Sunday, February 12, 2023

Fair/consumption tax adjustment

The main (vocal) comment on my consumption/fair tax post and oped  has been to complain about retirees who have earned income, paid taxes, saved, and now must pay consumption taxes on what they buy with the proceeds. 

When writing an oped, one tries to anticipate a few objections, but not to overdo it. I left this one out because it surely seemed an easy exercise for the reader. This is a problem easily solved with money. If the consumption tax is 30%, then the government can top up retirement savings by 30%. Done. 

It obviously need not be that generous. First, old savers will benefit by not having to pay capital gains tax and estate tax on their savings. That almost adds up to the consumption tax right there! So at best they need a subsidy only equal to the difference between the new consumption taxes and what they will save from the absence of all other taxes. Second, the market is likely to boom. So, subsidy only to the value of investments on the day before the tax is announced. Third, this only applies to old savers. Fans of wealth taxation should be lining up for the consumption tax as it hits high wealth accumulators most! (There is an interesting question whether the CPI will include the consumption tax or not. If so, social security is immediately indexed and rises to pay the tax, thereby greatly benefiting seniors who no longer pay income taxes on social security.) 

But more importantly, in the big government intergenerational transfer scheme, current old people who have saved money came out pretty well. They get a lot more out of social security and medicare than they put in, and a lot more than young people will ever see. Whatever the benefits of 100% debt to GDP are, they got them and their grandchildren will pay them. If one is arguing on distributive justice, leaving the poker game just after you scored a big hand, and then crying about taxes is a bit unseemly.

And I'm sure that's only the beginning. Every reform has winners and losers. Tax lawyers and accountants are going to do terribly!  I assume some muddy mess will emerge to compensate old savers and other politically organized losers.  Government and politics are about transfers. Economics is about incentives. If every change must be completely Pareto optimal, we might as well go back to subsistence farming. 


  1. "Every reform has winners and losers."

    "Win-win sees life as a cooperative arena, not a competitive one. Win-win is a frame of mind and heart that constantly seeks mutual benefit in all human interactions. Win-win means agreements or solutions are mutually beneficial and satisfying."

  2. Dr. Cochrane,
    As a current retiree, I read your first article about the Fair Tax and wondered about the double taxation issue which you tackled in your second posting. So what amount would be, “topped up”? My IRA? All of my bank and brokerage accounts? What about my real estate and other assets?
    R. Q. Kafader

  3. Or, the solution could be to only provide a tax credit for NEW savings. More concretely, increase the amount that people can contribute to Roth IRAs and remove the income limits (that don't really apply anyway due to backdoor roth IRAs).

  4. I’m almost never surprised about what people will complain about (I have a wife and kids!) but I am surprised at this one. I like the idea of a consumption tax but if I was forced to argue against it, I wouldn’t worry about the olds, instead I’d make two related points, one empirical and the other theoretical.

    Empirically, I’d point to the European countries with high VAT and low growth rates (isn’t that most of them?) and ask why they aren’t doing better. The obvious answers, of course, are demographics, regulations and the size of the government. But it doesn’t seem like relying on consumption taxes does much good.

    Now I’m sure the pro-consumption tax side would counter by saying that they always claimed that they wanted to replace the current system with something better. John’s op ed was very clear about this.

    But this brings up the theoretical point I’d make in this imaginary debate. Most of the theory of public choice tells us that institutions like ours won’t produce such a clean outcome. Politicians depend on redistribution and are not going to support anything that makes redistribution more transparent, even if that means the redistributive mechanisms are more efficient. John is right when he points out that we can have almost any level of progressivity alongside a consumption tax. Although there will be dead weight loss associated with these schemes (e.g., income based subsidies change incentives) these would be much more visible and less burdensome than the mess we have now. Politicians might like it when the DWL goes down (or maybe not, accountants and lawyers are an important constituency) but they don’t like the visibility. When everyone can see who’s getting the goodies, it’s hard to transfer to narrow, focused interest groups. The worry, in other words, is that we’ll end up with a bigger state and no real reduction in the inefficiency that comes from having a big state.

