Item: A decades-old proposal to replace federal income, estate and payroll taxes with a national sales tax has gained support and attention in the new House GOP majority, but House Speaker Kevin McCarthy said he doesn’t favor the policy. The so-called FairTax, if enacted, would be the largest structural change in U.S. taxation in 110 years. Wages, capital gains and corporate profits would become tax-free. The new levy would hit consumption instead. The national sales tax would apply to a broad base including food, medical care and new homes. Mr. McCarthy (R., Calif.) told reporters late Tuesday that he doesn’t support the FairTax, distancing himself from an idea with support from a vocal segment of his party but that has begun to cause political headaches for Republicans. . . . The plan starts the sales tax at 23%. That is measured as the tax divided by the total cost of the item, including the tax itself. That’s different from how traditional sales taxes are calculated, where the tax is calculated by multiplying the pre-tax cost of an item by the tax rate. Using that method, the tax rate would be 30%. — The Wall Street Journal 01/25/2023

Given the populist lurch of the Republican party since 2015, I would think that any bad policy ideas—all political parties have them—would be new, bad policy ideas. And to be sure, there are those, especially when it comes to immigration and trade. But the FairTax is an old, bad policy idea. I mean, over the years when I’ve received emails from regular people with their grand tax ideas—the first step is always to scrap the current code—the FairTax has often been presented as the Idea That Will Change Everything. Maybe, but probably not for the better. This from a great chat I had with tax expert Alan Viard, now a senior fellow emeritus here at AEI, way back in 2013: 

[On the FairTax] I think the supporters of the FairTax have their heart in the right place because they’re trying to find a consumption based tax system that avoids the penalty on saving and investment that’s built into the income tax. The specific proposal they’ve put forward, though, really does have a number of problems. And many, many economists have pointed them out. First of all, a retail sales tax at that high of a rate is really likely to have a lot of enforcement and compliance problems. And countries that impose consumption taxes at that high of a rate, they tend to use a value added tax structure, which is really economically the same as a sales tax, but administratively is different because you collect it at multiple stages. And that just helps with the enforcement and the compliance.

So it would be a pretty modest change, actually, to say let’s do it in a value added tax administrative mode instead of a sales tax mode. But that’s I think the first change you need to make to their plan. The rate is also not revenue neutral. They’re proposing a 30% sales tax rate and that’s not enough to replace revenue. And I think, given our deficit environment, obviously a tax reform is not going to be viable if it lowers revenue. So – and of course, there you could just raise the rate.

A bigger problem is that, there’s no progressivity in this and they – well, they have pre-bate that introduces some progressivity, but compared to the taxes they’re replacing, this would be a big shift in the tax burden, away from high-income groups towards middle-income and lower middle-income groups. And whatever you think about that politically, I think that’s just not viable.

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