Thursday, March 2, 2023

Fair tax full text

From the Wall Street Journal Feb 2. After 30 days I can post full text. 

A Consumption Tax Is the Shock Our Broken System Needs

Something remarkable happened last month. On Jan. 9, Georgia Rep. Buddy Carter introduced the “Fair Tax” bill to the House of Representatives, and secured a promise of a floor vote. The bill eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax. Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed.

Mainstream media and Democrats instantly deplored the measure. Mother Jones said it would “turbocharge inequality.” Rep. Pramila Jayapal called it a “tax cut for the rich, period.” The New Republic asserted that consumption taxes are “always a dumb idea”—but presumably not in Europe, where 20% value-added taxes finance welfare states—and called it a “Republican dream to build a wealth aristocracy.”

Even the Journal’s editorial board disapproved, though mostly on politics rather than substance, admitting a consumption tax “might make sense” if Congress were “writing the tax code from scratch.” The board worried that we might end up with income and sales taxes, like Europe. And the tax change won’t pass, making it is a “masochistic vote” that it will “give Democrats a potent campaign issue.”

But our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion. Former President Trump’s taxes are Exhibit A, no longer making headlines because we learned that he simply aggressively exploits the complex rules and deductions that Congress offers to wealthy politically connected real-estate investors.

A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption, or add to the rebate.

More important, the progressivity of a whole tax and transfer system matters, not of a particular tax in isolation. If a flat consumption tax finances greater benefits to people of lesser means, the overall system could be more progressive than what we have now. A consumption tax would still finance food stamps, housing, Medicaid, and so forth. And it would be particularly efficient at raising revenue, meaning there would potentially be more to distribute—a point that has led some conservatives to object to a consumption tax.

Others complain that the rate will be high. An effective 30% consumption tax, added to state sales taxes as high as 10%, could add up to a 40% or greater rate. But taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes.

A range of implicit subsidies will disappear. Good. Subsidies should be transparent. Money for electric cars, health insurance, housing, and so forth should be appropriated and sent as checks, not hidden as tax deductions or credits. They can still be as large as Congress and voters wish. However, it is vital to keep the tax at a flat rate and not try to redistribute income or subsidize industries by different tax rates.

Will there be some problems of compliance and evasion? Probably, but sales taxes or value-added taxes are hardly new, untested ideas. The Fair Tax bill addresses many objections and real-world concerns, and more refinements can follow. A value-added tax or personal-consumption tax can achieve similar goals.

This is a big moment. For a long time, consumption taxes have been debated in academic articles, books, think-tank reports, administration white papers and so forth. When the U.S. eventually decides to reform the tax code, consumption taxes will be the obvious answer. It is great news that real elected politicians like Rep. Carter get it, and are willing to stick their necks out to try to get it passed.

No, it’s not likely to pass this year, or next. All great reforms take time. The 8-hour workday and Social Security started as wild-eyed dreams of the socialist party. Civil rights took bill after bill being voted down. The income tax took a long time. But if we never talk about the promised land and only squabble over the next fork in the road, surely we will never get there.


  1. I share the Journal's concerns. Also, there could be loopholes were small private companies can take advantage of the system. If investment is not taxed, we need to clearly define what an investment is. As a southern European I know this can ve tricky. Anecdotal evidence: a friend of mine who owns a small business buys a 5,000 euros bike. Claims that's a "transportation" investment and the government returns VAT. Not ideal to finance governments. Flat low income tax that makes the upper middle class happy is to me the best way to simplify things.

  2. so if businesses are does a person like Warren Buffett pay taxes? Or Hedge funds, etc? How about a 5% tax on the GROSS of all wall street transactions...make it about investing...not churning, like sales tax on a car or relator fee on Houses. Also a 5% tax on money moving offshore. Also we need to put a limit to who doesn't pay Colleges, hospitals, non-profits where people make millions, create billions in protected endowments etc. How about you can be a non-tax paying long as NO ONE is given $100k+ of cash or services!
    We have large parts of the economy where NO ONE, especially the richest PAYS!

    1. Warren Buffet would pay the taxes the same way any citizen does, with his personal consumption. If Buffet tried to claim all of his personal consumption was actually business consumption, then this would be tax evasion and could subject him to criminal penalties if revealed in an audit. It's important to note, this type of evasion can exist currently. Any business owner could try to claim their personal expenses are business expenses and reduce their net business income accordingly!

      Additionally, one popular loophole to complain about currently is when wealthy people take loans against the capital value of their property and spend the loans instead of drawing income. A consumption tax would eliminate this particular loophole.

    2. They buy things, Guy. Expensive things. You probably have less hiding from taxes because the borrowing against assets to buy things today will be taxed when they buy the things, unlike how borrowing against assets is essentially realizing capital gains, but not actually taxed as such.