    To repeat these are the arguments I’d make in a debate that I’d hope to lose. I’d love to see us replace income taxes and corporate taxes with some kind of VAT.

    One last point. John says that even without expectation of change in the near term we need to keep this conversation rolling. I guess that’s right—unless Luke launces his X-wing the Death Star will remain. But I’m reminded of how many opeds the WSJ published over the past 40 years on Social Security privatization. As far as I can tell, they’ve given up trying. The economic benefits of privatization are as clear as the benefits of consumption taxes. I’m not sure, but I suspect the path to a consumption tax replacing other taxes are even more complex than the path to Social Security privatization.

  5. It seems to me that your proposal is just another way of going to a VAT. My recollection is that most economists have been highly critical of Europe’s VAT. If yours is different why don’t you do a post explaining why. While you are at it, address suggestions for a simpler flat tax that only has two brackets.

  6. "Government and politics are about transfers."

    Government and politics are about adversaries (Right vs. Left, Rich vs. Poor, Debtor vs. Creditor, Republican vs. Democrat, Liberal vs. Conservative, etc.).

    "Economics is about incentives."

    Economics is also about public goods that are both non-exclusive and non-rivalrous.

    "Every reform has winners and losers....If every change must be completely Pareto optimal, we might as well go back to subsistence farming."

    Only because you think in terms of bilateral exchanges and two good capital markets with a winner and loser.

  7. First, old savers will benefit by not having to pay capital gains tax and estate tax on their savings.
    Hard to see within the context of the argument against the consumption tax how the estate tax fits it; the old savers do not benefit, but their heirs do. Perhaps from a value point of view, but that does not address the old savers need for money to spend.

  8. I should have made this comment on your first post on this proposal, but I will make it here because it still relevant.

    It may be great economics, but it is bad politics, bad administration, and worse sociology.

    Any rate of sales tax applied to a broad enough selection of goods and services will produce absolute outrage and even violent reactions. A 30% tax on milk and bread will produce riots. If you exempt milk and bread, you have to raise the rates on juice and gasoline? Ask President Macron how that worked out for him. The party that enacts such a tax will be turned out in a landslide at the polls.

    It will do you absolutely no good to send people checks and tell them that they are in the same economic position. Emotionally, and thus politically, they will feel that the checks are their due and they will not be grateful for them, and they will see the taxes as a terrible imposition.

    Any tax produces tax avoidance, tax minimization, and tax cheating. This tax would be no different. It will drive activities offshore. There will be an astronomical increase in smuggling. The southern border is completely out of control as it is. If they can smuggle people and drugs, they can smuggle everything else.

    There will be enormous increases in Federal taxes. The deficit and the debt are out of control, the major entitlement programs are out of control. And China is spoiling for a war. We will have orderly tax increases or we will have hyperinflation and devil take the hindmost.

    For the record, I want a VAT and a carbon tax both. I want to increase the top marginal rate on the income tax to 50% (25% on capital gains), extend the FICA tax to remove the cap on income. I think the high earners deserve that for backing the Democrats. I have no idea idea if that would bring the deficit and the debt under control, but it would be a good start.

    Also for the record, I also want major cuts in spending both in entitlements (retirement age of 70) and discretionary spending -- no subsidies for Teslas. However we need to be on course to double the defense budget over the next few years.

    1. You might be right, but if you frame it under the guise of your paycheck no longer has huge amounts taken for things that provide no direct benefit to you (or no observable or current period benefit), then maybe the conversation can be different? I would be happy to see my paycheck and at least know that I have some control over how I am taxed. If I want expensive things, then I can pay the tax. If not, I can keep my money. Now, if I work harder and earn more I just get to keep a smaller percentage of it. Also, it may be harder to smuggle billions of gallons of milk across the border, though conceptually it is a fine point that will apply to some goods. But it needs to be compared to all the current perversions.


