A ‘Goals-Based’ analysis of tax reform proposals

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Goal: Fair to ALL

Goal: Fair to All

The more progressiveness there is in the tax code, the harder it hits the upper income brackets. But before you start shedding crocodile tears for the rich, consider that embedded corporate and payroll taxes more than offset any change in progressiveness in the income tax code and it’s those embedded taxes unfairly hit the poor hardest. So our current system, regardless of progressiveness, manages to be quite unfair to the poor; most of whom don’t even realize how much they are paying in additional embedded taxes (see “Goal: Transparency”).

On the other hand, IF a flat income tax contains no corporate tax or payroll tax, then this downside of embedded taxes is pretty much eliminated. But by its very nature, a flat income tax unfairly hits the poor hardest. IF however, a flat income tax also includes a dependent deduction, much of the pain on the poor is eliminated. However, a tax on savings could undo all of this. But a flat income tax could be pretty fair to everyone IF it does not impose a tax on savings. “IF”, “IF”, “IF”. In fact, it’s very unlikely that all these “IFs” will get into a flat income tax. No past flat income tax proposals have included all of them. But even if only two of those “if” make it into a flat income tax, it would go a long way towards becoming fair to all, we assume the best and give it three stars.

9-9-9, containing three taxes, actually gives us the worst of all worlds. The sales tax component would appear to help. But without a method to keep it from unfairly hitting the poor hardest, it offers little benefit. In fact, the poor are hardest hit by the flat personal income tax portion, the embedded corporate tax portion also hits the poor hardest, and the sales tax portion, that has no prebate, hits the poor hardest. This combination would be devastating to the poor. We were however, generous, and gave it one star for the very small positive effect of the sales tax component.

The FairTax, on the other hand, eliminates both the personal and corporate income taxes that currently help keep the poor down. Furthermore, it doesn’t tax savings and investment. Then it goes on to solve the problem that has traditionally plagued sales taxes. Unlike past sales taxes, that hit the poor harder than most others, the FairTax includes a prebate for every citizen or permanent resident family. That prebate is based exclusively on family size and is equal to the amount of sales tax that a family of that size would pay on poverty level spending. The result is that although the effective rate goes up as spending goes up, everyone is taxed at exactly the same rate and everyone receives exactly the same prebate, based on family size. It’s hard to complain that you aren’t being treated fairly, when you’re being treated exactly the same as everyone else.

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