The American public loves the "Fair Tax" because it would make return
preparers unnecessary. But it would take away an important vehicle for
ordinary Americans to participate in the economic opportunities that
our society (supported by our tax dollars) creates, and the economic
benefits it would provide could be provided more effectively and
fairly by the Shared Economic Growth proposal.

Proponents of consumption taxes like the "Fair Tax" claim that it is
OK to have an anti-progressive tax so long as you throw some cash at
the poor to hold them harmless. Sure that helps, but it misses the
point that such a tax still shifts the tax burden from wealth to
wages, increasing the work penalty, and eliminates the main vehicle
through which ordinary Americans can share in the opportunities
otherwise confined to the well-to-do.

Consumptions taxes like the "Fair Tax" super-sales tax or the
"BAT" (i.e. VAT) proposed by Treasury last week are promoted on the
grounds that they don't tax income from capital, they just tax wage &
salary income. Given that the government is going to collect X amount
of tax dollars, that is not a good trade. A properly constructed
income tax (our current system is not properly constructed, but is
easy to fix - see below) would not discourage people from investing
capital. However, a tax on labor does discourage work. The effects are
not dramatic for the most part (they mostly affect the decision of
whether a spouse who would prefer to stay home with the kids will
instead work for pay and hire day care), but they are there. Further,
it is bad for the national mood for people who work hard all day to
pay a high tax on their income, while people who just invest their
inherited wealth get off free. (I hear you cry "but a sales tax hits
all kinds of income when you spend it". There are long and short
answers to this. The short one is that rich people don't spend all
their money - they get benefits just from having it. Similar to the
observed phenomenon that a beautiful married woman will be treated
better than ordinary mortals, wealth produces power, access and
prestige even without being spent. The long answer is an economist
thing having to do with equilibrium theory and the notion that
eventually all wealth traces back to labor.) If all tax revenue is
collected via sales taxes, is it not obvious that the burden will
shift from Bill Gates and Donald Trump down to the family making and
spending $80,000 a year?

Beyond this, though, is a point that most people miss about income
taxes. Substantial income comes from two sources - labor, and the
ability to finance risky ventures. Opportunities involve risk, and the
ability to absorb that risk carries a large economic premium. A family
just scraping by can't afford to go into hock to start a business that
has a 40% chance of failing. This bit of common wisdom is enshrined in
the two old expressions "it takes money to make money" and "the rich
get get richer". Our economy provides a lot of opportunity, but only
the people who have enough wealth to take the associated risks can
grab those opportunities and profit from them.

Enter the income tax. Through income tax, the government (on behalf of
all Americans) becomes a partner in every business venture, taking a
piece of the upside through tax and a piece of the downside through
deductions for losses. But because the government is the ultimate
portfolio investor, having a piece of every bet, it is like the House
in casino gambling - it always comes out ahead on average. In this
way, every citizen gets to participate in the opportunities that our
economy provides. Or, looked at another way, if a major function of
the government is to provide the infrastructure that creates business
opportunities, income taxation funds those efforts by giving the
government a piece of the action. That makes a huge amount of sense.
It makes much more sense than giving the opportunities just to the
wealthy, and then having them sell stuff for profit to their employees
with the employees paying all the tax burden.

However, our current income tax system is defective because a large
part of the tax burden falls on corporations. Corporations are mobile
- they can shift operations or be bought out by foreigners. This means
that taxing corporations makes them shifyt jobs and research to other
countries. Individuals are much less mobile. They like living here,
and if they try to move we can impose a big exit tax on them. (That
does not work well with corporations - I have been through the
planning for that for a former employer, and it's not hard for a
foreign owned corporation to largely avoid any attempt to impose an
exit tax.) But that can be fixed. The Shared Economic Growth proposal
outlined at www.sharedeconomicgrowth.org would shift the burden to
individual shareholders under our progressive income tax system
(without giving an advantage to corporations - they would have to
cough up their cash as dividends to get the benefit), and induce
corporations to bring high value activities and jobs back to the
U.S.A. That would boost our economy and given market power back to
middle class workers. That would be a sensible tax system - and
Congress could enact it easily. It just needs people speaking up to
demand that Congress pay attention.

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