Democrats Should Love the Fair Tax

Dr. Laurence J. Kotlikoff, a professor of economics at Boston University and one of Mike’s economic advisers has published an opinion piece in the Boston Globe explaining why all Democrats should love the Fair Tax -- and Mike Gravel.

Dr. Kotlikoff’s op-ed follows after the jump.

Why Democrats should love the FairTax

SUPPOSE A presidential candidate proposed taxing wealth and using the proceeds to reduce taxes on workers and provide a rebate large enough to cover taxes paid by poor workers. Such a candidate would be hailed by the left and reviled by the right.

Thus, it's remarkable that so many Democrats, with the exception of presidential candidate Mike Gravel, oppose the FairTax and so many Republicans, particularly presidential candidate Mike Huckabee, support it. In fact, the FairTax, which replaces all federal taxes with a federal retail sales tax and provides a rebate, represents a way to tax wealth, reduce taxes on wages, and disproportionately redistribute money to the poor.

A sales tax effectively taxes wealth?

It does. When we buy goods and services in a sales tax world, part of the payment goes to sales taxes. So we end up with fewer real goods and services.

Take Mr. Megabucks, who is sitting on $65 million and wants to buy a jet like Oprah Winfrey's - a 10-passenger, $50 million Global Express XRS. Under the FairTax, the jet costs him an extra $15 million because of the 30 percent sales tax. Mr. Megabucks gets the jet, but the extra $15 million, which he had budgeted for Beluga caviar, Dom Pérignon, and other flight snacks, goes to Uncle Sam.

Now $15 million is 23 percent of $65 million - so the FairTax cost Mr. Megabucks 23 percent of his wealth. Precisely the same outcome would arise were Uncle Sam to directly tax Mr. Megabuck's $65 million in wealth at a 23 percent rate, leaving him with $50 million to buy the jet at the original price.

What if Mr. Megabucks sits and counts his money? With a direct wealth tax Mr. Megabucks pays $15 million immediately and is left with $50 million in purchasing power. Under the FairTax, Mr. Megabuck is in the same boat. Retail prices rise by 30 percent and Mr. Megabucks finds that his $65 million can only buy $50 million in real goods and services; Mr. Megabucks has the same number of dollars, but 23 percent less purchasing power.

This equivalence is no coincidence; taxing consumption is mathematically identical to taxing the resources used to buy consumption - current wealth holdings plus wages as they are earned. The beauty of the FairTax is that taxing wealth at a 23 percent rate generates enough revenue to reduce workers' marginal tax brackets to 23 percent. This is dramatically lower than the 30 percent to 45 percent marginal tax bracket confronting most workers under our combined income and payroll taxes.

The FairTax sales tax rate isn't graduated; everyone's resources get taxed at the same 23 percent effective rate. What makes the FairTax progressive is its rebate. The rebate is a trivial share of the resources of the rich, but 23 percent of the resources of the poor. Since our current tax system is regressive, adopting the FairTax would achieve progressivity.

Our tax system is regressive because none of the corpus - the principal - of the wealth of the rich, including our more than 400 billionaires, is subjected to taxation. Instead they pay taxes only on the income earned on their wealth. But this income comes primarily as capital gains, which are taxed at only 15 percent. Furthermore, capital gains taxes are levied only when wealth holders realize their gains - when they sell their appreciated assets.

But the superrich don't need to sell their gains. If they need cash they can borrow using their appreciated assets as collateral. When they die, they can hand their heirs their appreciated assets with a step-up in basis, which wipes out prior capital gains. With the right estate planning, they can also avoid most estate and gift taxes. Unlike most of us, what the superwealthy and just plain wealthy pay in taxes is a matter of choice - their choice. When Warren Buffet says his tax rate is much lower than his secretary's, he's got it right.

So why do so many Democrats think the FairTax is regressive? Because they consider taxes relative to annual income rather than resources, and the former is a terrible proxy for the later. Bill Gates's income this year may be zero given what's happening to stocks. If so, a man with over $47 billion in resources will be classified, based on income, as no better off than the homeless. And since Gates's consumption is based on his resources, not his current income, the ratio of this "poor" person's FairTax payments to his income would be sky high. Measuring taxes relative to income will thus suggest regressivity with respect to consumption taxation where none exists.

