Let me guess, this "sales tax" would mostly apply to things that poor people buy, and not the things rich people buy (like legislation).
No, if you want a "fair tax", let's look at how much the median American pays relative to their net worth. It's about 8% per year, which means there should be a wealth tax of 8% (with a tax-free allowance on the first $100m so that 99% of people are exempt).
That's not progressive (the marginal rate is flat, not progressive); its equivalent to a very low UBI [0] + flat tax. Is it better than a flat tax without a “prebate”? Yes. Does the prebate avoid a massive downward shift of tax burden compared to the status quo. No, it doesn't.
And that's even before considering the fact that its not revenue neutral and is proposed by people who want to use it as leverage for social program spending cuts.
[0] By the stated basis, its a UBI equal to the consumption tax on spending at the poverty line.
But it still means that the middle class and wealthy are paying the same flat rate, rather than the current progressive system. So the effect is to shift the tax burden from the wealthy to the middle class.
That's before taking into account the fact that the very wealthy don't spend a majority of their wealth on consumables, so are unlikely to be taxed. That makes it even more regressive.
It's a terrible plan that sounds good if you don't think about it too much. It would be equally trivial to have a flat income tax, and only trivially more complicated to have a progressive income tax. It's not progressiveness that makes the tax system complicated. The complications come from the many different things that can constitute "income" and all of the things we want to exempt as beneficial "expenses".
None of that goes away when you shift the numbers to the consumption side. You want sales taxes on stocks? Houses? Carried interest? What makes those transfers of money for goods and services different from sales at stores? You'll end up with an equally thick book of rules.
It's the kind of plan you come up with when you have no idea why the current system is the way it is, so you just wipe it out and leave others to re-invent all of the complexities that don't show up in a system that has never faced the real world. And it gets promoted by the kind of people who are well aware that it shifts the burden to the middle class and away from the wealthy.
The prebate for a family of four is about the same as the Child Tax Credit for a family with two children., so at zero income they’d have about the same net taxes with “fairtax” giving a effectiv marginal rate on additional work income (given near unity marginal spending) greater than status quo payroll taxes (they would face 0 or negative net income taxes under the status quo because of standard/dependent exemptions and EITC.)
So, the burden still falls on the poor, particularly the working poor.
> So the effect is to shift the tax burden from the wealthy to the middle class.
No, it shifts it from the middle class (or, rather, high-income wage earners) who pay the highest rates under the current system (not capital income recipients, which is the dominant income mode of the truly wealthy) to the poor, who pay taxes at lower income levels and higher marginal rates without significantly greater initial refundable credits.
That's even before considering that marginal propensity to consume drops with income (and is near 100% for the poor), and effective marginal rate under fairtax is the nominal rate times marginal propensity to consume.
The “fairtax” is “fair” to people who see the poor as “lucky duckies” [0] successfully executing a devious tax avoidance strategy.
You seem quite eager to get the pitchforks out since it doesn't attempt to solve the tax problem in an extreme (your) way.
While an income tax captures all income, at least in theory, a sales tax doesn’t apply to money that isn’t immediately spent. It doesn’t apply to money that is parked in the stock market, spend outside the country, spend on personal employees like your butler, and, depending on specifics, real estate.
So in terms of real-world effects, this is rather transparently a wet dream for the super-rich and, maybe, some of their lesser friends. It will allow, by definition, people earning twice as much as they can currently spend to cut their contribution to society in half, with those spending most of what they make on consumables auch as food or clothes on the hook to make up the difference.
With any “fair” taxation scheme you always have to ask who pays less and who pays more. Whenever I dig into these schemes it’s always one of the middle groups of tax payers who end up paying more.
Two people, married filing joint status: currently $25k standard deduction. Current FPL for two: $17.4k. I picked a couple with no kids because the higher refundable child tax credits just started and raise the bar for where federal income taxes start on a family of four (nb: they pay many other taxes: state, FICA, sales, property...)
There is a talking point from some on the right that 47% of US households pay no federal income tax that also makes me think this could be a net negative for many.
No, its not.
I mean, have you heard of capitation?
One purpose the tax code serves is to incentivize behavior. If that tool is taken away from the government, what will the unforeseen costs be? Do they outweigh the benefits?
