Fair Tax: The Myths of Inequality

A recent editorial in the Wall Street Journal by Kevin A. Hassett and Aparna Mathur debunks the idea that the Fair Tax is unfair to the poor because it is not progressive.

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.

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Frank Jones February 20, 2013 at 03:21 AM
Stephen…You consider my views very far left and I consider your views extremely far right. You consider yourself a Constitutionalist just as I consider myself a Constitutionalist. We have different interpretations of the Constitution. Having ultra-conservative views doesn’t mean you’re any more correct than myself or others. You and other attorneys are entitled to your view of Obamacare and Chief Justice Robert’s opinion. However, Roberts is a Justice of the Supreme Court and his opinion trumps yours. Many attorneys that believe that the decision was accurate and that the dissenting justices – Scalia, Thomas, and Alito – did so for political or ideological reasons. Taxes...Stephen, I have extensive tax knowledge as well as business knowledge. I handle mergers & acquisitions and business planning for high net worth individuals. Many of my clients have corporate jets and most use the planes for business purposes but mostly for pleasure. There is no “liberal agenda” but merely informed personal observation. The poor and taxes…Again, you’re bashing of the working poor and seniors living on retirement income is unbelievable. The working poor pay taxes, just not Fed Inc Tax. Seniors living on their savings have of already paid their fair share. You declare that they contribute nothing and yet, the working poor are paying your SS and Medicare benefits. Nice! If you're drawing SS & Medicare, you're a hypocrite and a Socialist.
Frank Jones February 20, 2013 at 04:09 AM
Let's leave the rhetoric behind and look at financial and tax facts of the working poor. Consider a married two-wage earner couple with 2 young children and combined gross wages of $50K. This family pays $3,825 of FICA tax, but receives zero current benefit. This family has living expenses and pays $12K for shelter, $8K for food, $10K for childcare, $5K for health insurance, $5K for gas, $1K for car insurance, and $5K for car pymt. In total, they have to spend $46,000 to live/work plus the $3,825 of FICA tax for a total of $49,825. As such they're left with $175 for all other expenses and income taxes. Federal income tax will be $569 so they're now in the hole by $394. My argument is that people should pay taxes based upon reasonable discretionary income. In this scenario, their discretionary income was $175 and yet they are paying income tax of $569. That's an effective tax rate of 325% not to mention FICA taxes; include FICA and the effective tax rate becomes 2511%.
Stephen C. Eldridge February 20, 2013 at 01:40 PM
Again, merely DECLARING me to be "Ultra-C" (Whatever that means & how it helps your Saul alinsky 101 emonize the enemy). Scaliaand I belive in the rule of law and apply the canons of legal interpretation to interpret the Constitution. These canons are utterly devoid of politics. Although no longer in tax practice, I am confient that the portion of your clients' use of their jets for pleasure is NOT DEDUCTIBLE. I recall a rule which DISALLOWS ANY portion of the use of a car UNLESS the car was used over 50% for business and then ONLY for the business pupropses. I don't see suport for your accusation that I bash the working poor and retitrees. I do take my SS checks - I am recoveringg just a smaall portion of the SS & IT that I ahve aid to supporta lot of pooor peoople. I am still vey deep in the hole.
Stephen C. Eldridge February 20, 2013 at 01:50 PM
There you go again Comrade Marx, you want people to pay taxes based upon their NEEEDS with the balance being paid by those with additional MEANS. Your view is that the Constitution guarantees OUTCOMES while we believe that it guarantees FREEDOM TO FLY not OUTCOMES., Everyone must pay his fair share of the maintenence and we are all free to fly as far and high as ur investments, energies, talents etc take us. It is incomplrehensible to me that you consider yourself a Constitutinalist while you believe in a outcome based approach. Forfive me Frank, but I believe that you delude yourself in order to clothe your Marxist views in Constitutinal-sounding words. The fact your guy pays SS and gets no current benefits (he does - disabiliity insurance coversage) he merely "pre-pays" for his eventual benefit its somewhat like life or LTC insurance.
Stephen C. Eldridge February 20, 2013 at 05:11 PM
Frank, to expand on my lasr answer: For some reason you ignore totallly what i say and go back to reapeating your view. As I have said before a poor person aying SS/Mdicare ax pays only a small portion of the benfit he gets - WE PAY for him.Any State tax he pays is for STATE SERVICES not FEDERAL (separate conversation). Let's agree to disagree with each other's analytical views. BTW, I do not mean to inflame you (onlly to elicit humor) by calling you Comrade Marx. Even if you view is only modified-Marxism (perhaps you mean only that the rich must provide a good life for everyone and the rich can then enjoy any excess money they may be able earn), but even that is Socialism in my book ( and un-Constitutional) AND it always gets worse because people in office can never steal enough money fro the rich to buy votes from the non-rich.


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