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Why the Fair Tax would fail, and is regressive.

by on September 24, 2014

The Fair Tax is the idea that by repealing all income taxes and replacing it with taxing sales on any newly produced item by 23% will create an influx of spending that will cause a boom to the economy.  You could read all you need to know about it from the hyperlink.  I’ve read both books and read the bill that has been proposed numerous times in congress.  At one time I had thought it was a great idea, that keeping all your income and only being taxed on what you bought was a great idea to revitalize the economy.  I believed this until I took a few economic classes and was able to better scrutinize the plan.  There are several things that I would like to point out that the plan hasn’t taken into consideration.

1)  A tax on sales is a tax on demand, and a tax on demand is a tax on employment.  So anyone that is forced to spend all of their income to survive are going to pay 23% on anything considered a new item.  So in order for people to save some money there is going to be a new reason to purchase “used goods” as they are exempt from this tax.  So factory orders on new merchandise will decrease, meaning factory workers, who are already hurt from shipping their jobs overseas, will now see their jobs being cut.  Either that or they will have to get a job in retail working at a used goods store, likely making near minimum wage.

2)  The tax is sold as being revenue neutral, as they tout it will obtain the same revenue as we obtain now with our collective taxes we already pay.  But after taking some advanced classes in economics one learns that the purpose of taxation should not be to obtain revenue but to slow down an overheated economy.  Any kind of tax, no matter how big or how small, is considered a demand drain.

3)  The prebate is a good idea, but people will still have to pay 23% on the money they get back from the prebate.  So no matter what, every class of people will be paying 23% of their discretionary income on taxes.   But people who support the Fair Tax try to explain that this is avoided by purchasing used goods.  Hence why point number 1 is the most important.

4)  Let’s get back to the idea of discretionary income.  In this chart provided by the proponents of the Fair Tax, it shows that if a rich person spends $2,000,000 they will pay 23% on that, which it tries to play off as the same rates as the lower classes.  But this is discretionary income, not income.  A rich person that spends $2,000,000 per year, could be very well earning $100,000,000 per year.  So if you take the 23% of the $2 million in discretionary income, you get $460,000 out of $100,000,000 of income being taxed.

That is a tax rate of .46% on the mega rich, while the rest of us pay 23%!

5)  Last but not least is the idea that savings generates investment in new businesses.  This is a belief of supply side economic theorists, that somehow our savings, while not being spent, will be realized with new jobs and investment.  This goes counter to what Keynes taught us that “aggregate demand” is the driver of our economy and makes it grow.  Increasing aggregate demand, put simply, is increasing sales, not increasing savings.  While savings is great for the individual, it is damaging to the economy as it is a demand drain.  So even if this does promote more savings for Americans, is that something this economy can really handle?

The important thing to remember in regards to any kind of plan or idea, is to measure it by it’s results, not by it’s name.  “Fair” is a very subjective word based on the morals of the person using the word fair.  So this Fair Tax may be fair to those who propose it, it really isn’t fair when the results are measured on who pays less as a percentage of their total income.  Sure someone that makes $100,000,000 a year could spend all of their income, but I doubt they got that rich by spending all their money.

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7 Comments
  1. The Fair Tax is not regressive. Stop lying to yourself. Why do you perpetuate falsehoods that have no credibility? Why is it so wrong for someone who busts their ass to want to keep every penny they earn?

    • I laid out how it is regressive. As those with less disposable income are burdened more by the tax than those with more disposable income.

      Also I have no issues with people keeping more of their money.

  2. JP Hochbaum, you omit the fact that purchases up to the poverty level are tax-free. Even if it was regressive, which it is not, everyone would keep their whole paychecks tax-free. People would get an advance refund on purchases of basic necessities. Another upside is the fact that purchases up to the poverty level are free of tax. Who can spend your money better-you or a government bureaucrat?

    • I left out the prebate because everyone receives the prebate not just those under the poverty level. And it only applies to necessities as explained in the first line here:

      “Under the FairTax, all Americans consume what they see as their necessities of life free of tax.”

      Which includes only clothing and food. So if someone pays rent they are paying taxes that the landlord passes on, they are paying taxes on computers, phones, furniture, and numerous other things not deemed as necessary. Poor people still have to buy non-necessities in order to work and to sleep, etc….

  3. JP Hochbaum, you never directly answered my question about who could handle your money better, being you or the government. Also, since purchases up to the poverty level are tax-free, poor people would still pay nothing. The tax rate of .46% on the mega-rich is a false statement. Have you even read the books?

  4. Well, in a sense, it actually is relevant. Even if it has nothing to do with the article, who do you think could manage your money better-you or the government? Also, since this post talks about taxes, the question does have something to do with this article.

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