The Fair Tax: A Tax Reform to Alleviate Recessions and Reduce Biases in the Tax Code

Abstract

The present tax code implicitly treats profits and losses asymmetrically. The government shares in profits but firms bear full cost of losses. The paper argues that giving tax payments to firms suffering losses would decrease the volatility of the business cycle, reduce tax biases against small firms and new ventures, mitigate distortions caused by capital market imperfections, and encourage risk taking. By having the government share in both profits and losses, these tax credits would move the corporate tax code closer to symmetry. Since losses are the greatest during recessions, the tax credits would prevent some recessions and mitigate the severity of others. The transfers would automatically be focused on the regions and industries in which slumps are the most severe. Fraud could be minimized by using the payments only to purchase debt or equity held by unaffiliated investors.