  9. There appears to be some confusion over the impact of the proposed national sales tax or “Fair Tax” [H.R.25 - 118th Congress (2023-2024): FairTax Act of 2023] on "old capital", a.k.a., accumulated household savings. The impact on accumulated household savings can be negative, neutral, or positive, depending on the household's average effective income tax rate prior to the date that the Fair Tax regime becomes effective. The higher the household's taxable income under the income tax, the more positive is the effect on the household's wealth from the Fair Tax. The lower the household's taxable income under the income tax, the more negative is the effect on the household's wealth from the Fair Tax. For elderly retirees nearing the end of their lives, the greater is the amount of spending on medical/health services not funded by Medicare and private health insurance. The demand for those services in the terminal phase of life before death is highly inelastic.

    The proof proceeds as follows. All quantities expressed in constant 2023 dollars; r = 0.
    Consider a typical elderly retiree's budget constraint under each tax regime, i.e., the current federal income tax regime and the proposed federal Fair Tax regime:

    (1) Income tax regime:
    C₁ = ∑ⁿ¹ pₜ∙xₜ ≤ M₀ + ∑ⁿ¹ (1 – τ )∙Aₜ t = 0, 1, 2, ..., n₁
    (2) Fair Tax regime:
    C₂ = ∑ⁿ² (1 + μ )∙pₜ∙xₜ ≤ M₀ + ∑ⁿ² Aₜ t = 0, 1, 2, ..., n₂

    (a) n₁ and n₂ are life expectancies (random variables related to the ability to pay for medical/health services) under the income tax regime and the Fair Tax regime, resp.;
    (b) pₜ∙xₜ is the tax-exclusive cost of medical/health services required by the elderly retiree, where pₜ is the tax-exclusive price of the services per hr. and xₜ is the intensity of the services, hours per year;
    (c) M₀ is the elderly retiree’s accumulated unspent life savings at t = 0;
    (d) Aₜ is the elderly retiree’s income per year;
    (e) τ and μ are the elderly retiree’s average income tax rate and the tax-exclusive Fair Tax rate, resp.;
    Take the expectation of C₁ and C₂. Applying Wald’s equation to the expectations and putting the equations in canonical form gives
    (3) Income tax regime:
    E{C₁}: E{n₁}∙[E{p₀∙x₀} − (1 – τ)∙E{A₀}] ≤ M₀
    (4) Fair Tax regime:
    E{C₂}: E{n₂}∙[E{p₀∙x₀} − E{A₀}/(1 + μ)] ≤ M₀/(1 + μ)
    If the Fair Tax rate is constant and the income tax rate is variable what are the regions where the elderly retiree’s expected life, E{n₁}, under the income tax regime goes from exceeding his expected life, E{n₂}, under the Fair Tax regime, to being less than his expected life under the Fair Tax regime? The answer is found to be the following:
    (5) for (1 – τ)∙ (1 + μ) > 1, E{n₂} < E{n₁}, i.e., the elderly retiree’s savings and income allow her to live a longer life under the income tax regime;
    (6) for (1 – τ)∙ (1 + μ) = 1, E{n₂} = E{n₁}, i.e., the elderly retiree’s savings and income allow her to live as long a life under the income tax regime as under the Fair Tax regime – she is indifferent;
    (7) for (1 – τ)∙ (1 + μ) < 1, E{n₂} > E{n₁}, i.e., the elderly retiree’s savings and income allow her to live a longer life, c. p., under the Fair Tax regime.

    We know from experience that the greater the average income tax rate that an individual or a married couple filing jointly or filing separately pays, the higher the income of that individual or married couple taxpayer. It follows from the results of the analysis that the consumption tax regime favors high-income individual and married couple taxpayers over low-income to middle-income individual and married couple taxpayers when those taxpayers are elderly retirees and they have savings accumulated under the prior income tax regime at the time the consumption tax regime enters into effect.