  3. Estate Tax...easy...lower it to 5 or exceptions, generation skipping, crazy non-profit scams, etc. Simplify! A consumption tax...just rewards people who consume the LEAST of the total income! So if you buy a billion dollar company, land, that consumption. If it is...then Great...I am for it!

  4. The political difficulty is us. Each of us thinks we are expert on how competing tax systems work, but seeing only the parts of the new that look to make us worse off, ignoring the parts that make us better off.

    Not only is the progressivity of the whole tax and expenditure system the right question, but even a naked Consumption Tax taken by itself is not regressive, it's proportional over the life-cycle or when the heirs inherit. The timing of tax payments is affected, not their volume.

    The only problem is the transition. Those retiring who have paid income tax on their savings now have to pay a consumption tax again. This is easy to fix. Just convert all retirement savings plans to IRA status.

  5. How is this not incredibly distortionary as people shift consumption out of the United States to Canada and Mexico and other countries? Especially with more remote work and a 30-40% consumption tax

    1. Why would there not be a tax at the border? Online retailers already collect taxes based on your jurisdiction.

  6. See 10th amendment to the Constitution:

    "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

    Even if you get a majority of Senators and House members to vote for it (say 53 states worth), the other 47 states that vote against it can simply refuse to remit the collected taxes to the federal government and instead simply refund them back to the taxpayers.

  7. These sorts of taxes are particularly burdensome with those who have a high marginal utility of an extra dollar. But, on the other hand, life is already rough for these folks, so it could improve some things and make others worse. Trade-off contemplation time.

  8. "It’s easy enough to exempt the first few thousand dollars of consumption"

    How is that going to happen? How is the the government going to determine when a consumer has spent the "first few thousand dollars" that are exempt in order to start collecting the VAT? Will people have to start reporting every thing they purchase so the government will know when to start taxing?


    2. A value-added-tax will not allow the government to determine a household's rate of consumption. VAT data collection is restricted to the expenses and revenues of the producer, importer, wholesaler, distributor, dealer, and retailer alone. If the government determines that subsidies payable to households are necessary (some governments do rebate VAT, based on income tax return data; filing an income tax return is a pre-requisite) then in absence of a personal income tax the government must adopt a subsidy that will be universal and not means-tested. For example, the Fair Tax Act establishes a universal subsidy based on the HHS poverty guidelines (adjusted annually) at 23% of the HHS poverty guideline value for the size of the household. To determine the size of the household to qualify for the subsidy, households will report to the Department of the Treasury the number of persons making up the household. A similar method will be implemented to determine the OASI and DI benefits which will be predicated on self-reported age, disability, and number of retirees (elderly) in the household. OASI will not be determined by life-time earned income (the income tax and FICA taxes eliminated; the IRS eliminated) but by Congressional budget legislation appropriating discretionary spending. It will allow Congress to determine both the subsidy to low-income and middle-class families and the subsidy, in the form of OASI and DI, to retirees and the disabled. This will address congressional Republic caucus' concerns over unfunded social spending overwhelming government revenues in the face of continuing negative primary surpluses going forward. 'Makers' need not then disparage 'takers' (for the poor are always with us) but it needn't necessitate ever-expanding budget deficits to maintain them. It will go swimmingly ... until it doesn't.

  9. Another issue that needs to be addressed is Social Security benefits, which are calculated based on lifetime earnings. With no IRS, how do earnings get accurately reported?

    1. "Another issue that needs to be addressed is Social Security benefits, which are calculated based on lifetime earnings. With no IRS, how do earnings get accurately reported?"

      Answer: By eliminating Social Security's Old Age & Survivors Insurance based on the beneficiaries' earned income as a basis for determining the level of benefits. OASI benefits are replaced by a universal subsidy upon reaching a specified age, say, 70 years of age. The universal subsidy might be predicated upon the annual HHS poverty guideline, say, 80% of that guideline value for a 1-person household and 85% of the guideline value for a 2-person household. For 2023, the HHS poverty guideline values are $14,580 for the first person in the household plus $5,140 for each additional person in the household.

      This is the only sensible approach when earned income is not reported to the government. It has the further benefit of allowing the government to divorce the OASI benefit from life-time earned income. The government will determine the level of OASI benefits to pay in a given year, based on the government's budget policy (generous during Democratic Party controlled governments; tight-fisted during Republican Party controlled governments).

      It is important to the question of policy to know where the "Fair Tax Act" arose from. Development of the 'fair tax' on consumption concept with its emphasis on elimination of the Internal Revenue Service, the corporate income and FICA taxes, and the personal income and estate taxes, was set in motion by three residents of Texas--all owners of crude oil and natural gas exploration and development companies. The owners were wealthy, their wealth derived from crude oil production, and they combined individually (not corporately) to fund the development of a new concept for funding the U.S. government that would do away with reliance on the corporate income tax, the personal income tax and the estate tax. The Fair Tax Act follows the prescriptive policy that consultants to the three Texans developed. If the Fair Tax Act is discriminatory (as it likely is), it is discriminatory in favor of wealth (in general) and individual entrepreneurial proclivities (specifically). The implied benefits to the less well-to-do and the poor, under the Fair Tax Act, arise from growth in the economy leading to higher employment levels ("full employment"), for only through employment and earned income can the less well-to-do and the poor maintain their standard of living, such as it might be, and avoid a state of homelessness and indigency. From a Calvinist ("Reformed Church") point of view, the worth of the individual is predicated on his productivity, and his productivity determines his wealth and standing in the community. This is the hard truth underlying capital-ism, and the over-arching concept behind the development of the Fair Tax Act.

