By Gavin Putland

The proposed FairTax Act (H.R.25/S.155) would replace most U.S. federal taxes, including payroll tax and all forms of income tax, with a retail sales tax. To compensate for the rise in prices of necessities, the legislation provides for an annual "prebate" of a fixed amount per legally resident adult, plus a fixed amount per dependent child.

Some critics object to the prebate on the ground that it is an unconditional handout to able-bodied people of working age. This objection (whatever its merits or demerits) can be overcome as follows: for a person who is capable of working, make the prebate payable not to that person, but to any employer who hires that person at a legal wage (with a pro-rata prebate for part-time employment). Thus the prebate would become a wage subsidy, defendable as a Pigovian response to the social cost of unemployment.

Due to competition, the wage subsidy would be passed on through some combination of lower prices, higher wages, and more jobs. All three modes would help to compensate working people for the sales tax. The first (lower prices) would reduce the required compensation for both working and non-working people.


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Gavin Putland



Published: 25 May, 2015

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