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Notes -
The FairTax proposal does not tax anything rich people spend a lot of money on.
The section of Wikipedia page on FairTax titled "Taxable items and exemptions" says:
It also says that rent would be taxed. It's not specified there, but reading into the sources, I see buying a house would not be except for new construction (unclear exactly what that means if most of the price of the house is the land it is on? Is that amount re-taxed every time a new building is built on it?).
Sure, rich people spend more on food and other everyday expenses than poor people, but not a lot more. Many more expensive purchases (housing, education, companies) are exempt from the tax or could easily just be made in a different country (yachts, private planes) and carefully never "imported". Those purchases are currently made with money that's at least theoretically taxed as income.
Investments aren't spending, they are a form of savings.
Sure, that's the way they act for the middle class when who are just buying enough stock to fill out a retirement account. But for the wealthy making investments large enough, they are buying power.
TANSTAAFL, no matter how rich.
If they’re financing businesses through loans, the businesses will be buying services and goods on the open market using the loan money, and those will be FairTaxed. The goods or services those businesses sell will be FairTaxed. That’s less money returning to the investor.
If someone rich buys a used mansion, either they’ll refurbish/remodel it to their own standards using FairTaxed services and goods, or the seller will refurbish/remodel it before putting it on the market and raise the purchase price from “fixer-upper” to “like new”. And if they try to work around the FairTax to refurb it, the contractors will get caught and charged with tax evasion, so the contractors will be sure to include FairTax in their receipts. Trickle-up taxation.
According to Google search summary by AI, “New home sales and improvements, which would include land, would be subject to the tax. Sales of existing homes and, presumably, existing land, would not be taxed. This is consistent with the FairTax's exemption of ‘used items’ to prevent double taxation.”
If the rich are buying used stocks (not IPO), why should they pay FairTax? If they’re buying new IPO stock, they’re transferring ownership of a used company from the private proprietors, who built it by buying and selling FairTaxed goods or services. If they’re buying and merging companies, same deal. The difference is they can’t just sell it at a loss to cut their tax liability. (I’m looking at you, Hollywood Accounting!)
If the rich buy a big, big boat worth a bunch of bucks in Bahrain and keep it in the Bahamas, why should the federal government of the USA get a single dime of that purchase?
As to the fairness of power, prestige, reputation, value speculation, and all the other ancillary benefits of capitalism, the existing income and investment tax system has no ability to curb them, so the FairTax doesn’t even try. The tax system should be focused primarily on efficiently collecting necessary revenue for the government, not solving all the social ills caused by the 1% of the 1%. That’s what antitrust is for.
Thank you for engaging with me on this, there’s little I love as much as talking FairTax.
I think this is a really cool idea, and I appreciate being introduced to it. Thank you.
How on earth does it work with buying a house vs renting?
If I buy a house for $100,000 and then sell it for $150,000, is the new buyer taxed on the incremental $50,000? How does that change if that $50k comes from land appreciation vs renovation? What about if you sell a house at a loss?
Does this play as an absurd penalty to rent vs buy? Does renting get 30% more expensive while purchasing used housing stock stays the same price?
Second buyer doesn't get taxed on the appreciation; the developer pays FairTax out of the first “retail” sale if the first sale occurs after the FairTax is legislated into existence, otherwise the govt. already got embedded taxes a myriad of ways. Sell at a loss, the govt. doesn’t pay anything.
As a renter, you’re already paying the income taxes of your landlord and property mgmt company’s hirelings, embedded in the price of your rent, similar to “utilities included”. This is a market distortion which is expected to be compensated for by rentals dropping 23% and then having the 23% added back in (30% exclusive) on the receipt as FairTax.
Used homes not being FairTaxed (except renovation/remodel costs) is a philosophical reward similar to owning DVDs costing less than renting them a dozen times or paying streaming and rarely watching. Besides, the homeowner will be paying FairTax on everything they’ll use for upkeep in the future.
Interesting.
The rental price drop makes sense, although seems a bit handwavey. Although rental prices are set by the market (supply/demand) anyway so I'd imagine they'd have a hard time arbitrarily going up.
The DVD analogy really bugs me though, I need to think about why.
Partially it's because DVDs are a luxury item consumed for enjoyment and places to live are a hard requirement for life to not suck. I don't understand why renters aren't entitled to any "philosophical rewards" despite also being humans who need to live somewhere, who have any number of reasons to not want to buy a home (either voluntary, or involuntary). That part doesn't sound very fair.
There's also the fact that renter FairTax paid >>> homeowner FairTax paid over basically any period. Again, seems quite unfair, although I'll need to think on this more. I don't remember how deadweight losses imposed by taxes work but I'm curious how that plays in this specific scenario.
Let me add a thought experiment: what would be the effect on the housing market were all rental property owners exempted from the portion of income tax derived from renting? Grok suggests three outcomes:
Distorting the market in favor of “necessary” goods usually ends up with those goods costing just as much, other goods costing more, and inequality rising. That’s the primary reason the FairTax has no loopholes for housing, food, or medicine, just a flat pre-calculated rebate that makes governance effectively free for people at or below the poverty line.
Fully agreed.
I think my gut feeling is that this distorts the market in favor of homeowners, although I really need to sit down with some paper and excel and model this to be confident in my assertions (hence why I am bugging you, as you seem quite knowledgeable on the topic).
I'm also deeply supply pilled on housing, so exempting landlords from taxes on rentals doesn't sound like the worst idea right now (although gutting zoning garbage would be much more effective).
I guess my question(s) to you are:
am I off base for assuming/feeling like this tax policy will make people tilt even harder towards ownership vs rental
maybe this is the same question phrased differently but how is this not a huge imputed benefit for home owners? We already give them SO many (tax free appreciation, the fact you get so much leverage at all, frequently able to gain tax benefits from mortgage interest or Smith maneuver HELOCs, tax breaks/credits for Hosie upgrades that improve quality of life subsidized by taxpayers) and now on top of that there is a consumption tax on rent.
I also again want thank you for introducing this idea to me. I've actually been thinking a lot about tax policy recently (lmao) and I'd recommend taking a look at the Mirrlees report if this is a subject of interest to you, it was cool.
Personally, I was thinking of a tax regime along the lines of:
Land value tax (maybe not 100% Georgist, as I think there are some economically optimal but societally sub optimal outcomes in extremely expensive downtown cores)
0% corporate tax
Aggressive marginal income taxes with brackets wayyyyy up into the millions.
Elimination of tax deferral/planning at a HoldCo level with extremely punitive (in Canada, referred to as "Part IV taxes") measures to ensure that all cash not reinvested into businesses is taxed immediately. Galen Weston, a Canadian billionaire, has a private HoldCo that receives more than $100mil in dividends each year from his public operating companies. I want that $100mil either poured back into his operating companies at their level as tangible investments in the company, or taxed at his personal income tax rate before he gets to invest it in whatever else he feels like.
The two outstanding parts to this "model" are:
I need to make sure "Part IV on steroids" doesn't break LP/GP structures and other such things. I am not trying to cripple the finance industry, just ensure everyone pays their fair share and money gets put to the highest and best use.
I wasn't sure how to deal with sales taxes. I generally view them as regressive and kind of silly, and a burden on everyone to file for, etc. seemed "cleaner" to just boil it all down to income tax and then ensure everyone's income was fully reported.
However, FairTax might be converting me. It is actually even cleaner to just delete everything and instead just do sales tax. It's an interesting proposal.
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