Taxes, FAIR and otherwise

Arnold Kling looks at the Fair Tax proposal, and counters with one of his own.

His proposal:

1. Abolish the income tax for households with incomes under $100,000. Tax 10 percent of income between $100,000 and $150,000 and 35 percent of income over $150,000. Index these brackets for growth in nominal wages, but otherwise put in mechanisms that freeze the income tax.

2. Abolish the payroll tax.

3. Institute a national sales tax of about half of the FairTax plan. In the future, implement all tax cuts and tax increases through the sales tax, not the income tax.

Roughly speaking, the income tax provides 1/2 of Federal revenues, and the payroll tax accounts for 1/3 of Federal revenues. If we cut income tax revenues by 1/3 and abolish the payroll tax, we would lose in total 1/2 of Federal revenues. Thus, the national sales tax would have to be about half of what it would under the FairTax plan. If Gale's estimate is correct, then the national sales tax would have to be between 20 and 25 percent.

The idea of freezing the income tax while leaving the sales tax up for grabs politically is to try to increase the public's sensitivity to the cost of Federal programs. Right now, politicians can treat high-earners as an ATM machine, always there to dispense cash for "targeted tax cuts" or foolish spending programs.

Instead, the idea would be to fix the amount of "soak-the-rich" taxation permanently, with all of the variation at the margin coming in the sales tax. Thus, if a politician wants to raise spending or institute some form of "targeted" tax cut, the sales tax rate has to rise, and everybody has to feel it.