TDAXP On The FairTax

TDAXP has a post on the Fair Tax.

The plan is summarized as this:

  • 23% (or so) Sales Tax to replace other taxes
  • deductions gone
  • federal government mailing a check every month to every head of household for the amount of tax that they would pay during the month up to the poverty level.

Personal (non-corporate) Tax Reform is a good idea. Corporate Income Tax reform is a good idea too, but I don't want to talk about that in this post.
I don't think this plan is maybe the best one. That being said, it is still better then what the US has.
There are two big reasons for Tax Reform:

  1. Reduce Compliance costs (leads to less disruption in economic decisions, increased economic growth rate)
  2. Reduce Power of Special Interests (which disrupt the economy and political process)

There are lots of tax reform ideas.

Consumption Tax ideas include:

Reform Income Tax ideas plans generally have these characteristics:

  • one tax brackets
  • zero or close to zero special interest tax breaks
  • large standard deduction (fixed amount or based on poverty level)
  • Capital Gain and dividends are taxed like income not taxed at all.

Sometimes, the Income Tax reform idea is really a Negative Income Tax (that replaces the income tax system and the entitlement system). Arnold Kling has outlined a negative consumption tax that he calls Bleeding-Heart Libertarianism.

Generally, either the negative income tax or the negative consumption taxes would be my preference. it has the benefits sated above for tax reform and can be used to replace large parts of the welfare/entitlement bureaucracy.

The problem with major tax reform is that while it will be long term a good thing, short term it could be terribly disruptive with many of the economic effect not predictable.

I believe a transaction tax would be the least disruptive, but I think it will not be feasible for 10 to 20 years. When feasible, a Transaction Tax might be the way to go.
Arnold Kling has an idea for a single digit tax rate based reform. His idea would be to have multiple taxes (sales, vat, income, whatever) but limit all of those to having a tax rate less then 10%. So, you would have tax reform, the compliance cost would be reduced (but not quite as much as going with one tax) , special interest power would be reduced, but the disruptive effect of any one tax would be smoothed out. His plan has other features as well.

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