Do Republicans Really Want to Cut Taxes on the Wealthy and Raise Them on Everyone Else?

By :: August 25th, 2011

Of all the curious rhetoric floating around both Washington and the campaign trail, the strangest may be the demand of many Republicans that Congress raise taxes for low-income working households even as it cuts taxes for the wealthy.  The left has, not surprisingly, gleefully leapt on the issue. And, honestly, it seems like terrible politics for the GOP.

But this idea is hardly new. It is a key element of various forms of consumption taxes such as the National Retail Sales Tax (including the wildly misnamed FAIR tax). It is also favored among those on the right who want to close “loopholes” to force  low- and moderate-income households to pay some income tax even as they cut rates across the board—a design almost certain to favor high-income taxpayers.

Texas governor and GOP presidential hopeful Rick Perry supports the FAIR tax (or at least did last year when he wrote his manifesto Fed Up). This levy would repeal nearly all federal taxes (including the income tax and the payroll tax) and replace them with a single-rate national sales tax on the purchase of all goods and services. FAIR tax backers set this rate at 23 percent but the Tax Policy Center’s Bill Gale and others have concluded that the rate would have to exceed 30 percent if the scheme is to raise as much money as current law.

To try to get a sense of what such a levy would do to the tax burden across incomes, the Tax Policy Center analyzed a generic consumption tax designed to replace most federal taxes. In, um, fairness, it is important to note that TPC did not review the actual FAIR tax but rather a stylized Value Added Tax –type consumption tax. But any broad-based consumption tax will generate roughly the same pattern.     

 Still, the results are dramatic. On average, such a levy would raise the share of taxes paid for all but the highest-income households, who would pay far less than they do today.  A consumption tax without any rebate to protect low-income people (the red bar in the graph) would be extremely regressive. In other words, the more you make, the lower your tax burden, and the less you make, the higher--a mirror image of today’s moderately progressive tax system.

The reason is simple: A consumption levy would not tax income from saving, and low- and moderate-income people save a lot less than the rich. Thus, if Congress taxes consumption, those down the economic food chain will inevitably pay more in taxes. One way Congress can address the problem is with a rebate—effectively exempting thousands of dollars of spending from tax (the exact amount is tied to the poverty level so it rises as income falls).  

As the blue bars in the graph show, such a rebate would not completely fix the problem. Low- and moderate-income families would still pay more on average than they do today. But they’d pay a much smaller share than if there was no rebate.

There is a funny thing about the rebate, though (called a prebate in the FAIR tax). It would end up exempting a lot of low-income households from tax—recreating exactly the problem Perry and others complain about. And even with a rebate, the highest income 5 percent of households would still enjoy a major tax cut even as others pay more.  Such a consumption tax would reduce the tax burden for the top 1 percent (who make an average of $1.6 million per year) by a stunning 40 percent.

Of course, tax systems are about more than fairness. Efficiency and the effect on the overall economy matter. But I’m not sure I’d want to run for president on a promise to cut the tax burden on millionaires by 40 percent even as I’d raise taxes for nearly everybody else.  Forget class warfare. This is more like the charge of the Light Brigade.

13Comments

  1. Rob in CT  ::  4:29 pm on August 25th, 2011:

    I’m shocked, SHOCKED, to find an attempt to shift the tax burden downwards going on here!

    Duh. That’s exactly the plan. If you do the rebate thing (to avoid completely screwing the really poor), you end up soaking the middle class in favor of the rich.

    And current tax policy *already* favors the rich (largely because of preferential taxation of capital gains) over the middle class.

    The Right Wing obsession with taxing the poor more strikes me as both unfair and, beyond that, nutty. They poor are, well, POOR. They don’t have the damned money.

  2. Ralph H  ::  6:41 pm on August 25th, 2011:

    In general Republicans do not support a VAT although if they thought about it they would.

    I like it for a few reasons. (1) We would tax foreign made goods just as much as domestic. (2) People who escape income taxes (drug dealers, bartenders, cleaning people, welfare people), will pay more than they currently do. (3) its easy to collect and presumeably will raise a lot of money, (4)It does not penalize savings.

