Your Opinion: Some Fair Tax comparisons
Friday, March 18, 2011
Ed Williams raises some issues about the Fair Tax which I would like to address. First he is correct the regressive nature of a sales tax is well known among economists but he neglects to mention the vast majority of economists also regard a sales tax as the most efficient means of taxation to promote economic growth.
Also Mr. Williams fails to mention the Fair Tax is not a straight sales tax. It includes a prebate which covers the sales tax for all individuals up to the poverty level. For example, a family of four with two adults and two children who lived on $29,140 a year would receive monthly checks totaling $6,702 for the year to cover the cost of the sales tax on the items they purchased which would give them a tax rate of 0 percent. The same family of four living on $50,000 a year would pay a net of $4,798 in sales tax which is a 9.5 percent tax rate. (The same family with standard deductions would pay $6,010 under the current system which is a 12 percent tax rate.) The same family living on $100,000 a year would pay a net of $16,298 in sales tax if they spent the entire $100,000 which would be a tax rate of 16.2 percent or if they saved or invested $20,000 they would still pay $11,698 in sales tax which would be a tax rate of 11.7 percent. Clearly the Fair Tax is not regressive although it is not as progressive as our current system.
Mr. Williams is concerned the prices of new items will increase (which they will), but he doesn’t realize individuals will take home the full amount of their check so their purchasing power will remain the same or increase. For example, someone in the 25 percent tax bracket under the current system has to make $100 to have $70 to spend after paying income and Social Security taxes. Under the Fair Tax she would get to keep the entire hundred dollars to spend on an item which now costs $91 ($21 in sales tax) which would leave her with an extra $9 to spend or invest as she sees fit.
Space doesn’t allow me to cite specific examples of the unfairness of the tax code, but I believe we are all aware of examples where those with money and connections are they able to game the system to their benefit. That will not be possible under the Fair Tax.