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Last week my Tax Policy Center colleague Len Burman explained some of the problems with the FairTax, a single-rate national retail sales tax. The levy, backed by Republican presidential candidate Mike Huckabee, would replace the progressive federal tax system with one regressive tax. Two charts tell the story.
The first chart is the current distribution of federal taxes, including individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The distribution shows the average tax rate for six income groups.
The distribution is progressive because average tax rates increase with income. On average, those in the lowest-earning group pay 1.9 percent of income in federal taxes while those in the highest-earning group pay 29.0 percent. The individual income tax, which has higher rates on higher levels of income, is mostly responsible for the progressivity of the federal tax system (payroll taxes and excise taxes are regressive).
The distribution of a national retail sales tax is very different, as the second chart shows.
These estimates were produced by Dan Feenberg, Andrew Mitrusi, and Jim Porteba in 1997. The years and income groups are different so we cannot make exact comparisons between the charts. But the pattern is clear: The single-rate national retail sales tax is regressive because average tax rates fall as income rises. Those in the lowest-earning group ($10,000 to $15,000) pay an average of 21.5 percent of income in taxes while those making more than $200,000 pay an average 15.6 percent in taxes.
These estimates include a "prebate," a cash transfer to low-income people meant to offset some of the sales tax. While that design reduces tax burdens for the lowest-income households, low- and middle-income households still end up with higher tax burdens than upper-income households under a national retail sales tax. The bottom line: If everyone pays the same tax rate on consumption, tax burdens decline as income rises.
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