Is The Fair Tax Really Fair?

An informed opinion:

Over the past several years the “Fair Tax (FT)” scheme has been pushed by some Libertarians and other right wing commentators as a means of eliminating the present income tax system.

Basically the tax is a national sales or consumption tax on all new goods and services consumed by all U. S. residents.

The claim of fairness comes from the fact that all residents pay the same tax for consumption. regardless of income.

a. The FT rate would be 23%-25% on all new goods and services.

b. The tax on first $25,000 worth of purchases would be rebated to all residents

c. The tax is revenue neutral in that the rates would be set to provide the same national revenue that the current income tax system provides.

d. An unproven theory holds that manufacturers would be able to offer goods at lower prices due to lower tax costs but even the theory ignores the fact that a large portion of goods come from overseas and would not be affected.

The problem: The tax burden is shifted to those households that spend all their earnings on taxable consumption and from those households that only spend a portion of their income on consumption. For example a family of four with a gross income of $50,000 would spend all of their income on goods and services. The same family with a $500,000 income would save and invest a significant amount of income and only pay taxes on the consumption portion.

I quick trip through the IRS Form 1040 tax schedule quickly reveals that the lower earner would see a significant increase in federal taxes while the more affluent would see a significant decrease.

In the end it's the same old regressive tax that is typical of all sales taxe ideas.

Regressive tax explained: http://www.investopedia.com/terms/r/regressivetax.asp

Some examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.

Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.

Paul Hunter