A Rising Tide Floats All Boats
Many critics of the “Fair Tax” argue that it would hurt people who have lower incomes. This is not completely true. For many reasons, the Fair Tax proposal would have many positive consequences for low-income individuals and families.
First, low-income individuals and families would see an automatic increase in their take-home income that is equal to the amount that they currently pay in income tax. They would be able to take home 100 percent of their earnings, because there would be no income tax withheld if the Fair Tax were implemented. This would be a tremendous benefit for those who live from paycheck to paycheck. In their recent policy study for the Show-Me Institute, “Previous Estimates Overstate ‘Fair Tax’ Rates, Harms,” Prof. Joseph Haslag and Abhi Sivasailam note the following:
In Missouri, the personal income tax rate is 6 percent; if this tax were repealed, consumers would be richer by that same amount.
In addition to having more money in their bank accounts, low-income individuals and families would also benefit from a personal exemption that would help them pay for the increase in sales tax. Like most Fair Tax proposals, the Missouri bill includes a “prebate” check system that is based on federal poverty guidelines and the number of people in each family.
Plus, eliminating corporate income taxes would place downward pressure on consumer prices and increase individual income even further. This is because businesses pay for corporate income taxes by passing them onto their consumers, employees, and shareholders. They do this by increasing the price that they charge for their products and services, reducing the amount that they pay their employees, and/or by eliminating or reducing dividends to shareholders.
States that have zero income taxes experience higher rates of growth as a consequence. For example, as Jenifer Zeigler Roland and Dave Roland recently demonstrated, the absence of an income tax caused Tennessee to outgrow Missouri. And, as the saying goes, a rising tide lifts all boats. The status quo hurts low-income individuals and families because income taxes discourage economic progress and because this population is disproportionately impacted by periods of slow economic growth. Low-income individuals and families are more likely to lose their jobs, possess fewer resources to endure periods of financial hardship, and are more in need of the initial employment opportunities that a healthy economy provides.
As another benefit of the Fair Tax, low-income individuals and families would benefit from increased employment opportunities. Eliminating the income tax would attract new businesses to Missouri, and they in turn would increase employment opportunities and broaden the tax base. Missouri needs all the help that it can get right now — the state’s unemployment rate was 9.5 percent in December.
Something that critics of the Fair Tax don’t address is that it eliminates loopholes and income tax exemptions in the existing income tax system that favor some businesses and individuals over others. High income individuals and corporations would no longer be able to use such loopholes to their advantage. As a consequence, the proposal would eliminate the mechanisms that are built into current tax law that send income tax revenues toward earmarks and special interests.