    We see from the foregoing that the Fair Tax regime imposes an uncompensated negative externality on low- and medium-income elderly retirees nearing the end of their lives, and produces a bounty for high-income elderly retirees.

    1. This relies on many assumptions. One is that nothing else about government spending (entitlement or otherwise) or S&L taxes would change. This clearly isn't the case. Two is that nobody changes their intertemporal consumption patterns and that there is no change in prices. This clearly isn't the case either.

      Anything you tax you get less of. Tax income you get less income, tax investment you get less investment, tax consumption you get less consumption. Except consumption is actually fun, so the effect may be smaller here. At any rate, this would increase investment and savings by a great amount and low income people would benefit a great deal from higher economic growth.

    2. Anon., you missed the premise that underpins the proof, namely,

      "For elderly retirees nearing the end of their lives, the greater is the amount of spending on medical/health services not funded by Medicare and private health insurance. The demand for those services in the terminal phase of life before death is highly inelastic."

      Income, savings, and consumption are related in the following way:
      Y = C + ΔW, where Y is income, C is consumption, and ΔW is the change in accumulated savings (i.e., assets net of liabilities).

      In the elderly retiree, income is a combination of interest and dividends paid on investments and pensions and social insurance benefits, and is largely of a fixed nature apart from adjustments for the cost of living. Consumption is a combination of housing expenditures, food consumed at home and in restaurants, transportation services, dental services (not covered by health insurance, none are), medications (not covered by Medicare D or private health insurance), medical fees (not covered by Medicare B or C, or private health insurance), home healthcare services (not covered by Medicare A), and medical aids (not covered by Medicare or private health insurance), and entertainment services (TV and pay-for-view movies). With the exception of the entertainment services, the price elasticity of demand is highly inelastic up until the point in time when accumulated savings are depleted.

      The model is a simplification of reality, as all models are. It is intended to cover one demographic segment, and not all retirees, but only those who are in the final stage of life but not yet confined to a hospice or a state-run or sponsored institution for the indigent elderly.

      The purpose of the model and proof is to illustrate the income-dependent effect on the elderly retiree of the "fair tax" (national sales tax) under the Fair Tax Act of 2023. For that purpose the "fair tax" rate is fixed at 23% tax-inclusive (~ 30% tax-exclusive), and the income tax under the present income tax code is variable to reflect the differing ranges of income, Y , that the elderly retiree might enjoy.


    3. Anon., you are right to suggest that a national sales tax ("fair tax") will alter consumption and production when implemented. It did so in Canada in 1991 with the imposition of the "Goods and Services" tax of 7% on the value-added component of the sale/purchase price for all goods and services (other than consumer essentials, and exports to foreign markets).

      A good that has an infinite price elasticity will see demand reduced to zero with the imposition of the "fair tax", if that good is a consumer good. A good or service that has a zero price elasticity will see the price increase by the "fair tax" (30% on the tax-exclusive price) but experience no drop in demand, if that good or service is a consumer good or service. Intermediate goods and services which are inputs to other intermediate goods and services, or to consumer goods and services, will see no change from the "fair tax" other than changes related to the change in demand in consumer goods that those intermediates are dependent on for their demand.

      The elimination of the income tax and FICA taxes will affect the marginal costs of all goods and services, but the effect will likely be muted compared to the change in demand for consumer goods and services affected by the imposition of the "fair tax". (Stated without proof.)

      A complication arises in the case of corporate taxation. The minimum tax pushed by Secretary Yellen and President Biden exposes U.S. firms and corporations with overseas markets and operations to a tax of 15% on business profits, payable to foreign governments that have enacted the Minimum Tax in their jurisdictions. France, Germany, and the U.K., along with Canada, are a few of the countries that have done so, and U.S. corporations with revenues in excess of a statutory threshold are subject to the 15% income tax in those jurisdictions when the Fair Tax Act of 2023 is enacted.

