It's not fair!

Kriston Capps asks a simple question and gets a lot of answers. Allow me to throw in my two cents, because I think most of the criticisms of the fair tax mostly miss the point.

I am in fact against the Fair Tax, and not only because (as it is) the thing is regressive-ish. But the liberal half of the blogosphere has made its claims too strong. The thing is not a poor-killing holocaust of massive proportions; and it is also not quite as economically implausible as they are claiming.

Most of the critics are hanging their criticism on the fact that the poor spend a higher proportion of their income than the wealthy. My answer to this is yes, and why should we care? Few of the wealthy are Scrooges who gain massive positive utility merely from staring at their stock certificates. Most of them, like most of the rest of us, enjoy their wealth only when they spend it on some form of consumption. And when they do that, they pay the same tax as the rest of us. Until they spend it on consumption goods, they are giving it to the rest of us to make our economy more productive. In this dimension, the tax is flat--actually very slightly progressive, because the "prebate" is a smaller share of their consumption than it is for someone in a low-paying job.

I am aware that one can argue that savings are actually a consumption good, first because massive accumulations of capital confer power (Bob Rubin gets his phone calls returned by famous people), and second because the security they offer is in itself a positive good. I find this unconvincing. There are very few people who have enough wealth to do the first kind of consumption, and almost every one of them gets much more clout from, say, being the president of GM, than they do from being rich. And the second form of consumption gets taxed as soon as you actually realize it, so I can't worry about it excessively.

There are, however, two important senses in which the tax is regressive. The first is that it moves us from a more progressive system: in the future, the poor would bear a heavier share of the total tax burden than they do now. (Forgive me if I suspect that for many of its boosters, this is a feature rather than a bug). I don't feel like the poor are such extravagent free riders that this should be a priority of tax reform.

And the second is that while the tax may be flat as regards consumption, it is steeply regressive as regards utility. While I think that the tax system should be structured so that the poor have a stake in spending decisions--so that new government spending requires sacrifice from them as well as from more affluent citizens--it seems morally obvious to me that they should pay a lower share of their income to the government than the wealthy should. Consider how much a low wage worker gives up when she hands over 23% of her paltry income--and then compare it to how much Warren Buffett sacrifices when he hands over the same 23%. Though his 23% is several orders of magnitude larger than hers, the net drop in his utility is many times lower. I find it ludicrous that anyone would even contemplate structuring a tax system that way.

These problems could actually be mostly allayed by playing with the prebate--if you make it large enough, the thing is progressive to any level any liberal of my acquaintance would like to target. But that runs into political problems. Which highlights the biggest problem, to my mind, with the fair tax. The tax's main virtue is its simplicity--it is a backdoor way to accomplish bipartisan goals like tax simplification. But that simplicity would never survive the political process. The prebate would be set too low to be progressive, or too high to raise much revenue; vast swathes of goods would end up exempted (medical supplies! new homes! baby products!); and the compliance process would get progressively more complicated in order to catch evaders. In the end, everyone except Steve Forbes would be begging for the return of the income tax.