Is the FairTax Fair?

Among recent proposals for a radical overhaul of the U.S. tax system, the FairTax plan is perhaps the most prominent.  It would replace most current federal taxes on income and transfers of wealth with a national retail sales tax levied at a rate of 23 percent of the tax-inclusive price, and would avoid taxing poor households by providing a cash “prebate” to all households.  We examine the distributional implications of the FairTax plan, both with and without the dynamic effects that a change to the FairTax is expected to have on incomes and spending.  The FairTax is more progressive than the current tax law if distribution is measured using expenditure per capita; this is an appropriate procedure as expenditure per capita is a sensible proxy for lifetime income.