Who might win under a national sales tax?
- People who are inclined to save A consumption tax can be avoided by not consuming. So it makes sense that people who do not consume a lot will benefit from the plan. Gale admits that there are savings for a large portion of the population, stating "If households are classified by consumption level, a somewhat different pattern emerges. Households in the bottom two-thirds of the distribution would pay less than currently, households in the top third would pay more. Still households at the very top would pay much less, again receiving a tax cut of about $75,000".
- People who can shop in other countriesThis includes people who take a lot of overseas vacations and Americans living near either the Canadian or Mexican border who can do their shopping in those countries to avoid taxes.
- People who own businessesThe sales tax will only be charged on goods bought by individuals and not by firms. Owning a business gives you an advantage as you can buy some goods for personal use and claim that they are for business use.
- The wealthiest one percentAs stated they will see an average tax cut of $75,000 per person.
The ability to get such a tax plan implemented will depend on the political power these different groups hold. It also may not be political feasible because of some flaws in the proposal. There are a few basic flaws with the FairTax proposal:
- The 23 percent tax rate quoted is a tax-inclusive rate. However tax rates are normally quoted as a tax-exclusive rate. The FairTax plan has a tax-exclusive rate of over 30 percent, which may be difficult to sell to voters.
- The ease of tax-avoidance and tax-evasion Since consumers can either make their purchases in another country, or claim their purchases as business expenses, the tax may not generate the necessary amount of revenue.
- The desire for exemptions Many desirable goods would be subject to the FairTax. Health insurance is one such good. It is likely that various political interests would suggest that certain goods not be taxed. It is likely that some of these appeals would be successful. If they are successful however, the tax rate would have to be raised even higher, or large deficits would occur.
- The possibility of having both an income tax and a sales tax The national sales tax is desirable because it replaces income taxation. However there is nothing restricting the government from having both a nation sales tax and an income tax. Repeal of the 16th amendment would make income taxes illegal, but repeal seems incredibly unlikely. If the government was able to tax income, they probably would.
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