September 18, 2014

Frequently Asked Questions - tax policy

The Fair Tax Plan would replace all federal income and payroll-based taxes with a 23 percent national retail sales tax. Supporters claim the switch would be a boon for economic growth, revenue-neutral and progressive in nature due to a “prebate” on all spending up to the poverty level.

The claimed rate, however, is misleadingly low for a variety of reasons. It assumes that there will be no politically popular exemptions, no tax evasion or avoidance, and no exclusion of hard-to-tax items from the tax base. Furthermore, the mark-up at the cash register under a 23 percent rate would actually be 30 percent.

The non-partisan Tax Policy Center suggested in 2008 that under a best-case scenario the tax rate at the cash register would have to be 44 percent to approach revenue neutrality (meaning it wouldn't add to the deficit).

Given the real rate structure required, the fair tax is not as appealing as supporters argue. Furthermore, other types of consumption taxes could potentially raise money more efficiently.