FairerTax?

Posted by Kromey at 1:36pm Nov 14 '11
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The current tax scheme in the US is based primarily upon income taxes, and uses a progressive (whether it's "progressive enough" or not is irrelevant right now) system of "tax brackets" that result in richer Americans paying a higher "effective tax rate" (i.e. a higher percentage of their income).

An alternative tax proposal is called FairTax, and basically boils down to replacing the current income tax scheme with a national VAT. It's the general consensus on this site, however, that such a scheme would over-burden the middle class with a higher proportion of the tax burden, while the rich who supposedly don't spend their money would benefit greatly.

An idea for a hybrid tax system has occurred to me. It has its advantages, but also I'm sure its own disadvantages. Here's what I propose:

First, let's address "capital gains": Right off the bat, let's abolish the special treatment these earnings get, and simply treat "capital gains" income the same as any other income -- add it up along with everything else when figuring your AGI, simple as can be.

Next, let's adjust our income tax brackets. Now, keeping in mind that the numbers I'm using here are wholly for illustrative purposes only, and that I lack the data to put forth actual hard numbers, let's put the bottom bracket as an AGI of $0-250,000, and let's make the tax rate for this bracket 0%. The next bracket, say, $250,000-$500,000, starts at a tax rate of, say, 35%, and goes up from there.

Right off the bat we can see that income tax is targeted exclusively at the wealthy. So what do the rest of us pay?

Everyone, rich, poor, and in between, is subject to a national VAT on all products and services except food [note that restaurants and the like aren't considered "food" for these purposes -- we're exempting the stuff you buy at the grocery store and prepare yourself at home]. Additionally, we can implement either a FairTax-style monthly "prebate" check equal to the amount of VAT one would pay on poverty-level spending, or we can issue tax-exemption cards in a similar manner to how food stamps are distributed; presenting one of these cards at the checkout counter would exempt one from paying VAT at all.

Let's for now put away the question of whether either of these approaches would be effective in exempting the poor from paying VAT, and instead just accept the intention here -- the poor are not expected to pay the VAT, period.

So, what do we gain by lifting income tax from the middle class, put shouldering them instead with VAT? Simple: We encourage saving and investment. Little-but-important things like putting money away for retirement, or into a savings account one can dip into for splurges (like that shiny new snowmachine), temporary hardships (lost your job), or unexpected big-ticket expenses (new baby).

Financial advisers already advise having money put away into savings, but currently money that you put away in savings or into investments has already been taxed, so you've got less of it to start with; then, anything that you might earn off of that is taxed again, further diminishing your earning potential! As a result, you pretty much have to have a large stack of cash for saving/investing to pay off over anything but the long term -- in other words, only the rich can benefit from it.

Well, why shouldn't the middle class get to benefit as well?

With no income tax on the middle class and only VAT to worry about, the middle class gets more money in their pocket (no tax deducted from their paychecks), and anything not spent (and thus taxed) can be saved without having to worry about giving good ol'/greedy ol' Uncle Sam his cut.
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