The Fair Tax’s touted advantages are mostly illusory and its drawbacks legion.
To become speaker of the House, Kevin McCarthy reportedly promised a floor vote on the Fair Tax Act. The bill would replace the existing income, payroll, and corporate taxes with a new national sales tax. The bill says the sales-tax rate will be 23 percent. What it means is that a product that costs $100 without the tax will cost $130. (The $30 in taxes is 23 percent of the total price of $130.) Most people will think of that as a 30 percent tax.
In the past, I have written that the Fair Tax’s touted advantages are mostly illusory and its drawbacks legion. Here, I’ll focus on the political costs of endorsing this plan.
Any House Republican who backs this bill can accurately be accused of voting for the following things: raising the price of everything by a huge amount at a time when inflation is already high; shifting more of the tax burden to the middle class; instituting a large new wealth tax on senior citizens; increasing federal spending by a massive amount; increasing the deficit; and creating large black markets.
It should be pretty easy to see how the bill would shift the tax burden from high earners to the middle class. It holds poor people harmless by sending everyone a “prebate” to cover taxes on all purchases up to the poverty line, and it substantially reduces the taxation of returns to investment. If the bill achieves its goal of raising the same amount of money as the current tax system, it has to increase taxes on the middle class. (And that’s even before considering how much states and localities would raise tax rates once they found that everything they bought was 30 percent more expensive.) It almost certainly would fall far short of that, but the middle-class share of taxes paid would still go up.
Senior citizens would find that the real value of their savings had dropped by about 30 percent. Having paid taxes on their income throughout their working lives, they would now also be paying taxes when they spend that income in retirement.
Federal spending would rise because of one way the bill tries to cushion the blow for seniors. Simply swapping existing taxes for a new sales tax would reduce the real value of Social Security checks, too. The bill solves this problem by enlarging the checks. That’s one of many reasons for thinking that the bill is likely to swell the deficit. Another is that a sales-tax rate this high is bound to lead to large-scale evasion.
FairTax supporters have answers for most of these charges. They are not, for reasons I detail at the link above, persuasive answers. But even if they were right, Republicans who vote for the bill would be taking on a formidable amount of defensive work. Those in competitive seats, especially, should know what they are getting themselves into.
Update: Oh, one more thing I forgot to mention: The bill would increase the share of the federal tax burden paid by parents, and especially by parents with several children. That’s a straightforward consequence of not having anything equivalent to the existing tax credit for children.