An Oped in the Wall Street Journal on the "fair tax" proposal. As usual, I have to wait 30 days to post the full version
The bill eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax.
I've been writing about consumption taxes for a while. Some previous posts on these points, VAT (WSJ), A progressive VAT, Consumption tax, Tax reform, Taxes, Alternative Minimum Tax, also Wealth and Taxes Convexification and complication Tax graph Economists and Taxes Corporate tax burden Tax Reform Tax reform again (WSJ) Corporate tax reading list Corporate tax (zero) Trump taxes 2 Those address a lot of the what ifs and whatabouts.
But it's not progressive! (Meaning, better off people pay the same rate, not the same amount, not "politically progressive").
Already the "fair tax" proposal adds
Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed.
Yes, effectively universal basic income from Republicans! One could do more. And as in the above forest of links there are plenty of ways to make a consumption tax as progressive as you'd like.
But the most important point, with added emphasis:
the progressivity of a whole tax and transfer system matters, not of a particular tax in isolation. If a flat consumption tax finances greater benefits to people of lesser means, the overall system could be more progressive than what we have now. A consumption tax would still finance food stamps, housing, Medicaid, and so forth. And it would be particularly efficient at raising revenue, meaning there would potentially be more to distribute—a point that has led some conservatives to object to a consumption tax.
Even the supposedly far right radical Republican plan bends here to political expediency in my view. Why should this particular tax add progressively, rather than just finance transfers?Won't the rate be too high? If the government spends 40% of GDP, and consumption is 85% of GDP, then the consumption tax rate has to be 47%. Wow!
But taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes.
(Currently taxes don't cover spending because we borrow a lot, but that can't last forever).
What about "starve the beast." Consumption taxes or a VAT are so efficient, government will grow. Keep an inefficient system so that government is forced to cut spending. While great economists advocated that view, it does not seem to be working!
BTW, I don't have a big view on consumption tax, sales tax, VAT. From where we are now, all three are about the same. There are differences, that will matter in the end. The fair tax bill actually has a lot of the thought out detail one expects.
The main point: Get out of the day by day politics. It's great news that a clean good fundamental reform idea is making it to actual legislation.
This is a big moment. For a long time, consumption taxes have been debated in academic articles, books, think-tank reports, administration white papers and so forth. When the U.S. eventually decides to reform the tax code, consumption taxes will be the obvious answer. It is great news that real elected politicians like Rep. Carter get it, and are willing to stick their necks out to try to get it passed.
No, it’s not likely to pass this year, or next. All great reforms take time. The 8-hour workday and Social Security started as wil...See full post