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•Seniors. People do not earn income at a steady rate during their lifetime. The bulk of most people’s earnings occur before the age of 65. People over the age of 65 have vastly reduced incomes and typically live off the savings they earned while employed in addition to programs like Social Security. A switch to a national sales tax would, in effect, result in taxing much of that money twice. These individuals would have already paid a lifetime of income taxes and would now be living off of a mix of previously taxed and tax-deferred savings. Under a new national sales tax system, the previously taxed savings would essentially be subject to tax again when used for purchases. Unless special consideration is given to the current generation of seniors, they would end up paying a disproportionate share of taxes.
• The Poor. Generally under the current system, the working poor pay very little (if any) income tax. But everyone needs to consume to survive. The poor would get hit twice under such a scheme. While currently the poor pay very little tax, under the new system they would have to pay taxes on their consumption, so their total tax bill would rise dramatically. The poor also spend a larger proportion of their total income on consumption goods to survive, so they would ultimately pay a larger percentage of their income in taxes than wealthier individuals. The FairTax advocates realize this, so their plan includes sending each American family a rebate or “pre-bate” check each month to cover the necessities of life. The size of the checks would be designed such that a family right at the poverty line would not pay a cent in taxes. Of course, the higher the allowance made for the poor, the higher the tax rate everyone else will pay in order to cover federal spending…
• Families. The current American income tax offers all sorts of deductions for small families such as earned income credits and child care credits. Under a national sales tax system, these would disappear with the elimination of the income tax. A sales tax, other than for purposes of the rebate, would not distinguish between families and individuals. Gale states that the “enactment of a broad-based, flat-rate consumption tax like the sales tax … would hurt families with incomes less than $200,000, because of the loss of tax preferences, but would help families with income above $200,000, due to the dramatic reduction in the top tax rate.” Given that the rebates in the current proposal would be given based on proximity to the poverty line, this is not surprising… (more)