I’d ask this from a philosophical standpoint here, not really a legal one as this could be applied to other non-US governments as well.
If I want to sit attend and eat cheeseburgers all day and be morbidly obese should the government try and incentivize me to go to therapy and a weight loss clinic?
If I want to follow a religion that is very different from the status quo e.g. Ultra-Orthodox Judaism or the Old Order Amish Mennonite Church and live apart from society should the government be ok with this or instead try to incentivize me to a certain behavior?
Should we use a tax-incentive to encourage having more children or getting the COVID vaccine?
There are lots of unforeseen costs here. I’d say this is not the best idea to incentivize anything. Way too many unintended consequences of tax incentives.
I do like the simplicity of the idea though, just that alone makes me lean in favor. It's not like the current system isn't also being gamed to hell anyway.
One point for anyone running calculations: AFFT uses a 23% figure a few places on their site, and at least to me it felt advertised as being closest to a 23% sales tax. However 23% is the equivalent effective income tax rate everyone would pay. The sales tax equivalent would be 30%.
23% income tax only: You earn $100, federal government takes 23%, you are left with $77. You buy $77 of groceries.
23% sales tax only: You earn $100, government takes nothing in income taxes, you go to the grocery store, you buy $81 in groceries and pay 81*1.23 = $99.63 at the register.
If the government still wants its $23 rather than $18.63:
30% sales tax: You earn $100, government takes nothing in income taxes, you go to the grocery store, you buy $77 in groceries and pay $77*1.3=$100.10 (actual tax rate is 29.86%, I rounded)
That's not saying anything about the economic effects, what might happen with salaries, benefits, etc., but to me it seems this is going to soak a lot of people living paycheck to paycheck so those who spend a fraction of yearly income pay less (to say nothing of that group's ability to avoid this tax).
Also, good luck telling folks at or near retirement and above FPL who already paid taxes on decades of savings they owe a new ~30% sales tax. They vote.
I believe there is a better simpler way.
An operational tax system is one where whoever is paying you your money pays tax on that value transfer. This is what a payroll tax should be - largely a tax on employers for using your services. The employee should always get the full wage and be completely ignorant of the tax paid. That allows taxes to be put up a little easier because corporations don't vote.
Since the sole functional purpose of taxes is to release resources for the public use, and the requirement tends to be for manpower, increasing the cost of jobs so there are fewer private jobs is exactly what is required. Then government can hire the people released. In fact government must hire all that are released since it is taxation that is stopping them getting a job in the first place.
If too many people are released then the tax is too high. Lower it. If corporations moan that they "can't get the staff", politicians have to justify why they need the manpower for the public use instead.
Also the tax has to be progressive, since government tends to want higher skilled people to work for it and they have higher salaries. Therefore there is no point taxing lower earning workers the same as the higher earning workers the government needs. After all there's already plenty of lower skilled people available - we call them 'unemployed'.
No income tax, no sales tax, no corporation tax. Just a highly salient tax on any value transferred to individuals from other persons - whether businesses, organisations or pension trusts - notionally charged on the individual, but calculated and paid by the third party. That ensures collection rates are high (the UK PAYE system has a collection loss of 1% vs 7% for VAT - the sales tax for example).
You'll note the operational tax taxes costs, not profits. Costs are a matter of fact, profits a matter of opinion. The tax is also on a cash basis, not accruals. If you use manpower today, you pay tax on it - again because government wants to use manpower today. It has to be on a resource and uses basis so everything balances functionally.
On top of the operational tax, you then require political taxes. In the UK we have different names for these - levies, duties, excise. So as the operational tax chugs away 'Releasing the Resources' required for government, the Cigarette Duty addresses the 'sin' of smoking and the 'Wealth Levy' targets inequality - or not as your politics dictates.
Since the purpose of political taxes are to change behaviour and eliminate themselves they don't offer a rational basis for funding the nation. Not because they don't raise the money, but because they don't release the resources government wants to use to achieve the public purpose. People aren't that fungible. Jeff Bezos doesn't have a secret stash of doctors and nurses in Amazon warehouses he can release when you tax him.
This is taxation on a functional engineered basis designed from the ground up by considering "why tax at all?", and it works whatever your political stripe.
Therefore it has no chance of ever happening.
