Do we want to become Mexico?

(2) The appeal to consumption as the step where the individual realizes value as the “natural” point to tax is overly simplistic to me. We buy many things long before we consume them, and few people earn income with no intent to consume (immediately, delayed, as a contingent safety factor, for children, etc.). The point of the full cycle (earn/spend) where taxation is least harmful depends on desired impacts on incentives, fairness, etc. One could argue that individuals with intent to earn but not consume are good people to tax because they may be the least sensitive to factors that reduce their earnings, minimizing negative impacts of taxes.

(3) I looked at the Fair Tax (Wikipedia). To maintain revenue, it takes money from the middle class and gives it to the rich and poor. Could you structure it differently? Absolutely, but it’s a hard system to use to create a customized model, and doing so would destroy its advantage of simplicity. Can you imagine the political battles as groups fight to have their classes of products exempted from the tax (milk, bread, college tuition, house purchases)? The cheating that will occur when every dependent gets you additional payments from the government? The incentives for people who think that an increase in the tax rate means that they get a bigger check from the government each month?

(4) While there is an element of choice, I see a difference between a wealthy person choosing to buy a boat and a poor person choosing to eat as far as when they pay taxes. Assuming that income eventually flows to consumption, tax will eventually be paid. The difference is that the individual with more resources can choose to defer taxes, similar to a 401K. The government is transferring wealth to savers as an incentive. If we believe that this is a critical value (i.e. more important than incenting home ownership, green technology, employer provision of health benefits, etc.), then it can be maintained or increased in the current system. It isn’t really an argument for consumption tax per se, although it might be an easier vehicle if you want to allow people to defer taxes in a more unlimited fashion (which I am not convinced of).

(5) Most people I have talked to feel more comfortable with Roth IRAs than standard ones, because it takes away a level of uncertainty regarding whether tax rates will change in the future and prevent them from having as much money to spend as they expect. Consumption tax creates a similar issue.

(6) Stability of government revenues is not necessarily a good thing. I would prefer to see a long term balance with more revenue collected in good years and less in bad.

Hot dog vendor spends $50K for a fancy truck. Big success, he earns $75K the first year. Pays himself $25K, uses $50K to buy a second truck. What’s his income, $75K? $75K less some depreciation on the truck? $25K salary? Or is that a dividend? Or return of capital?

If you say it’s $75K and tax him on that, maybe he can’t afford to buy the second truck. If you say it’s $25K, maybe he buys a Ferrari as a company car,

Once you get beyond cash salaries, income is a highly subjective concept and fair game for shenanigans, See the current carried interest debate.

1) Breadth
2) Progressivity to help lower income groups
3) Stability of government revenues
4) Severe handicapping of lobbying efforts to bury subsidies in the tax code, a.k.a. tax expenditures
5) Everyone spending above the poverty level has some skin in the game. A republic dies when its citizens realize they can vote themselves money.

I’ll add that I’m not naive enough to think that the Fair Tax solves every problem and introduces none. It does tax new housing providing a disincentive to buy a brand new home. It does penalize existing Roth or other after-tax savers but it helps everyone become a future saver. It will make life even harder on illegal day laborers.