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Notes -
It's hard not to like this tax in the current environment.
Before the current epoch, the knock on a Fair Texas was that it would encourage excess saving and reduce consumption, thereby stalling out the economy. This no longer makes sense. With a massive labor shortage that only looks to get worse over time, it makes sense to increase taxes on consumption (while decreasing them on labor).
It'll never happen because of the socialist tendencies of the powers that be, but I think the Fair Tax would a massive win.
It never made sense. The income tax system discourages savings and encourages excessive present consumption at the expense of investment in future consumption. A consumption tax is neutral with respect to the trade-off between present and future consumption. It results in a ratio of present to future consumption that is appropriate, given the time preference of consumers.
In the long run, the economy is perfectly capable of adjusting to less demand for present consumption and more demand for investments. And the whole point of central banks is to make the adjustment smooth. We should not try to use an inefficient tax system to do what central banks can do efficiently.
In the long run, a tax system that encourages an excessive baseline level of present consumption will not prevent recessions, and it will result in slower growth due to less investment.
I'm inclined to agree, but wouldn't China be a counterexample?
With a lack of productive investments, excess Chinese savings were dumped into unproductive real estate speculation. This is going badly for them.
Here in the U.S., we also have a lack of productive investments. Witness the explosion in meme stocks, crypto, property values, and the price of random shit like collectible cards during the pandemic. This was exacerbated by the extreme level of excess savings during the pandemic (now being helpfully unwound by inflation). But, as you point out, the Federal Reserve can fix this.
Ultimately, we'd never know until it was tried. Odds are, it's very unlikely to be worse than our current corrupt and Byzantine system.
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