we charged wealth transfers the same consumption rate, that could solve it.
I'm a big fan of a FairTax-esque approach since it simplifies things dramatically and lays the infrastructure for ramping up the prebate as time goes on, as our nation can afford it.
This idea is appealing to me as well but unless it's based on your income (hence yet another progressive tax), such a tax hurts the poor disproportionately.
I think I don't like this idea for the wrong reason.
Making sales tax less regressive would be a good thing.
The implementation difficulties don't bother me per se; I think what's making me not like this idea is that it wouldn't do much for wealth disparity. If you're Wealthy with a capital W, you don't really spend that much, compared to your income.
But even if I'm also interested in tax policies to decrease the accumulation of massive amounts of wealth and the accompanying power in the hands of a single individual, I shouldn't dislike a tax policy that would do a different good thing -- if it could be implemented -- just because it doesn't do the other thing I want.
Every flat tax proposal I’ve seen has either an income floor or a ‘prebate’ to counteract this. Generally they are set at an amount that actually improves the lot of the lowest income earners, largely due to knee-jerk reactions such as yours.
Sales tax only puts the burden disproportionally on the poor.
If you're making millions of dollars a year you're probably only spending a small fraction of it and if there's only sales tax you pay tax on a percentage of what you spent. So let's say you made 30 million dollars and spent 8 and say the sales tax rate is 15%. In this case you paid 1.2MM in tax for a marginal tax rate of 4%.
On the other hand if your income is 15k you're probably spending it all or very close. In which case your marginal tax rate is 15%.
Not all that fair I'd say.
Personally I like the progressive income tax method. I just think capital gains should be taxed as income rather than at a flat 13% and no special rules for corporations either. If they want to be people they can be taxed like people. If they want to be different then we can just get rid of corporate personhood. I doubt they'd like that much.
The prebate absolutely makes a dent in the regression. And greater the prebate, the less regressive. The FairTax currently uses the prebate based on poverty rate. A simple change (or compromise) of changing this to say double the poverty rate, and to remain tax neutral the 23% might need to go to 24-25%. This would change the graphic to look even more regressive. How about triple the poverty rate? Whatever this number is, below it, one receives more prebate $ than they spend in federal taxes. As i mentioned below, looking at the % (tax paid / wages) in the FairTax system doesn't make sense. You must focus on the consumption.
Studies have shown, most wealthy people will pay more tax in $ than they do today under the FairTax, and the poor will pay less tax $ than they do today. This is essentially the definition of a more regressive tax system. Not to even mention the other benefits like the time value of money and the international labor competition.
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