January 27, 2023

Fair Tax

“House Speaker Kevin McCarthy (R-Calif.) on Tuesday told reporters he opposes legislation to abolish the IRS and replace federal taxes with a 30% sales tax… The move effectively kills the legislation, which was part of a deal McCarthy made with hardliners in his conference to secure the speakership this month… Top Republicans told Axios that McCarthy's agreement only guaranteed the bill would get a hearing in committee — but that doesn't guarantee a floor vote.” Axios

Many on both sides criticize the proposal:

“The most recent estimates we have of what the FairTax specifically would do come from Brookings Institution economist William Gale, who ran the numbers in 2005. Assuming a reasonable amount of tax evasion (20 percent) — and the question of evasion is important, as you’ll see — he found that the FairTax would increase the deficit by about $10.6 trillion over 10 years. In order to avoid increasing the deficit 10 years later, the FairTax would have to be set at 64.4 percent…

“And in fact, that’s probably too low. Gale is assuming there that, as the FairTax proponents suggest, the tax would apply to purchases by the government, which would effectively force state and local governments to cough up hundreds of billions of extra dollars to the federal government every year. If government purchases were exempted, as is normal for sales taxes, the revenue-neutral rate would be 81.6 percent. The point is that at a 30 percent rate, it’s reasonable to expect the FairTax to increase the federal budget deficit by trillions of dollars a year.”
Dylan Matthews, Vox

“[Like earlier proposals, Rep. Buddy] Carter would rebate his consumption tax to low-income people, but Carter’s plan is appallingly stingy; the rebate brings families only up to the federal poverty threshold, which is currently $30,000 for a family of four. For comparison’s sake, a family of four is today eligible for the Earned Income Tax Credit up to an income of $53,057 (single parent) or $55,529 (married, filing jointly). So essentially the ‘fair tax’ increases the tax burden on low-income families above the poverty line and on middle-class taxpayers in order to provide huge tax cuts to the rich, for whom consumption is a much smaller proportion of their income.”
Timothy Noah, New Republic

“Replacing our current tax code with a national sales tax would create a system of double taxation on retirees. Take, for example, a 65-year-old who has spent a lifetime saving after-tax income and has retired, expecting to draw down that income without paying further taxes. Instead, they would now face a 30 percent sales tax on everything they buy. Representatives seeking reelection may want to remember that people over the age of 65 tend to vote…

“Nor would the Fair Tax Act do anything to reduce the size of government. The bill would hand the job of processing payments to the Social Security Administration. Shuffling responsibilities and personnel from the IRS to the SSA does nothing to shrink wasteful bureaucracy, let alone make it small enough to drown in a bathtub.”
Grover Norquist, The Atlantic

“Rule No. 1 in the legislative handbook is to make your opponent take the tough votes, but House Republicans may be reading it backwards. They’re set to vote on a national sales tax that won’t become law but will give Democrats a potent campaign issue… A consumption tax might make sense if Congress were writing the tax code from scratch. But it isn’t, and we could end up with both a national income and sales tax…

“The Fair Tax has hurt GOP candidates before. When tea party Republicans ran on the idea in 2010, Democratic groups ran ads that blasted the sales tax but ignored the other tax cuts. Few voters listen to a second sentence after they hear about a 30% tax on everything they buy. The tax issue is a rare GOP advantage these days, and Republicans would be crazy to squander it with a Fair Tax vote.”
Editorial Board, Wall Street Journal

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