At the end of this post, the discussion turned to the definition of “regressive” in the context of taxation. I thought this discussion should be promoted to its own topic because, even though it may have been discussed before, it is worth reviewing from time to time. In a culture centered on income taxation, the use of the term “regressive” gets pretty loose.
I have always understood the measurement for determining tax proportion as dividing a tax by its base. If that proportion decreases as the base increases, it is known as “regressive”. If it increases, it is known as “progressive”. If it stays the same, it is known as “flat”.
So, for our current income based system, one’s rate is tax / income. In our current system, if one’s base (income) increases, does the tax rate? Yes. So it is progressive.
Prebates aside, for the FairTax, one’s rate is tax / consumption. In this system, if one’s base (consumption) increases does the rate increase? No. Does it decrease? No. Does it stay the same? Yes, 23% inclusive – no matter what you spend. So it is flat.
Now throw in the prebate. The prebate is a fixed value by which everyone’s tax is reduced. Because the prebate value is fixed (that is, it does not increase or decrease based on the amount of consumption), it ends up being a larger percentage of the tax paid as the tax paid goes down. Because of this, after the prebate, the tax rate increases as the base increases. This makes the FairTax progressive.
So, how is it then that so many people casually refer to the FairTax as the exact opposite? How can something that is progressive be so commonly referred to as regressive without being challenged?
The reason is that in the calculation for rate, the variable for the base is switched with income. So instead of the rate being calculated as tax / base, the calculation is changed to tax / income. Of course, this is fine if the base is income.
But the base for the FairTax is not income – it is consumption. So the math has been changed. The implication is, no matter what is taxed or how it is taxed, when all is said and done we have to divide the final tax paid by income to determine the tax rate.
In other words, we have to marshal the FairTax back into being an income tax.
I wish that arguments for the FairTax would expose this issue more often and refuse to allow the discussion to be framed in this way. Aside from the fact that math should not be twisted for ideological purposes, converting the FairTax back to an income tax undercuts the foundation of a consumption based model which is that the rich are those that spend a lot – not those that make a lot.