Fair Tax: The Myths of Inequality

A recent editorial in the Wall Street Journal by Kevin A. Hassett and Aparna Mathur (requires subscription) provides a key answer to one of the most frequent charges against the Fair Tax: that it is unfair to the poor because it is not progressive.

For those who don’t know what the Fair Tax is, it is a long-standing proposal to eliminate the entire income tax structure and replace it with a consumption tax on all goods and services. The percentage is a matter of debate, but the idea is that it would put control of taxation back in the hands of citizens who, by their purchases, could control the amount of tax they pay.

The Fair Tax has been derided because of the fixed percentage, which many perceive to be unfair to the poorer because “the rich” would pay the same percentage as the poor.

The authors point out that despite all the thrashing and manipulation of income taxes that:

“…, in 2010 the bottom fifth accounted for 8.7% of overall consumption, the middle fifth for 17.1%, and the top fifth for about 38.6%. Go back 10 years to 2000—before two recessions, the Bush tax cuts, and continuing expansions of globalization and computerization—and the numbers are similar. The bottom fifth accounted for 8.9% of consumption, the middle fifth for 17.3%, and the top fifth for 37.3%.”

It seems that regardless of how much manipulating Washington does with the rates, preferences and structure of the income tax, everyone at each level figures out how to maintain their level of lifestyle without giving up more money to Washington.

If we assume that the Fair Tax would apply a fixed percentage of tax to each purchase in the above categories, the percentage of taxes paid by each segment of the population would be the same: 

• 8.7% by the bottom fifth,
• 17.1% by the middle fifth and 
• 38.6% by the top fifth.

Regardless of who wins the election, next year will bring a major Congressional push for tax “reform.” Our economy and our country would do very well if we steer this push into the Fair Tax.

Here’s what it would mean to you and me:

1. It means you take home your whole paycheck. All payroll withholding is eliminated, including Social Security and Medicare. It eliminates all capital gains and investment income taxes, encouraging people to save and invest.
2. It eliminates all gift and inheritance taxes, allowing people with a lifetime of savings to pass them on to their heirs.
3. It eliminates the hidden taxes that everyone now pays. Corporations don’t pay taxes, they collect them. All of a corporation’s income, payroll and other taxes are embedded in the price of products and collected for the IRS. The Fair Tax will make our entire tax burden visible to everyone, creating a powerful check on Congress.
4. Citizens will regain their freedom when Congress cannot “incent” them to do what they want. Congress will no longer be able to punish citizens for not doing what they want.
5. The Fair Tax also means that you can stop paying for someone else’s tax deductions. Everyone can buy what they want, when they want.
6. Another advantage of the Fair Tax is that it eliminates tax filings. It is estimated that our country spends over $300 billion annually just trying to comply with the 80,000 pages of regulations in our tax code.
7. H.R. 25 will implement a system where all companies can compete on an even basis, and not suffer a disadvantage because their competitor is “better connected” to a member of Congress. 
8. Employees will be able to work anywhere in the world and not be double-taxed.

Look into it. It’s worth your time.