A Fair Tax for Progressives

04/18/2012 10:52 am ET | Updated Jun 18, 2012

By Robert Dell

Millions of Americans who recently endured needless hours of toil and stress completing tax returns want fundamental tax reform and relief from the oppression of the current tax code, which includes a $400 billion annual compliance burden and which even progressive economists concede is a national disgrace.

Recently House Republicans began such an overhaul by passing the Ryan budget, which promises to cut the top marginal rate to 25 percent -- while offsetting the revenue loss by reducing tax exclusions, deductions and credits. But unless the GOP wins back both the Senate and the White House in November, their budget has little chance of becoming law. Why? Because virtually all Democrats agree with the assessment of the budget provided by White House advisor David Plouffe: that it "showers huge additional tax cuts on the wealthy" at the expense of the non-wealthy.

But if the goal is to obtain more revenue from the wealthy, there are better ways to do it than raising the top marginal income tax rate, as proposed in the Obama budget. The rich have ways of excluding or minimizing income that are not available to most of us. Hedge fund manager John Paulson, for example, made $9 billion in fees over a two-year period, yet paid no income taxes. By borrowing against "carried interest," fund managers like Paulson can spend lavishly and defer all taxes until they cash out of their investments. Real estate moguls like Donald Trump can utilize the depreciation deduction and tax-free exchanges to reduce, defer and potentially eliminate federal taxes.

In any given year, any of the nation's 400 billionaires could realize more losses than gains in their investment portfolios and thus pay less in federal taxes than someone earning near the poverty level, who neglects to offset his payroll taxes by filing for the earned income tax credit!

Republicans could adopt a different strategy and some have by sponsoring the Fair Tax Act. The FairTax would replace nearly all federal taxes with a single-rate tax on national consumption spending coupled with a cash payment to all households of record to offset taxes paid on private spending up to the poverty level.

The FairTax is not a tax cut for the rich. By definition, "rich" people are those with high net worth and/or high lifetime income who consume a lot -- like Bill and Melinda Gates. People with high wealth and lifetime income who theoretically consume at the poverty level would not be materially rich but impoverished -- until they spend more commensurately with their wealth and lifetime income. Until they do, why would we want to tax away their investments (which presumably expand employment and global output) or their charitable contributions (which presumably direct aid to the least advantaged and most deserving)?

The current tax code destroys wealth and diminishes wealth creation excessively, but it does not effectively tax wealth (in the sense of raising revenue). The FairTax would tax spending from wealth in addition to fostering more wealth creation. Some progressives will contend that the FairTax is less progressive than the current code as measured by effective tax rates relative to single-year gross or taxable income. But they should consider that a tax is more truly progressive if its burden falls most on the people who consume the most -- and they are those who tend to have the highest wealth and lifetime income. There is never a strong correlation between current income per capita and current expenditure per capita. Again, keep in mind that millionaires and billionaires who spend a lot from their wealth can often fall into the low-income category.

Some progressive economists, such as Cornell's Robert Frank, have even argued that income inequality is not an egalitarian concern per se. The issue for Frank is consumption inequality, which the FairTax would likely reduce.

Under the FairTax, real GDP and national income could be 10 percent higher than under the current code in just a few years. Most of us would be paying more in taxes, but would be richer on an after-tax basis. However, a 2007 study by economist David Tuerck and the Beacon Hill Institute concluded that if we group taxpayers by expenditure per capita, the average taxpayer in the top decile loses under the FairTax (with lower levels of after-tax consumption than under the current system, despite growth in income).

Writing in The Huffington Post a year ago, Democratic strategist Lanny Davis suggested that the FairTax was "worth a debate." Since the Reagan era, when has any prominent Democrat opened such a door to the Forbes flat tax or its variants, including the Ryan proposals? President Obama and Democratic leaders in Congress are on record opposing the FairTax, but they have failed to consider how and why it could enhance tax progressivity as to consumption and wealth. For open-minded progressives and for Republicans interested in achieving something greater than the pre-2008 election status quo, the FairTax is the tax reform plan most worthy of study and public debate.

Robert Dell resides in Atlanta and is author of the recent book, Back From Serfdom. An excerpt from the book's chapter on the FairTax is available at