Why The Fair Tax is Unworkable
By Arnold Kling
Estimates of the actual rate of taxation required for the FairTax to be “revenue neutral” (meaning for it to bring in exactly the same amount of revenue that the federal government collects under the current system) start at 30 percent and keep climbing. William Gale of the liberal Brookings Institution think tank says it’s a de facto 44 percent sales tax. Calculations go still higher once you add in all the necessary and politically inevitable exemptions on big-ticket items — like a new home or hospital care. Congress’ Joint Committee on Taxation, which draws members from both parties and both houses, says the real rate would be 57 percent. (And this leaves aside the enormous federal outlay required by the “prebates,” which even FairTax advocates say would cost the government $485 billion per year.)
…it’s a mammoth tax cut for the crowd making more than $200,000 a year and a substantial tax increase for those making between $30,000 and $200,000 a year.
Our current tax system takes its biggest bite out of people who earn much more than they consume. Because the Fair Tax (or any consumption tax) would abstain from tapping this rich vein of unspent earned income, it would taking larger bites out of others to obtain the same revenue.
Consumption taxes reduce tax rates drastically on people who earn more than they consume. To be revenue neutral, they have to increase taxes drastically on people who consume more of what they earn. Whether this is a bug or a feature of consumption taxes is more debatable than Brad lets on.