What Makes the FairTax Fair?
It’s so good, in fact, that I’m going to quote it here in its entirety:
Let us consider for a moment the question of ‘Fairness.’ We have been conditioned to think of fairness in terms of taxes collected as a percentage of income. I would maintain this is the wrong measure. Why, you may ask?
Well, think about what it is about the rich that people tend to think is unfair. What most people think of as unfair with the rich is their conspicious consumption. That is what we are taxing with the FairTax.
Consider the following example:
The Frugals are a married couple with two kids making $150k a year. They consume $50k a year, and take $100k a year and invest it, creating jobs and economic growth.
The Gluttons are a married couple with two kids making $150k a year, and consuming it all. They invest nothing.
Would it be fair for the Gluttons and the Frugals to pay the same amount of tax? They make the same income, they have the same sized family, but the Gluttons consumed three times as much as the Frugals. They got to ‘eat’ three times as much stuff as the Frugals. I for one wouldn’t feel right about one family getting three times as much stuff as another and paying the same tax. It would give them a much lower effective tax on what they got.
I would maintain that what is ‘fair’ is for the Frugals to pay the same amount of tax as any other family of four that got $50k worth of stuff, and the Gluttons, who got three times as much stuff, to pay more.
Ah, you might say, but how is it fair for the Frugals to pay the same amount of tax as the Smiths who only made $50,000 and consumed it all. The Frugals still have $100k in investments. To this I would reply: we will get them in the end.
You see there are really only two things the Frugals can do with that $100k they invested: they can reinvest it, thus generating more and more economic growth, or they can consume it later. For long enough values of later they will eventually consume that $100k. This is what everyone instinctually realizes, and resents. But when that $100k is eventually consumed it is FairTaxed. In effect it’s taxation has only been defered for as long as the Frugals keep it invested.
This is the central fallacy people run into when they look at effective tax rates in terms of income, rather than consumption. You can talk about what income is made in a given year, but not all income made in a given year is consumed at that time — but eventually, it is consumed. If you don’t believe me, look around at how few family fortunes survive to the fourth generation.
All you do when you tax income instead of consumption is reduce investment, and thus economic growth.
Well said. This is the crux of why the FairTax is so much more fair than the income tax.