Income tax versus Fair tax....help

May 4, 2008 2:32 PM

I need to better understand the proposed tax systems. Mainly the fair tax or sales tax versus an income tax. I am writing a paper for school on the viewpoints of TTARA (The Texas Taxpayers and Research Ass.) and CTJ (citizens for tax justice) but cannot gain a clear idea of what each side is proposing. Obviously the republicans want the fair tax, and since TTARA is business minded, I assume they too seek the fair tax, or at least support it. But what is the Dem idea of fair taxation? Do they want an income tax? What is all this talk on CTJ about income tax cuts? I don’t have the patience to sift through all the material so I'm hoping someone can give me a basic idea of the differing positions on the matter. Mainly answer the question of who wants what and why, and who benefits most from each plan.... Also what about the working poor, do they benefit most from an income tax? Etc. Etc.
posted by madmamasmith to law & government (17 comments total)

All of the questions you have asked are incapable of the sort of broad categorical answers you want. Of course, if you would do your own research, you'd already know this.
posted by Inspector.Gadget at 2:47 PM on May 4, 2008

[A couple things removed. Answer if you can, let's leave it at that.]
posted by cortex at 3:11 PM on May 4, 2008

Ok. Let me rephrase this. Can someone with tax knowledge please clarify the difference between the points of view of Ttara and CTJ. I have checked out the sites extensively but the information is hard to follow. I don't want anyone to write my paper for me, but I need a translator to explain to me in layman's terms just what the different proposals entail when it comes to varying income brackets.
posted by madmamasmith at 3:28 PM on May 4, 2008

From the CTJ web page you can figure most of what they're for and against. Progressives generally favor progressive taxation, typically income taxes, though other kinds of taxes can get dubbed progressive based on who they fall on. For example, most progressives are fine with the estate tax on large inheritances.

Tax cuts in the last decade have fallen remarkably to the rich, and most proposed cuts are for them (or benefit them mostly). Who benefits from each plan is a complicated question depending on what you think of various economic theories. Progressive income taxes take less (much less) directly from the working poor, but republicans would argue that taxing the rich is worse for economic growth and jobs.
posted by a robot made out of meat at 3:40 PM on May 4, 2008

Oh, if you want a recommendation for a publication that outlines their views, ask them.
Phone: [phone]
[e-mail]
posted by a robot made out of meat at 3:46 PM on May 4, 2008

If you're trying to write an objective paper, don't use the newspeak term "fair tax". Quick googling suggests that the Texas proposal is a flat sales tax, which doesn't meet most definitions of the term "fair". Poor people spend a much, much larger percentage of their income on things for which they would pay sales tax than do wealthy people. Here's a google of "flat taxes aren't fair" which maybe will give you links more easily digestible than those of the lobbying groups you were looking at.
posted by hydropsyche at 3:54 PM on May 4, 2008

Here's something out of left field: Al Gore, at a recent TED talk, proposed replacing the income tax with a Carbon Tax, which seems brilliant in theory but tricky to implement.
posted by JDHarper at 4:57 PM on May 4, 2008

I really appreciate the answers you all have given, I have a self diagnosed (and self medicated wink wink ) case of ADHD so it takes a long time for info to sink in. My class had a surprise essay we had to do over the weekend on taxes, something that we have yet to discuss so googling and trying to absorb stuff I dont' get is challenging. Again, thanks.
posted by madmamasmith at 5:01 PM on May 4, 2008

one more thing...something else that threw me off was the literature I have read stating that both the sales tax and income tax would garner the same amount in taxes just from different sources, so what's confusing is why there is so much debate about something that is essentially equal, excluding the removal of other taxes each plan calls for....? If you are being taxed the same regardless then why does it matter wether it's before or after you bring home your pay? I hate this subject....
posted by madmamasmith at 5:05 PM on May 4, 2008

Because the lower you go on the income ladder, the greater percentage of money you spend on taxable goods. As a single person making around $2000/mo net, I spend about $200 on food, 10% of my net income. My roommate, who makes more money than I do, spends the same. It follows that a greater percentage of my income goes to food taxes than his, which on its face, is unfair. His income is taxed at a higher rate, however, which evens things out a bit.
posted by downing street memo at 6:10 PM on May 4, 2008 [1 favorite has favorites]

>so what's confusing is why there is so much debate about something that is essentially equal

Same total amount of tax, but not from the same people. As mentioned above a flat sales tax is regressive - so if the total tax take is equal, the sales tax will take more tax from the poor.
posted by pompomtom at 6:12 PM on May 4, 2008

And the counter-argument is that the sales tax is easier to implement (thus reducing administration costs) and provides an incentive for saving, while removing a disincentive to productivity.
posted by ewiar at 7:59 PM on May 4, 2008

And, the counter argument to that is that items the sales tax is charged on are more likely to be inelastic necessities, and that the progressive tax code helps drive innovation by allowing class and income fluidity, and this counter arguer would ask the above poster to name someone who's been dissuaded from being productive by the specter of an income tax. Just for the sake of counter argument.
posted by downing street memo at 8:28 PM on May 4, 2008

You know, you really should do your own research. Asking here is kind of cheating, but if you are using this more like starting your research with the wikipedia to better focus your "real" research then fine.

