Thursday, April 23, 2015

A Way to Improve the Fair Tax

The FAIR Tax replaces the income tax with a national sales tax. In order to make the tax progressive, the government sends monthly checks to Americans in the form of a "prebate."

In the current proposal, the annual prebate for a single person is about $2500 a year. The annual prebate for a family with six children is about $8000.

The problem with the prebate is that the money for the prebate comes from tax dollars in the form of a monthly government check. The prebates appear like a massive new government entitlement. Estimates say the prebates would cost the government about $489 billion a year.

I believe that one could improve the Flat Tax proposal by replacing the "prebate" with a tax coupon.

The tax coupon would be a card with a unique ID that allowed tax free purchases up to a given limit. The coupon would be similar to all of the other coupons that we encounter in commerce.

Merchants would be happy to accept the coupons because the coupons directly reduce the size of the check they must submit to the government.

It is likely that many merchants would be happy to buy the coupons from customers at or near the cash value of the tax coupons.

The government should encourage the direct purchase of coupons.

In this scenario a citizen might receive a monthly tax coupon with a face value of $500. To avoid the hassles of using it as a coupon, he would sell the coupon to the store. Since the store would apply the coupon value to their tax bill, the store is likely to buy the coupon at or near cash value.

In this scenario, the tax coupon is working like the tax prebate except for the fact that the money flows from the merchant to the consumer rather than from the government. Issuing the monthly prebate in the form of a coupon makes the prebate look a bit more like an in store gimmick than like a new government entitlement.

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