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That’s the easiest misunderstanding to make, and the easiest to deal with, so I’ll work on it before dealing with your main point.
The FairTax is designed to replace the “embedded” taxes hidden in the prices of market goods. First, think of the income taxes currently embedded in a Big Mac cheeseburger. The cashier and the cooks, the manager, the franchise owner, the owner’s LLC, the food truck company’s drivers, packers, owners, the farmers who grew the food, the business owner’s and manager’s investment firms’ personal and corporate income taxes, etc.
And all of these taxes are built into the existing customer cost of the hamburger. That means, on top of your own income taxes (supplied by your job’s customers), you’re also paying everyone else’s whenever you buy anything. On average, the embedded taxes in American goods and services make up about 25% of the cost. For every dollar you spend, a quarter already goes to Washington D.C. through the IRS.
The bill outlines a transition between the income tax regime and the FairTax regime where, instead of part of the gross receipts of that burger going into everyone’s paychecks only to be immediately yoinked out for withholding, the FairTax portion of 23¢ from each dollar just goes right to Washington. Prices will remain basically as-is. Paper wages will go down but take-home gross remains the same. During the first year of transition, price gouging due to greed or misunderstanding will be heavily watched and penalized. After that, markets should be adjusted to the new reality, but fraud will continue to be watched for by a much smaller tax authority.
You are correct, it removes the incentive structures and turns American taxation into merely a source of government revenue, collected exactly once from each commercial activity, automatically and without loophole or bias.
If governments, federal and local, want to continue behavioral modification of the populace, they’ll have to find other ways. With all the overlapping incentives built into taxes and embedded in pricing, the market is hopelessly distorted and most people simply assume a price is a price and pay it. Keep in mind, nothing in the bill precludes laws increasing regulatory burdens which companies would predictably move into the price.
I do like that you noticed that! It would decouple revenue from labor in an increasingly automated marketplace, and it would institute the infrastructure for additional reforms such as replacing means-tested welfare (filtered through layers of salaried bureaucracy) with direct-deposit flat universal welfare.
Whether you see the FairTax “prebate” as basic income provided by the state, a tax rebate, or an “American dividend” akin to Yang’s proposal, goes back to the philosophical nature of what taxes are, and whether they’re theft or justified. I see the FairTax as a direct tax on economic activity, which income tax was always a proxy for anyway.
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