      The ”fair tax” is a tax on labor. The present income tax and FICA taxes are taxes on labor.

      There is no inherent superiority of a consumption tax over an income tax/FICA taxes, in economic terms, for raising a specified level of revenue for the government. Each type of tax creates its own distortions in the economy, and each has its own complexities.

      In the case of the Fair Tax Act, complexity comes in the method of collection and the means of enforcement. Eliminating the Internal Revenue Service hobbles the federal government’s ability to monitor and enforce collection of the national sales tax – those services are relegated to the 50 states and territories in the union, and each state will implement and enforce the national sales tax according to its own lights and at variance with every other state in the union. Needless to say, an underground economy will be enriched as a result, as evasion is ever attractive at tax rates of 30% and more.

      And, there is no certainty that the revenue raised under the Fair Tax Act will suffice to fund federal government services and transfers to households as these are today. The expectation amongst tax scholars in 1990s and 2000s was that a “fair tax” would have to be set at a rate (tax-exclusive) on the order of 60% to meet federal government revenue needs.

  10. Simulate some data and play it out, step by step.

  11. Better yet, just make the laws apply only to people that haven't been born yet. The old income tax regime will gradually phase out, nobody will be swindeled, and a new generation will live with the ability to keep the work of their hands.

  12. > If the consumption tax is 30%, then the government can top up retirement savings by 30%
    Two things:

    1) By 42% = 1/(1-0.3) -1 .
    2) Some pension savings are tax-deferred and withdrawals are taxed as ordinary income . Other savings (e.g Roth) are pre-taxed and their distributions are not taxed if one follows all the rules.

    1. 1) is incorrect. In the denominator, 0.3 should be 0.23. The equation then gives the result, 0.2987. This is rounded up to 0.3, or 30%, which matches the rate given in the article. That this lower figure is correct can be verified by multiplication, i.e., 1.2987 × (1 - 0.23) = 0.9999 ~ 1. On the other hand, if the answer of 42% were correct then 1.42 × (1-0.23) would equal 1. As it does not, 42% must be wrong.

  13. "When writing an oped, one tries to anticipate a few objections, but not to overdo it. I left this one out because it surely seemed an easy exercise for the reader. This is a problem easily solved with money. If the consumption tax is 30%, then the government can top up retirement savings by 30%. Done."

    The government that enacts the Fair Tax Act is not a government that would "top up retirement savings by 30%."

    The democrats would never enact a "fair tax" national retail sales tax. President Biden would not allow the legislation get beyond his Oval Office desk. It would die by veto.

    It would be a republican president, a republican majority in the House of Representatives, and a republican majority Senate that would be the likeliest government to enact a "fair tax" national retail sales tax, and none of the three would "top up retirement savings by 30%." It would undercut their credibility, and unleash a torrent of demands for equal treatment. The democrats would have a political field day if the republicans did so.

    The counterpoint is, simply stated, not persuasive.

  14. "But more importantly, in the big government intergenerational transfer scheme, current old people who have saved money came out pretty well. They get a lot more out of social security and medicare [s.i.c.] than they put in, and a lot more than young people will ever see. Whatever the benefits of 100% debt to GDP are, they got them and their grandchildren will pay them. If one is arguing on distributive justice, leaving the poker game just after you scored a big hand, and then crying about taxes is a bit unseemly."

    What to make of this paragraph? Social security is an insurance program. It's revenues are taxes on labor, i.e., the OASI and DI taxes and Medicare/Medicaid taxes that every wage earner and salaried worker pays. These are federal taxes and those taxes are unavoidable. The social security programs are pay-as-you-go stand-alone funds.