    2. "It is important to the question of policy to know where the "Fair Tax Act" arose from. Development of the 'fair tax' on consumption concept with its emphasis on elimination of the Internal Revenue Service, the corporate income and FICA taxes, and the personal income and estate taxes, was set in motion by three residents of Texas--all owners of crude oil and natural gas exploration and development companies."

      And yet somehow the three sponsors for the "Fair Tax Act" under it's various incarnations all ended up being from Georgia?

      Rep John Linder (Georgia, 11th District)
      Rep Robert Woodall (Georgia, 7th District)
      Rep Earl Carter (Georgia, 1st District)

    3. The Fair Tax Act concept was around when Geo. W. Bush was president. It will be around when the sun sets on the American dream.

      The appeal of a "fair tax" legislation is the boost it gives to high-income families (it depresses the consumption by middle-income families compared to those families' consumption under the current income tax code).

      It appeals to Republicans because it appeals to the high-income family's head of the household who will benefit more from the end of the high marginal tax rates that those households face today under the income tax code.

      Follow the money.

    4. "It will be around when the sun sets on the American dream."

      The American Dream will be around long after you are in the ground.

      Can't say as much for a tax policy idea created more than 20 years ago that has yet to be voted on much less approved.

      The Fair Tax Act concept predates President Geo. W. Bush. It was first introduced in 1999 under the Clinton presidency.

      Sponsored by Rep John Linder (Georgia, 11th District).

      Care to explain how a law "set in motion by three residents in Texas" ended up being introduced by a House member from Georgia?

    5. See the penultimate paragraph in my remarks above yours for an explanation.

  10. Why not tax every financial transaction under all US jurisdictions? This transaction tax should apply to all exchanges of goods and services as well as any contractual obligation subject to US federal and/or state civil court enforcement. Thus, all real estate and financial instrument transactions would be taxed. Stock, bonds and complex derivative sales would be taxed. Mergers and acquisitions by companies would be taxed. Effectively, every financial transaction that is subject to implicit or explicit contracts would be taxed on the value of the transaction. Any exchange that has value would be taxed based on the contractual value of the transaction. Some estimates suggest that total US annual financial transactions total around $1000 trillion. Hence a 0.1%- 1% transaction tax would yield enough revenue for the entire federal budget and allow elimination of all income and payroll taxes. A pre-bate of a few thousand dollars per year for every citizen could be maintained as proposed in the Fair Tax. Although ostensibly a regressive sales tax, this tax would hardly be noticed by most Americans whose financial transactions can not exceed their income. The egregious tax avoidance that wealthy folks have done for decades would end since their shenanigans of reclassifying income cannot be avoided since every financial transaction would be subject to this tax. Businesses as well as individuals would pay the tax every time they engaged in an exchange of money. Tax evasion would be impossible in the era of mostly electronic financial transactions. A resolutely fair and more equitable taxation system would result without the complexity and limited base as proposed in the Fair Tax Act.

    1. "Why not tax every financial transaction under all US jurisdictions?"

      What you are describing is an income tax - a tax on every type of transaction whether you are paying for goods, stocks, bonds, real estate, derivatives, or anything else.

      The only difference is who pays the tax - the buyer of a good / service or the seller.

      With an income tax, the seller of the good (the recipient of income) pays the tax.

      With a transaction tax, the buyer of the good (the supplier for income) pays the tax.

      The problem with a transaction tax is that the buyer of the good may not have enough liquidity to both buy the good AND pay the tax.

    2. How could liquidity be a problem for a 0.1% tax?

    3. Under current law, sales of goods or services are only “income” if the cost basis is less than the gross proceeds. What I am proposing is entirely different. I am suggesting that every single financial transaction be taxed at 0.1% regardless of the transaction “category”. No transactions would be exempt. Traditional sales of goods and services are obvious transactions that would be taxed. But not-so-obvious transactions such as M&A or repo market transactions would also be taxed. Gifting would be a taxable transaction. Creating and funding a trust or an insurance policy would be a taxable event. A mortgage refinance would be taxed. A civil suit award would be taxed. A stock buyback would be a taxed. No exceptions.

  11. Aaaa, and again politicians strike once more. It seems that us economists don't know what a trick of a mess a VAT system creates with al the bureaucratic apparatus that creates.

    It's just a currency grab and nothing more. Instead of reducing the waste, let's add another tax.


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