Our economy needs a simple, transparent, and progressive tax system. The FairTax is the answer. Democrats should give it another look and a fair chance.

The original article appears here:


Not Sufficiently Progressive

The 2300 refund per person is NOT ENOUGH, be serious, you're only rebating the tax on the first 10,000 of spending!  Nobody can live on 10,000 or even 20,000 unless they have already gotten established, paid off their home, finished raising their kids.


To hit such low income folks with the full 23% just as soon as they pass 10,000, without hitting million-dollar spenders any harder, is unjust.  Reject this tax.  We need real progressivity in our tax system.   Not least, we must levy a bit harder taxes on the ultra-rich in order to move some of them out of the U.S.   They have a very harmful effect on national policy and on the role of America in the world.    I spent 25 years in accounting, and did the taxes of many thousands of high-income individuals for Ernst Young, Price Waterhouse and other firms.  You just don't understand, until you see the real numbers.


Tax the rich.   It matters.



Everyone gets the rebate


   Under the FairTax initiative, everyone from the poorest to the richest would receive a progressive "prebate" check in the mail at the beginning of the year.  This prebate is progressive because it covers not only necessities but also a predetermined amount of allowable consumption up to the poverty level.  

   For example, let’s say you are a single person with no dependents; you would receive a check for about $2300 a year to cover the cost of the consumption tax.  This check would be the same amount for both the rich and poor.  If you get married, the check jumps up to $4600, and climbs for each child you have.  

   FairTax wouldn’t "punish" any economic bracket because it is not a tax on how much you make, but how much you spend.  If you happen to be a middle or upper class earner who also lives pretty frugal, buys used items, doesn’t buy expensive flashy items, etc., then this FairTax schedule is perfect for you.  Plus it would encourage Americans to buy used, repair items instead of just throwing them away and buying new, etc.  I see no downsides, do you?

There are a couple problems.

There are a couple problems. Firstly the 23% tax rated stated is actually 30% IE if the good is originally $100 then the tax is $30.  30 is about 23 percent of 130 but this is a deceptive method of calculation. Secondly, this 30% tax rate calculation assumes no evasion meaning you have to bump up the rate 18% considering evasion  causes a 15% tax gap. So no we're up to a 35.5% tax rate which is much more realistic. Such a rate makes a black market tempting.


I am not saying that the a consumption tax is a bad idea, just that the Fair Tax specifically carries a lot of unwanted baggage. VAT taxes should be considered, or a mix of different types such as income tax and a VAT tax etc.



Question regarding the tax

I've always thought that a consumption tax was a good idea.  Here's the thing that I don't understand (and would like to know) about the FairTax: The way I understand it, those under the poverty line receive a rebate for "necessities."  So wouldn't the middle class get hit the hardest by this, since they don't receive the rebate, yet can't neccessarily afford all those neccessities with great ease?


I thought everyone could

I thought everyone could apply for the rebate, but that the rich were not as likely to do so as the poor and middle class.


"People will have to suffer a level of frustration and anger sufficient to reason their way out of this conundrum and reach for an "out of the box" solution to their own empowerment." (page 6 of Citizen Power)

Fair Tax FAQ


For those who are interested, here's a Fair Tax FAQ from the website, Americans for Fair Taxation



Join the  Mike Gravel Wiki !

Ignore this post.    

Ignore this post.



We Should E-Mail the Link to This Article to FairTax Leaders


We should e-mail the link to this article to all of the grassroots FairTax leaders throughout the country:


Just go to the contacts page at Americans for Fair Taxation, find a state, and e-mail the link to all of the e-mail addresses in that state.


I think this could be a good way to get the word out about Senator Gravel, since the article mentions that the author is one of Senator Gravel's economic advisors.


If decide to do this, we could list the states that we e-mailed this link to here in order to avoid redundancy.



What a great way to break it down!


Before i read this, i understood the basic idea of the fair tax, but numbers aren't really my thing, so i didn't really have a visualization of how that might actually affect the rich and the poor and everyone in between. this article was really helpful in giving me an example. i will use this in the future to explain the concept of the fair tax. thabks for posting it! that is great. obviously we need a more progressive tax system. the small changes that are constantly being made don't really do much, and i think the way we really need to go is to restructure the whole system. This made the concept much more tangible to me. thanks!