    The revenues from the OASI, DI, and Medicare/Medicaid taxes collected go to pay current retirees & eligible low-income families, and if there is a current period surplus (revenue taken in > benefits paid out) the surplus is added to the government's general revenues. The Treasury Department issues "special-issue bonds" and "special issue certificates" (i.e., I.O.U.s) and uses the OASI, DI, &c. net revenues to pay for government salaries, purchases, and transfers to industry & households. For the past several decades, the government (i.e., every tax payer) has reaped the benefit of this scheme.

    That will change in the next decade as the OASI and DI, &c., tax revenues decline and the amassed I.O.U.s that have not yet been redeemed are redeemed to pay beneficiaries.

    A government that runs a budget surplus would have no difficulty redeeming the "special issue bonds" and "special issue certificates". But, a government that runs a budget deficit will face increasing indebtedness to financial markets as the I.O.U.s are redeemed, and no one likes to be put in that position. (Aside: Would a debtor dishonor the I.O.U.s? Would the U.S. government be that debtor?)

    The issue is structural. The I.O.U.s are denominated in nominal dollars that are not indexed for inflation. The insurance program liabilities are indexed for inflation and the number of beneficiaries is increasing as the so-called "baby boom" generation retires, and Congressional majorities that control the spending of the government expand the number of beneficiaries and benefits paid beneficiaries from the same tax base. (This structural feature is “entitlement creep”--Note who controls that process.)

    The "baby boom" generation's children and grandchildren have not been sufficiently fecund; consequently the number of replacement workers is not keeping up with the retirement rate of the older generations. The OASI and DI, &c., revenues are projected to fall.

    Part of the structural problem is the design of the insurance policies. They appear to be too generous. Indexation of the benefits to inflation in the absence of real growth in the insurance program reserves (nominal $ I.O.U.s) penalizes later retirees (younger laborers). On the other hand, younger workers earn more than their parents did, in like occupations, and have greater opportunities for setting aside funds tax-free for their retirement years than did older generations. If it were not for the decline in the revenue base, and the absence of indexation of the reserves for inflation, younger workers would likely do as well as current retirees in terms of benefits received.

    It is Congress that decides the insurance program features; it is Congress that has decided not to index the “special issue bonds and certificates”; it is Congress that has decided to index benefits and expand benefits.

    Today's retiree did not have a hand in designing the social insurance programs; nor did she have a voice in the inflation indexation of benefits and the absence of inflation indexation of the social insurance reserves (I.O.U.s). Should she be blamed for paying her taxes when due and collecting her benefits when eligible?

    1. Nobody is blaming these people. But the money isn't there. As you note, the benefits are too generous. And the transfer program is too extreme. I suppose you could blame people broadly for clearly kicking the can down the road when it was obvious there would be future problems, but at that point you just blame people for being human.

    2. Anon., the "money is there". If it isn't there, as you contend, then that can only be so because the U. S. government is insolvent and its creditors are unwilling to advance loans in exchange for future promises of repayment with interest. If the U. S. government is insolvent, then there are larger problems than only those alleged of the social insurance programs.

      The "transfer program" (social insurance) is self-funding. The deficiencies of the social insurance program design are the diversion of the program surpluses to fund general government expenditures and the absence of inflation protection for those surpluses.

      Once those surpluses have been spent on then-current period government expenditures, the money is gone and it is replaced by a note called, alternatively, a "special issue bond" or a "special issue certificate". These notes have maturity dates and fixed interest rates. The principal of the notes are not 'inflation-protected', which is to say, as John has previously observed, the indebtedness of the government to the social insurance trust funds erodes away as long as inflation is positive. Over the course of 50 years, with inflation at 2%/year, the purchasing power of $100 is reduced to $37.153, a loss of purchasing power of 62.847% of the principal value. Conversely, over the course of 50 years with inflation at 2%/year, the benefits paid to retirees rises from $100 to $269.16. In constant dollar terms, benefits remain at $100 while the government notes that represent the accumulated surpluses fall to $37.15. This results in a shortfall of $62.85 representing the loss resulting from the coercive action of the government along two dimensions: (1) taking of then-current surpluses and replacement with nominal dollar "special issue" notes, and (2) institutionalizing a positive rate of inflation set at 2%/year. The nominal interest paid on the “special issue” notes, will ameliorate the decline in the purchasing power of the principal value to some extent.

