With the rise of so called "fiscal conservatives" in recent elections, ideas like the Fair Tax may be getting a second wind. This is a look at what the Fair Tax is and how it would impact the overall American economy.
What is the Fair Tax?
The Fair Tax replaces our graduated income tax system with a flat consumption tax of 23% on all items bought in the US. The term "flat" may be deceiving, however, as even though the Fair Tax does employ a flat tax on consumption, it is not a simple flat tax. Instead, it shifts the burden of taxation from earned income to spent income.
Does the Fair Tax Hurt the Poor?
The Fair Tax proposal contains a rebate paid in advance (called a "prebate") for basic living expenses. With the abolition of the payroll tax along with any income taxes, this will reduce the tax burden of any Americans living below the poverty line to 0. This effectively gives the poorest 12% Americans a tax cut because they will be paying less taxes than they would under our system. If the prebate is larger than the amount spent by these families, they effectively get free money from the government.
Does the Fair Tax Hurt the Middle Class?
In theory, the middle class would be paying graduated amounts of their income of between 15% and 30% of their overall income in taxes under our current system. The Fair Tax, taxing just 23% of all spent income and proving the prebate, would appear to lower the tax burden for most middle class families.
However, only about half of all US households actually pay any taxes. This is mainly because the very poor didn't qualify, or middle class families found enough deductions and tax credits to avoid having to pay anything. The prebate is set for poverty-level families, the poorest 12%, so the "lower middle class" families between 12% and 50% would get a tax increase, though it would be a fairly modest one: 23% of their income spent on services, minus the prebate and minus the negation of their payroll tax. Since the homeowner's tax credit (along with all other tax credits) would end, middle class families who are homeowners would be hit harder by the Fair Tax than renters.
Does the Fair Tax Benefit the Rich?
The "working" rich would be helped by the Fair Tax because their incomes would no longer be taxed, and they would only get a smaller rate applied to just their consumptive spending. The wealthy who rely on inherited money or money achieved through the stock market would pay higher taxes under the Fair Tax in theory, but there's no reason why they would have to be limited by buying their goods and services in the US. If they used their wealth to travel to other countries to buy what they needed they could reduce their taxes substantially.
The Fair Tax is slightly helpful for the poorest Americans, slightly harmful to the lower middle class, helpful for self-made millionaires and harmful to rich heirs who spend all of their money in the US.
Sources:
Jared Plotkin - I recently graduated from UC Irvine and I am trying to make a career out of freelance writing. I enjoy writing about a wide variety of ...
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