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How does the FairTax proposal work?
The FairTax proposal aims to replace the current income and payroll tax system in the United States with a national consumption tax. The idea behind it is that instead of taxing income, it taxes consumption, so people are taxed on what they spend, not on what they earn. This proposal is intended to simplify the tax system, increase economic growth, and promote fairness and transparency. FairTax supposedly works like:
Elimination of income and payroll taxes: FairTax would eliminate all taxes on personal and corporate income, including capital gains, dividends, and payroll taxes. This means that individuals would no longer have to file income tax returns or pay taxes on the money they earned.
Replacement with a national sales tax: To make up for the lost revenue due to the elimination of income and payroll tax, FairTax would implement a national sales tax, which would be levied on all new goods and services at the final point of purchase, meaning that it would apply only to retail sales (business inputs would not be taxed). The proposed tax rate is 23% on a tax-inclusive basis (this translates to approximately 30% on a tax-exclusive basis).
Prebate program: To counter the regressive nature of a sales tax, FairTax includes a "prebate" system, where every household receives a monthly tax rebate based on family size. This prebate would be equal to the amount that a family living at the poverty level would pay in sales taxes. This aims to prevent low-income families from being disproportionately burdened by the sales tax and to, in effect, make the first portion of every citizen's consumption tax-free.
Elimination of corporate taxes: FairTax would eliminate corporate taxes, resulting in a more competitive business environment, both domestically and internationally. This could encourage foreign investment in the United States and reduce the incentive for corporations to move their operations to countries with lower tax rates.
Border adjustment: The FairTax system would impose taxes on imports but not exports, known as "border adjustment" or "destination-based taxation." This means that exported goods would be exempt from US taxes, while imported goods would be subject to the FairTax, thereby leveling the playing field for domestic producers.
Simplification of the tax code: By eliminating income and payroll taxes and establishing a single sales tax, the FairTax system would simplify the tax code, potentially reducing compliance costs and tax evasion.
Encouragement of savings and investment: By taxing consumption rather than income, FairTax would encourage people to save and invest more because savings and investments would no longer be subject to taxation. This could lead to higher economic growth and prosperity.
Proponents of the FairTax argue that the system would lead to increased transparency, economic growth, investment, and job creation, while reducing the power of special interest groups and eliminating loopholes in the current complex tax code. Critics contend that FairTax might disproportionately burden lower-income citizens, fail to generate sufficient tax revenue, or even unintentionally incentivize a thriving black market.
At any rate, the simplification of the US tax alone system seems worth it, regardless of the other benefits!
Please don't GPT post like this. At minimum you should at least say that is what you are doing. And even then, it's a pretty low effort thing to do.
Apologies for being lazy, I should have put a disclaimer up!
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The US tax system is already a really shitty version of this in terms of redistributive effects. The US engages in a massive amount of income redistribution through its myriad welfare programs, and if you smoothed out the marginal tax a bit, you'd find that the marginal tax rate doesn't really climb with income that much, except for the richest and poorest people. The highest marginal tax rates are actually paid by people with low incomes.
https://twitter.com/MaxGhenis/status/1638015961931427841/photo/1
https://www.cbo.gov/publication/58353
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Isn’t this tax extremely regressive? As in the poor would be taxed a vast majority more % on their taxes than the wealthy?
Well no, because the poor effectively wouldn't get taxed (see point 3). But also, I don't really think it's a bad thing if we have a completely flat tax. It's not "regressive", it's fair. It's not a hill I would die on, but I don't think the usual arguments as to why we should tax the poor less are particularly persuasive.
But doesn't that money have to be spent at some point in order for the owner to derive benefit? It's taxed now or later. In the long run, it should be a wash.
I think you’re thinking of it like a VAT, 30% on top of what’s already asked at the register. It’s actually a replacement of existing “embedded” taxes, referring to how the consumer’s prices are already hiding the cost of the employees’ income taxes.
The 30% is adjusted out of the initial price by law during the transition year. Since companies will no longer pay employees the amount which goes to FICA and employment taxes, they’re expected to drop baseline prices and then add the tax back in. The resulting prices are equivalent,
and anyone caught gouging will be fined harshly.EDIT: Whoops! I added that last bit myself from a half-remembered statement. The actual penalty provisions of the bill are plain and limited, as you can see. What it mainly comes down to is that nobody except businesses will have to fear the tax man, and the bill deliberately makes compliance so conceptually and logistically easy that Etsy sellers and Tupperware consultants can do their own taxes.
The text of the bill appears to include no such provisions. (And there's nothing wrong with "price gouging" in the first place.)
