My Essay on the Fair Tax
On my earlier post, commenter Morgan wrote,
This is where the transparency of the sales tax is such a huge advantage. For the first time we can say, do you support this Bill at the cost of $.01 of sales tax? Do you support the Farm subsidies at the cost of $.03? The most important strength of a market system is associating costs with actions. Income tax totally fails to do this resulting in no effective constraint on government spending.
This anticipates the thinking of my new essay, where I try to get the transparency without the radical reduction in the share of government paid for by high-income taxpayers.
Compared with the FairTax, the semi-Fair tax would not reduce taxes on high earners–some of them might even face higher taxes. However, it would reduce taxes on work and increase taxes on consumption. That combination might encourage more saving. In addition, if the rules about keeping the income tax invariant and paying for new spending with sales tax increases could be made to stick, the bias toward higher government spending might be greatly reduced.
Update: Megan McArdle gives her view. She says that one could dial up the progressivity of a sales tax with a large enough exemption. I think the arithmetic makes that quite difficult–see my essay.