Lesh
Diamond Member
- Dec 21, 2016
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Actually I do
Disadvantages
While the FairTax plan sounds reasonable in theory, some economists say it would wreak havoc upon the middle class. That includes Alan Viard of the American Enterprise Institute, who studies federal tax and budget policy and sat for an interview about the subject with AEI.Major concerns include:
- Penalizing the Lower and Middle Classes. Detractors say that individuals and families above the poverty level and considered middle class will bear the brunt of the tax burden for the country. It’s billed as a progressive tax, which means that the wealthy pay more and the poor and middle class pay less as a percentage of their income. But that’s only true if individuals spend 100% of their incomes on taxable expenditures. In reality, very high-income taxpayers save a larger percentage of their income than low- and middle-income people. So this plan would indeed be regressive — meaning those with less money end up paying a higher percentage of their income in taxes.
- Increasing Potential for Tax Evasion. One of the reasons Bush’s tax reform panel scrapped the FairTax idea was concern that a high sales tax rate would result in widespread tax evasion, possibly through trade and purchasing goods in other countries.
- Eliminating Tax Deductions and Credits. Currently, many tax deductions and credits incentivize specific social policy goals, such as buying a home, giving to charity, getting a college education, and saving for retirement. The FairTax’s prebate is designed to make up for those lost deductions. However, because it’s given to all households rather than encouraging people to spend their income in certain ways, people may be less motivated to take certain actions that could benefit them in the future.
- Making State Income a Bigger Burden. Though federal income tax would go away, state income tax would remain, and it would no longer be deductible against federal taxes. The effect would be a great burden on residents of high-income tax states like California and Hawaii. Moreover, unless you live in a sales-tax-free state, like Oregon or New Hampshire, you could pay your state’s sales tax on top of the FairTax — and on top of your state’s income tax. For a family living in Los Angeles making $100,000, that would be well over 40%!
- Depending Too Much on Spending. This tax is dependent on spending. But since many wealthy individuals already invest on their own and in other businesses, they may be further motivated to do so. Those moves could benefit the economy overall, but since these activities would be nontaxable, the national burden shifts to the lower economic classes.
- Increasing Costs for Immigrants. Prebate checks would only go to U.S. citizens. That would significantly raise the cost of living for lower-income immigrants, permanent residents, and visa holders. It could also deter highly educated foreign workers with highly sought-after expertise, such as doctors, engineers, and technology sector workers, from immigrating.
