Earlier this year, 31 House Republicans released a proposal to replace virtually all federal taxes with a 30% national sales tax. As other analysts have noted, a sales tax would be easy for companies to dodge and difficult for the government to enforce — meaning that to avoid revenue losses, the proposal would require a significantly higher tax rate, possibly as high as 60%.
The bill has also been criticized for being regressive. In tax terminology, a tax is “regressive” if it takes a higher share of income from the poor than from the rich; “flat” or “proportional” if it takes the same share of income from everybody; and “progressive” if it takes a higher share from the rich than from the poor.
The Republicans’ overall bill is certainly regressive and should be rejected on that account. But its core idea — taxing consumption rather than income — is not inherently regressive if properly designed. Much public commentary has mistakenly concluded that a national sales tax would fall predominantly on low-income Americans. But as this analysis demonstrates, taxes on spending fall on everyone roughly equally, and certain elements of the Fair Tax — such as its universal child payments — are actually progressive. While the Fair Tax ought to be rejected due to its regressive tax cuts and poor enforceability, two elements of it are worth keeping: its flat per-child cash payments and its emphasis on taxing spending rather than saving.
