Arnold Kling  

My Essay on the Fair Tax

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On my earlier post, commenter Morgan wrote,


This is where the transparency of the sales tax is such a huge advantage. For the first time we can say, do you support this Bill at the cost of $.01 of sales tax? Do you support the Farm subsidies at the cost of $.03? The most important strength of a market system is associating costs with actions. Income tax totally fails to do this resulting in no effective constraint on government spending.

This anticipates the thinking of my new essay, where I try to get the transparency without the radical reduction in the share of government paid for by high-income taxpayers.

Compared with the FairTax, the semi-Fair tax would not reduce taxes on high earners--some of them might even face higher taxes. However, it would reduce taxes on work and increase taxes on consumption. That combination might encourage more saving. In addition, if the rules about keeping the income tax invariant and paying for new spending with sales tax increases could be made to stick, the bias toward higher government spending might be greatly reduced.

Update: Megan McArdle gives her view. She says that one could dial up the progressivity of a sales tax with a large enough exemption. I think the arithmetic makes that quite difficult--see my essay.


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CATEGORIES: Tax Reform



COMMENTS (9 to date)
Randy writes:

Sounds good, but its not gonna happen, and neither is the fair tax. They're just not feasible. I think the first step in finding a feasible solution to the problem is to define the problem. In my opinion, the problem isn't the income tax itself, but the vast array of deductions currently allowed. It is the deductions that create the perception of unfairness. So, stop adjusting the Alternative Minimum Tax. In time, the AMT would eliminate so many deductions for so many taxpayers that a new simplified form would become practical. It would be nice to adjust the rates downward to match the revenue requirments, but not really necessary - there is a national debt to consider.

PJens writes:

I too do not have much hope that a different income taxation method will be implemented anytime soon. In the realm of ideas, Arnold you have a good one here.

I have often wondered why the transactions of stocks, bonds and other market commodities are not taxed. If a trillion dollars worth of assets changes hands each business day, and a transaction tax of .001 was placed on it, it would yield a billion dollars a day.

Josh H writes:

This isn't the Congress here, Arnold isn't trying to pass any binding laws. It's really important to talk about this stuff intelligently, and Arnold's plan makes a lot of sense, not just economically but politically.

I'm glad you're bringing up the transparency issue, I think that's a big part of the charm of a consumption tax.

Chuck writes:

Yes, I like your plan as well.

Morgan writes:

I'm glad you like the transparency issue. I've been pushing this for years. The problem I have had with Libertarians and Free-Marketers is their incredible inconsistency when it comes to actually believing and supporting the basic premises of a free market. They pay a lot of lip service to it, then turn around and support policies and practices which violate the essential building blocks because they want to support business and oppose liberals or whatever end result they are focused on.

Robert writes:

I love the discussion you have going here.
It seems like many are having different opinions on what is actually "fair." Do we hit the rich a little more or should everyone pay according to their earning? Which of the two is actually fair and to whom?

Robert
The Issue | www.TheIssue.com

Morgan writes:

I think a basic problem here is that since economists have such difficulty measuring wealth, they take the lazy shortcut and measure a very narrow definition and specific type of income over a one year tax period.

If I cash out a million dollars in year one, of my $200 million estate and essentially live off of that for years 2-5 lounging on the beach while my investments grow from $200 million to $300 million, what is my income in each year as derived from the tax records? What is my real income each year assuming 2% inflation? In what income quintile am I listed in the statistics? How much tax did I pay? What was my positive contribution to production over that period? How much did I consume? Now let's assume that instead of cashing out an investment in the US, I cash out some holdings in a third world country. What is my listed income for years 1-5 and how much tax did I pay?

Robert writes:

Morgan:

Hmmm... I don't know.
Those are all good questions that I feel need to be addressed and people need to be aware of. This new model that Huckabee wants to implement is not as simple as he promotes it to be.
Of course tax evasion is an issue I think will always exist. Any system put in place will always be subjected to to its fair share of cheats trying to get the best of it.

Robert
The Issue | www.TheIssue.com

Jon writes:

To all:

The problem is not taxes,(or government)the problem is with our elected official who run the government and assess taxes to the benefit of "Big Business" and "Special Interest". Until we get rid of the corruption no tax system will be "fair".

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