      My personal view is rooted in stoicism. I pay my lawful taxes when due, without regard to whether the taxes are likely to enrich me personally in some future capacity (e.g., as a retiree). I do not begrudge others their good fortune, nor do I worry over the outcomes for future generations of retirees. Should social insurance benefits decline by 38% when the accumulated surpluses are depleted, I will, if I am alive at that point, adjust to the new reality, and I expect the younger workers current retirees to be fully alive to the possibility that benefits may be lower even as benefits rise with the rise in the CPI and FICA tax rates remain constant, and to plan accordingly. Social insurance is a 'back-stop', and like all government programs it is not designed to be the premier source of retirement income, nor could it be.

      One should never put all of ones trust in one social insurance scheme, but diversify and maintain a surplus (savings) for that day when life enters the final stage and accumulated savings make the difference between penury and the ability to sleep soundly, à la Charles Dickens.

  15. I don't think taxing necessities works because we will never agree on necessity. Food is needed; lobster and caviar are not. What food is deemed necessary? Clothes are needed. Cashmere is not. We could just send rebate checks that properly phase out if you want to cover some base level of living costs.

  16. One issue with old people is that most exist from Social Security and Pensions. The Fair Tax would actually benefit those programs; and the underlying asset value of the pensions should increase with a Fair Tax scheme. The true penalty is the older person that is sitting on a pile of savings in a bank account that was taxed on that money when they saved it. How much are we really talking in actual assets when you look at it that way? Not an insurmountable amount I don't think.

    1. $300,000 for every $1,000,000 in tax-exclusive medical and health care expenses not covered by insurance. If the expenses are $1,000,000 before 2025, the year the Fair Tax Act specifies for repeal of the income tax and its replacement by the national sales tax, the elderly retiree pays $1,300,000 for the same uninsured expenses from Jan. 1, 2025, onwards. If the retiree's savings are $1,000,000 at the commencement of 2025, then her ability to pay for those uninsured medical and health care services is reduced by 23%. If prior to 2025 she looked forward to four years of retirement in assisted living, then after 1/1/2025 she will only be able to afford 3 years of retirement in assisted living and will spend the fourth year, and any subsequent years, living in a state-run nursing home penniless except for a small allowance for incidentals that the state might out of the goodness of its heart provide her.

      There is no advantage to the social insurance pension arising from the Fair Tax Act of 2023. Benefits will not increase. Whatever the effect of the Fair Tax on the rate of inflation and the effect of inflation on the adjustment in the dollar value of the social security payments might be, the net effect is at best zero. It's a 'wash' -- inflation pushes the cost of living up by 30% for the elderly retirees because their consumption demand is highly inelastic with respect to price (there are few substitutes for medical and health care not covered by insurance, or staples required to sustain themselves), while the cost of living adjustment of social security will be less than 30% because consumption demand of the working population is more elastic and the mix of goods and services consumed differs markedly from that of elderly retirees.

      Social security benefits adjust in proportion to the rate of change in the consumer price index for urban consumers, all items, viz., "U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL]".

      The Fair Tax disproportionately favors high income employed workers and the very rich who spend much less of their incomes on consumption than do the working poor and middle-income households.

      As with every new tax proposal, the authors of which are motivated by self interest and partisan considerations, the Fair Tax Act is pitched to appeal to a narrow segment of the population, but hopes to convince a broader segment of the population by playing up certain features of the tax while downplaying other features that are less beneficial. The tax rate is advertised as being 23% of the tax-inclusive price, a rate said to be comparable to the average income tax. But on a sales tax basis the rate is 30% of the tax-exclusive price. There is every likelihood that 30% will be the introductory rate, not the final rate (estimated to be nearer 60%).


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