Saturday, August 20, 2005

Towards Demonstrating Revenue Neutrality

One of the things that people frequently question about the FairTax is whether the 23% inclusive rate is sufficient to raise sufficient tax funds to leave the government with as much revenue as the current system is generating. FairTax proponents will line up the economists who have studied the issue and found the revenue neutral FairTax rate to be between 22% and 24%.

But if you are like me you feel much better if you can *see* the numbers, and follow the calculations. So, I'm going to make a go at making similar calculations to show that the 23% FairTax rate is plausibly revenue neutral. Please note, I am not an econometrist, nor do I play one on TV. My calculations on this matter will be somewhat rough, but hopefully will be sufficient to demonstrate that the 23% FairTax rate is plausibly revenue neutral, and also to show why it is, since this point is so counterintuitive to many people.

To do this I'll:

  1. Start with the current system and show where, in aggregate, our current tax revenue comes from.
  2. Demonstrate how much revenue one could expect to generate from the FairTax at a 23% rate given the current personal consumption data.
  3. Make an estimate of the cost of the FairTax prebate.
  4. Compare the revenue generated by the FairTax, less the prebate cost, with the revenue generated by the current system.

2 Comments:

At 5:47 AM, Blogger Sudipta Das said...

well the basic conception behind the Fair tax is rich people spend more money than other individuals. They buy expensive cars, big houses, and yachts. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities. But why do I spend my hardly earned money on these things? So I think the Fair tax is not fair at all

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