    My fear on it is that it will give an opportunity for favored interest groups to lobby for exemptions. my hope is that if it was implemented at a reasonable rate (say 6%) it would let us reduce corporate tax rates and simplify the income tax for individuals.

  3. Michael Bindner  ::  6:42 am on August 26th, 2011:

    It would not tax the under ground economy any more than it does now. Drug dealers, bartenders and prostitutes already pay the income taxes of those they purchase services from, they just do so invisibility. VAT or Fair Tax would shift some of the invisible taxation to visible – but members of the underground economy started collecting VAT or Fair Tax on what they sell (not bloody likely) they would still be tax evaders.

  4. Michael Bindner  ::  6:48 am on August 26th, 2011:

    It is not enough for Fair Tax to match current taxation – to be credible, it must fund current spending – but that rate is too high to be sustainable without an income surtax.

  5. Daily Digest for August 26: Way Down in the Hole » New Deal 2.0  ::  6:58 am on August 26th, 2011:

    […] Republicans Really Want to Cut Taxes on the Wealthy and Raise Them on Everyone Else? (Tax Vox) Yes, they really, really […]

  6. Earlybird1  ::  7:21 am on August 26th, 2011:

    A truly fair tax would be to eliminate all tax deductions which would leave us with the effective tax rates people actually pay on average.

    This plan would save more than a hundred billion a year in tax compliance costs. Tax cheats cost an estimated 400-500 billion a year. If just 20-25% of the cheating was eliminated by a tax code based on effective tax rates, we’d net a hundred billion a year in increased revenue without making honest Americans pay a penny more on average.

  7. The Tax Doctor  ::  9:39 am on August 26th, 2011:

    The so-called FAIR tax would–to state and local governments–be rather the unfair tax, as it would mandate states to manage the collection of the federal tax, an awesome burden or unfunded mandate, especially in a tax area where there are thousands of different sales and use tax systems; and the tax would apply to state and local services. Mayhap it should be called the Irene Tax, because the critical rescue services of state and local governments in response to Hurricane Irene would all be taxed by the federal government, albeit with the actual uncompensated costs of collections paid for by state taxes.

  8. Doug  ::  10:01 am on August 26th, 2011:

    How about a flat rate transaction tax? Let every single financial transaction be taxed, stock trades, real estate, grocery purchases, etc. These transactions all benefit from the faith and credit of the US dollar and a flat transaction tax would be a fair compensation to the US citizens on the reliability of US currency in supporting these transactions.

  9. glossolalique  ::  11:01 pm on August 26th, 2011:

    Big Yawn – lookat what’s already happening: a rise in retirement age (tax increase), forced private-sector health care (same as a tax increase), etc et c. there’s more, just look and think…

  10. Brian Dell  ::  12:57 pm on August 27th, 2011:

    Which Republicans are seriously advocating for a VAT? Dan Mitchell has been railing against a VAT for some time now and his outfit, the Cato Institute, is thoroughly right wing/libertarian.

    A VAT wouldn’t fly in the USA not because of the distribution post-rebate but because the rebate is “post-.” If the electorate sees the VAT at the cash register they will be outraged, never mind that they get fully compensated later (or even before) by a govt cheque. Anybody who’s politically experienced knows that “revenue neutral” sound plausible in theory but in practice it is extremely difficult to implement without a political backlash if there is any separation at all in time, space, and beneficiary between the measure that marginally increases the tax burden and the measure that reduces it.

    We just a referendum in British Columbia that rejected a tax reform despite revenue neutrality and the progressivity of its effect primarily because a VAT is just too visible a tax.

  11. DCLawyer68  ::  10:11 am on August 29th, 2011:

    Brian – don’t ask for “facts.” When it comes to political analysis, Mr . Gleckman traffics in assertions.

  12. PD Ess  ::  3:59 pm on August 29th, 2011:

    The bottom line is that the Republicans want to take from the poor and needy and give to the rich and greedy. Period.

    Is this what the founding fathers envisioned?
    No.

    Is this what Americans really want for our country?
    Most Americans can’t be bothered to read, analyze and think. So…
    Maybe.

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