I’ve been a supporter of the “Fair Tax” for a few years now, but this article from Bruce Bartlett completely changed my mind.

The Fair Tax is a system where the federal government eliminates the IRS, and instead gets its revenue from sales taxes. Proponents cite a number of benefits:

• Simplicity. Rather than fill out a complicated set of forms every year, on which rich people can find all sorts of loopholes, Americans would simply go about their lives. Whenever they spent money, a certain portion of it would go to the government.

• Savings encouragement. If you save your money instead of spending it, you don’t pay taxes. In the current income-tax-based system, you’ve paid taxes before you even see your money.

• Fairness. Rich people spend the most money, so they pay the most taxes. This is as opposed to a flat tax (supported by some economists of the libertarian bent), which charges everyone the same percentage income tax.

In other words, the Fair Tax is a flat tax that’s, well, fair.

It’s amazing how poorly thought out this line of reasoning is once someone of Bartlett’s knowledge lays it out. He spends much of the article criticizing the specific version of the Fair Tax that was recently proposed (it misleads the public on the size of the tax, and it would force the government to basically tax itself), but he goes much deeper and basically rips the entire concept’s guts out.

The Fair Tax is not fair; it’s actually worse in terms of distribution than a flat tax would be. It is regressive, meaning it charges the poor proportionally more than the rich. Why? Because while rich people spend the most money, they spend the lowest percentage of the total money they earn. (I consider myself good with numbers, and I’m ashamed I didn’t notice this until reading the Bartlett piece.)

Say a household earns $100,000 (before income tax) in a year and spends half, or $50,000 (before the “fair” sales tax). Another household makes $30,000 and spends two-thirds, $20,000. (If anything this understates the phenomenon — the poor often go into debt and spend more than they even make.)

Say the fair tax is 25 percent. The government would make $12,500 off the rich family and $5,000 off the poor one, for a total of $17,500 in revenue.

To get the same revenue from a flat tax, the government would have to tax the total $130,000 income at a rate of 13.5 percent. The kicker: This method takes $13,500 from the rich house and $4,000 from the poor one.* Even compared to a flat tax (as opposed to our current progressive one, where the rich pay a higher percentage of income), a fair tax would create a huge shift in the burden from the rich to the poor.

(The current proposal tries to get around this by tracking every household’s monthly income and sending rebate checks. What was that about simplicity?)

And of course, an outright flat tax won’t make it through the political process. Regardless of the economic rationale, it pushes the wrong buttons to charge Joe Sixpack and Bill Gates the same rate. It seems we’re stuck with basically the system we have now, a progressive income tax.

One thing I would support, though, is the virtually complete elimination of tax deductions. Like sales taxes, they are regressive. I once summarized an argument from Arthur Brooks:

For example, say someone [deducts] $100. If that person is well off enough to pay 36 percent of his income in taxes, he’ll save $36 for an actual sacrifice of $64. A poorer person with a 15 percent tax rate will only get $15 back, going without $85 when all is said and done.

If the government still wants to encourage the behaviors it currently promotes through deductions, it should offer a flat rebate. For example, instead of a $1,000 child deduction, give a (say) $200 discount.

*I concede this is a simplistic way to put it, but it captures the basic principle. In reality, people would react to the tax system; someone who made $100,000 under the fair tax would probably make less under an income tax — the tax makes working less lucrative, so he’d do it less. Likewise, under the fair tax, he’d spend less, because the tax punishes consumption.