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Depends on what gets defined as "consumption" (to be fair, our current tax scheme has no shortage of problems with what gets defined as "income"). Wikipedia gives a description and the big one that jumps out at me is investments are not taxed, which makes sense, but buying companies for control over them is something the very wealthy spend their money on, which would not be taxed at all under FairTax. Lower down the economic ladder, tuition is also excluded and is something wealthier people spend a lot more money on (both college and private school). Strangely, health care is taxed under the proposal, despite it currently often coming out of pre-tax money in our current system (at least if you have an HSA). It also applies only to personal purchases, and pretending personal purchases are business purchases is already a way people evade taxes, and would continue to be so under FairTax.
On top of that, "used" goods don't get taxed and I'm not sure exactly how much of a loophole that is. I'd expect poorer people probably buy used goods more often, not sure how that shakes out, although cars are a particular big ticket item that could mean people buying new cars would be paying a lot more tax. But I'd also be worried about games getting played with the definition of "used", just like games get played with the definition of "personal" vs. "business" purchases that are technically illegal but poorly policed.
The definition is very clear in the proposed legislation: retail goods sold for the first time to a consumer, with caveats more carefully worded than a genie’s least favorite wishes.
One of the goals of the law is to ensure any goods are only taxed once, ever. After that, refurbish it and resell it if you wish. Thrift stores will pay zero in FairTax. Used cars, used homes, used skyscrapers, etc., will be zero tax at point of sale; refurbishment services get taxed, so feel free to price that into your asking price.
Yeah, it's more a question of exactly what workarounds would get invented once the tax is in place and how well the legislature adjusts to them.
For another example, if used items aren't taxed but services are, then buying a (used) plane which and hiring someone to fly it would be untaxed (erm, what is the difference between paying for a service and hiring an employee such that the former is taxed and the latter isn't, anyway?), but buying plane tickets would be taxed.
Similarly, wealthier people buy "used" houses to live in which would be untaxed while poorer people pay rent which would be taxed. I assume no individuals buy skyscrapers new or used, so they would never be taxed in whole, although the rent (or pieces of them sold to individuals as condos) would be.
I guess the idea is that the tax should be set high enough that the "used" cost prices in the tax that had to be paid when it was new, so buying something "used" you're still sorta paying the tax indirectly?
I'm not any kind of expert in business or tax evasion and I can come up with a list of ways that FairTax is far more regressive than it looks at first glance. I'm sure the experts can come up with more, which is a general problem with any attempt at a simple tax proposal; having multiple taxes makes it harder to evade all of them, which part of why we have consumption+income+property+excise taxes (there's currently no consumption tax at the federal level, but FairTax covers a similar set of transactions to state level sales taxes).
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Not with the prebate.
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That issue was addressed in item 3 of the comment to which you replied. Likewise, the official FAQ says:
Used buildings don’t get the FairTax, new buildings/developments do. I haven’t examined the details of this aspect further yet.
The FairTax will be on new structures only, or on construction materials and services for refurbishment of a used building. Speculation remains part of the price, unlike Georgeism, but it also means the owner is truly the owner.
This is gonna cause a lot of house of Theseus situations. If a new building gets mega taxed and a refurbished old warehouse gets 0 tax, then every extant structure when the law passes will be upcycled forever. Wherever the line gets drawn on what a "new" house is, people will stop just short of it. If the point of refurbishment is where the taxation happens, people will make small incremental improvements that don't warrant a tax audit or what have you. Also what about land? just not taxed anymore? Not much new land being sold in the US.
Also this hugely incentivizes people to just try and fix/improve stuff themselves, when they really shouldn't. If i'm building my own new gazebo would i get taxed on the input materials i buy? What if it's a business gazebo, for hosting business lunches?
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This assumes that low-income bank accounts are stable on the timescale in which rebates would be distributed.
It doesn't matter if they'll get the 30% back at the end of the month. Groceries cost 30% more.
Reminder: the 30% is adjusted out of the initial price by law during the transition year. Since companies will no longer pay employees the amount which goes to FICA and employment taxes, they’re expected to drop baseline prices and then add the tax back in. The resulting prices are equivalent, and anyone caught gouging will be fined harshly.
The text of the bill has no transition year and no prohibition of """gouging""".
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Elsewhere they clarify that it's a prebate, not a rebate. You get a check at the start of the month for the taxes you'd pay on poverty level spending for the month.
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Did you write this, or did chatgpt write it?
It looks like someone asked BingAI to summarize the FairTax, and it’s accurate.
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I think it was bot written. if there is a real-life example of negative and foreseen consequences of AI, not just some hypothetical, it's the inability to know what is authetic or not . We need AI just to identify AI.
If you can't tell the difference, why does it matter?
You can't tell the difference to 100% confidence, but not having 100% doesn't make it useless.
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Maybe I'm missing something but how does this not generate intense deflation and slow economic activity to a crawl?
Not to mention a massive incentive for various types of underground economy -- also while I'm sure somebody has done the 'math', I'm skeptical that even ignoring second order effects, '30% of all sales in the US' is equivalent to 'all personal and corporate taxes paid in the US'. (plus whatever you'd save by simplifying the IRS, although I'm also skeptical that this would play out quite how the proponents imagine)
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