'Bizarre' Effects

Tax plans face off

Two Boston University economists, Laurence Kotlikoff and David Rapson, recently compared our current tax system with the proposed “FairTax”—a 23 percent federal sales tax, intended to replace all existing federal income, payroll, estate, and gift taxes. They wanted to see how a shift to the FairTax would affect Americans’ incentives to work and save.

Their answers favored the FairTax, which, they argued, would create a lower tax rate on wages for almost all American households across a range of income levels. It would also replace effective marginal tax rates on savings of about 23 percent to 54 percent with a rate of zero, since any dollar not spent would not be taxed.

Before they got to those answers, Kotlikoff and Rapson came to a conclusion that’s significant in itself: “Thanks to the incredible complexity of the U.S. fiscal system, it’s impossible for anyone to understand her incentive to work, save, or contribute to retirement accounts absent highly advanced computer technology and software.” They also resorted to language you don’t often see in analyses from the staid National Bureau of Economic Research, which published their study: “The patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word—bizarre.”

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