First, "fair" in "fair tax" is pure marketing. You have to decide with your research whether you think it is actually fair.

Arguments for a sales/use/value added tax (VAT - plug that into Google):
- it is fair because it taxes what people really spend
- it encourages savings as saved earnings are not taxed, only spent money
- it is a flat tax so it doesn't unfairly burden higher income earners. they pay more because they spend more, but they don't pay higher rates. when you are as rich as Bill Gates, won't you want such fairness? ;)

Arguments for a progressive income tax, or even just a flat income tax:
- it is fair because it taxes people who get more money, more, and people who earn less money, less.
- non-wealthy people spend more of their earned income just to provide the basics and wealthy people get to save more. A VAT tax is effectively a lower tax on their earnings because of their higher savings rate. Is that really fair that they should have a lower rate than less wealthy people?
- is encouraging savings really beneficial to the economy? Our current economy is driven by consumption. Encouraging savings takes money out of the economy depressing the current economy. It may lower investment costs in future production. This is a fairly contentious area. Don't forget to include Japan and the end of the 20th century into your research.
- for some, although I am not sure about your state issue, a VAT/sales tax etc. is a code word for flat tax with no tax on saved income versus a graduated income tax on all income, the former being quite beneficial to the wealthy at the expense of the less wealthy. Some people actually believe that those who are more fortunate should actually pay a larger share of their income in taxes than those who are less fortunate. Surprisingly, many of these people who believe this are actually more fortunate. See Warren Buffett. The reality is they pay less. See Warren Buffett.

This is a fascinating subject. Do your research and you will see.
posted by caddis at 8:48 PM on May 4, 2008

Oh, the whole economy of the taxation thing. It won't work. It might in Texas where they are willing to overly tax the poor. The usual fix is to have some sort of huge deduction of which no taxes are due, say the first $20,000/year. To achieve this you need to file an annual income tax return. Politicians being what they are, and lobbyists for all kinds of interests being what they are, any attempt at simplification once this occurs is dead in the water. How about a deduction for my hybrid vehicle, my home office, my..........? It quickly becomes as complex as the income tax. A counter argument, an earned VAT credit only for those with low incomes, no other breaks, so only a portion of the population ever need file that annual form, and since many are unsophisticated many won't, kind of like product rebates.
posted by caddis at 9:02 PM on May 4, 2008

Here's the biggest argument in favor of relying on a sales tax:

An income tax is a tax on earnings. A sales tax is a tax on consumption. Comparing an economy where the primary tax is on income to one where the primary tax is on sales, the big difference is that income which is invested is also taxed in the income-tax economy, but not in the sales-tax economy. That means there's more money to invest.

The presumption is that with more money being invested, you get more economic activity, more wealth creation, and in the long run everyone benefits from that, even the poor who do not invest.

All other things being equal. Problem is, the other things are never equal, so it's virtually impossible to test the hypothesis. However, it doesn't look good empirically.

Looking at the world overall, I don't see any such correlation. The US, which relies primarily on income taxes, has historically had more economic growth than Europe, where the VAT (a kind of hidden sales tax) is much more important. It actually turns out that the total tax burden on the economy, irrespective of how it's collected, is what's critical. Government in the US consumes a much smaller percentage of the total US economic output than European government does, and that seems to be the main difference that does make a difference.
posted by Class Goat at 11:04 PM on May 4, 2008

This is a big topic, but I just wanted to add that it's important to be specific in your terminology. As caddis points out, you should decide for yourself whether a particular system is "fair"; however, you should also realize that the Fair Tax is a specific tax plan as opposed to generic terms like VAT, or a flat tax.

That being said, here's my watered down, 10-second summary of the typical arguments on the topic.

guy1: The Fair Tax will work because it directly replaces income tax, effectively taxes currently untaxable income like drug money, reduces red tape, and provides breaks for the poor in the form of rebates.

guy2: The Fair Tax won't work because it can't possibly be a direct replacement for income tax. The suggested sales tax rate of 23% would have to be more like 50% in order to actually work, which is ludicrous. Also, a sales tax disproportionately effects the poor because food isn't optional.

I'm pretty sure the CTJ is guy2.
http://www.itepnet.org/sale0904.pdf

Good luck!
posted by systematic at 12:28 AM on May 5, 2008 [1 favorite has favorites]