I must admit, this only recently came to my attention. The fair tax (not to be confused with the “flat tax”) is a system that does away with income taxes completely, instead it taxes consumption at a 30% rate. Lower income households are “pre-bated” their projected sales taxes, so in effect, they would pay no tax at all.
Many questions occur to me as I ponder such a system. I’ve saved mostly in a pre-tax 401(k). Seems this system with let me access that money at retirement with no further taxes due until it’s spent, same as others would pay with money they’ve already paid taxes on. And therein lies the rub. How are these two sources of funds (one’s savings already taxed vs money in pretax accounts) differentiated? I feel sorry for the retiree who spent the last few years converting all his retirement money from a pre-tax IRA to a Roth IRA, now to only find a 30% sales tax waiting at the other end.
On the other hand, there’s a certain appeal to knowing that those in the underground economy, who are paying no taxes at all, will be drawn in to the system if only when they go to their local grocery store. I’m not sold either way, a lot more discussion is needed on this topic.