Dracil’s BlogJournal

October 27, 2010

Fair Tax: Supporting the Rich and the Poor on the Shoulders of the Middle Class

Filed under: Controversy, Politics — Tags: , , , , , — dracil @ 6:14 pm

This is just warmup.  I want to write about the Taxes are Theft idea and general thoughts about government spending but I’ll start with the Fair Tax first.

The idea of Fair Tax is to abolish all federal taxes and replace it with a national 23% sales tax.  And then give some money back based on the poverty line (adjusted for marriage and kids).

The biggest problem with Fair Tax is the assumption that your income = your expenditures.  This is only really true for the poor.  As your income goes up, the percentage of expenditures to income goes down.  Oh, the Fair Tax people will say rich people buy more expensive things and it all works out, but there’s still a limit to this.  Even if you eat lavish expensive meals all the time, there’s still only so much food you can eat in a day.

So what’s the net effect here?  The situation for the truly poor won’t really change.  The rich will pay even less since instead of paying a percentage on income, they pay a percentage on their much lower expenditures.  Since the Fair Tax claims to be revenue neutral, guess who’s footing the bill?  The middle class.  It also means their 23% number is total bullshit.

Except, it turns out their 23% number is bullshit anyway, because it’s intentionally misleading.  The 23% sales tax does not work like regular sales tax.  It means for every $100 you spend, $23 of that goes to the government and you only get $77 worth of goods.  What does that work out to in terms of what people normally think of when they think of sales tax?  It means for every $100 worth of goods you buy, you pay an extra $30 in taxes (30/130 ~ 23%).  So this is really a 30% sales tax.

I actually completely glossed over that myself until I read the FactCheck analysis of it: http://www.factcheck.org/taxes/unspinning_the_fairtax.html  Lots of good stuff here too.  Worth a read too so you know the real numbers and consequences of what these Fair Tax people are proposing.  TL;DR: If you make between $15,000-$200,000 your taxes will go up.  If you make over $200,000 your taxes will go down.  Is that what you expected and wanted from something called the Fair Tax?

It does have its merits though.  It does mean no more annoying tax day.  And it closes some tax evasion, especially with people who make money in underground economies that still buy stuff from normal stores.

But to actually be practical and not simply widen the income gap (a term noticeably absent on a lot of Fair Tax proponents’ sites), it would probably need to be set to something like 50% and with a lot higher prebate.  Unfortunately, all this does is shift who carries the burden.  And the people above the (pyramid shaped) curve will still continue to increase the income gap with anyone below the curve.  The only point where this won’t happen is at 100%.  And well, we know what THAT’s called.

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