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.
I agree. I've long been a in favor a consumption tax such as FairTax, which gives everyone a "prebate" for taxes on the first $50,000 or so, to ensure it is still a progressive tax.
However, I don't think that would work in a theoretical "post labor" world where only 25% or less of the population is actually employed.
> The FairTax provides a progressive program called a prebate
That's not progressive (the marginal rate is flat, not progressive); its equivalent to a very low UBI [0] + flat tax. Is it better than a flat tax without a “prebate”? Yes. Does the prebate avoid a massive downward shift of tax burden compared to the status quo. No, it doesn't.
And that's even before considering the fact that its not revenue neutral and is proposed by people who want to use it as leverage for social program spending cuts.
[0] By the stated basis, its a UBI equal to the consumption tax on spending at the poverty line.
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 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.
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.
It's a flat tax on consumption, which is a regressive tax on income; when unspecified, progressive/flat/regressive in regard to taxation conventionally refers to relation to income.
> but it doesn't really matter since as long as the prebate value is large enough, the poor still come out ahead.
The size of the prebate (and the 23% rate) is part of the FairTax proposal (though a slighlty incoherent part, since it is defined in terms of income, not spending)—it is defined at the level that a taxpayer would pay 0 net FairTax with poverty level income (presumably, this assumes 100% spending at poverty level.)
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.
One of the aspects of The Fair Tax, which is basically a flat tax, is the idea of a "prebate" - a sum of money (between $4-7K if I recall) that is paid to each taxpayer every year to help cover the basics like bread and milk.
It's worth noting that the UK, France, Germany, Sweden, Australia, and almost every other western democracy finance very large chunks of their governmental expenditures via high consumption taxes. Most people agree that not only are they not hellholes with the poor and middle class starving on the streets, but they're actually nicer places to be poor than the US. So while you're right that this would be a shift to a less progressive tax system, it's also clear that this isn't the whole story.
In fact, the progessivity of the tax system has very little impact on inequality. You can have a highly progressive system (like the US, which by some measures has the most progressive tax system of any first world country), or a relatively regressive system like most of Europe, and it just doesn't matter. In which case, anything to simplify the tax system in the US is probably a good idea.
Further, the "rich" in your example are able to easily evade most taxes. Consumption taxes - specifically if implemented as a VAT, as in Europe - are effectively impossible to dodge, even if you're very rich. You may not pay a lot as a percentage of your total income, but you will pay. The (nominally) highly progressive system in the US is unable to guarantee that.
(And in any case, as recursive pointed out, the prebate check would make the system arbitrarily progressive, undermining your entire complaint. Although personally, I'd favour just implementing a straight up European-style regressive VAT, and if you want to redistribute income, do it via welfare payments; that's what they're there for. And unlike tinkering with the tax code, they actually are capable of effecting significant redistribution. Your entire argument seems predicated on the idea that the US tax code has something to offer that the typical European tax code does not. Will all due respect, I question this. The US tax code is a disaster, and US prosperity has been achieved in spite of it, not because of it.)
A progressive sales tax not based on purchasers income, but the type of good. For example, luxury goods should be taxed higher and basic staples very low to none. This the wealthy could not avoid tax by simply shifting money around political jurisdictions. This system would encourage transparency, encourage wealth creation as well as thrift in lower and middle income earners.
Also, a side benefit (not that I entirely agree with it) is this is a way to enforce social policy like healthy eating. Tax unhealthy items like sugary food and tobacco highly (up to a point). This is done already in the United States successfully. And if you want more tube riders and less drivers in a city, have a very high toll and vehicle purchase tax. Singapore does this successfully.
Some countries that have no income tax already employ this to an extent by taxing certain sales and imports. I think this type of system is worth experimenting with at least on the city-state or state level (canton / province / state). If it does not work, you can always go back.
There's been talk of this type of system in the US but it's not likely to gain traction. The real reason for progressive income tax is not good policy, but divide and conquer class politics. Something all sides of the political probably spectrum agree with: governments need to be good stewards of tax revenue no matter the collection method.
> 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.
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.
Sales tax would be the only conventional tax in the scheme proposed. So it would need to be as high as needed to fit the public government spending. In some EU countries that would be above 50%, in the US may be roughly 40%. That may seem like a lot but averaged it would be the same than the average tax payer paid before, except more evenly distributed so likely median tax payer would be benefited.
UBI by itself is progressive, a simple flat UBI creates a progressive effective rate. You can tweak the numbers to obtain your desired target tax curve; increasing or decreasing UBI, having different VATs for different products. As John Von Neumann said, "with 3 parameters I can draw an elephant and with 4 I can make it wiggle its trunk". There is enough free parameters to make the taxation more or less progressive.
I'm not prescribing those details because I think there should be ample room for fine-tuning. What size government spending should have in an economy and how progressive should a tax system be are questions that different countries have answered differently and you find success and failure all across the spectrum. So I consider it a transversal issue.
My focus is on efficiency, resiliency to abuses/gameability and economic incentives.
Yeah, I'm not on board with all the FairTax tenants. For one, the sales tax should be progressive based on product type (range from basic necessities to luxury).
Savings and DYI are a good thing long term. Maybe not so much for the inflationary consumer based system that the banks and megacorporations benefit from.
The pre-bate, which is similar to a basic income should help offset the regressive nature. In fact, I think it could replace most welfare programs.
The Fairtax prebate alleviates the burden on the working poor, but the regressiveness shifts up to the middle class.
The wealthy still don't consume most of their income. As the article you link to points out, "you wouldn’t be taxed on your interest, dividends and capital gains" -- the things that wealthy people do with their money. The burden of running the country would fall on the middle class, raising their taxes from what they are now, and decreasing it on the wealthiest.
Economists only prefer consumption taxes on things they're trying to diminish, like producing carbon. On everything else, they want consumption. It's what keeps the economy going; it's the essence of GDP. Consumption increases the velocity of money and keeps people employed. Sitting on your cash causes deflation, which most economists consider very dangerous.
Consumption taxes, like the VAT,are regressive, but can be made progressive when implemented in conjunction with a universal refundable tax credit system or a universal basic income. For example, Andrew Yang proposes a 10% VAT and a $1,000 monthly UBI per adult. Napkin math suggests that unless you are spending $10,000 per month on VAT-taxed consumption, the $1,000 UBI provides a net gain. I think it is unfortunate that we focus on the disadvantages of the VAT (i.e. regressive), when there are advantages to it in terms of making it more difficult for companies to avoid paying taxes, if it is placed with policies that together become quite progressive.
Technically, it's a flat tax. You can argue that it's "effectively" regressive if you divide mean spending by income across the income distribution or something, but it doesn't really matter since as long as the prebate value is large enough, the poor still come out ahead.
Needless to say, I'm not claiming that FirTax would work. I'm just pointing out the similarities between it and UBI. If this experiment shows evidence that UBI doesn't work, then that gives me less confidence in FairTax as well.
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.
reply