A Distributional Analysis of the FairTax Plan: Annual and Lifetime Income Considerations

Abstract

Dissatisfaction with the current federal tax system is fostering serious interest in the FairTax Plan, which would replace most of the federal taxes with a national retail sales tax. The FairTax is promoted as being progressive, but there is considerable skepticism of this claim. We examine the distributional effects of the FairTax, as well as the current system it intends to replace, under both annual income and lifetime income approaches. Global measures of progressivity suggest that the current federal tax system is progressive while the FairTax is regressive. Our results are also robust to different assumptions used for estimation.

Should the U.S. Consider a National Consumption Tax?

“…Other consumption taxes, like the X-tax and personal expenditure tax, feature graduated rates. Even so, most studies find that consumption taxes would be less progressive than the existing tax system (Feenberg et al, 1997;Kuang et al, 2011;Metcalf, 1997;The President's Advisory Panel on Federal Tax Reform, 2005). In addition, the transition to a consumption tax, some generations could be hurt as existing wealth is taxed (Altig et al, 2001).…”

Consumption Taxes: The Good, the Bad, and the Unworkable

“…Other consumption taxes, like the X‐tax and personal expenditure tax, feature graduated rates. Even so, most studies find that consumption taxes would be less progressive than the existing tax system (Feenberg et al., 1997; Kuang et al., 2011; Metcalf, 1997; The President's Advisory Panel on Federal Tax Reform, 2005). In addition, the transition to a consumption tax, some generations could be hurt as existing wealth is taxed (Altig et al., 2001).…”