I didn’t mention savings and investments because I’m not sure what effect the Fair Tax would have. While it would tax consumer spending on new items and thus possibly reduce such purchases, according to the Fair Tax website, reducing the behind-the-scenes cost will lower the pretax retail price. Depending on what federal regulations require in terms of posting prices (that is, whether stores are required to post prices that include the Fair Tax or can use the pretax prices), it might appear to customers who don’t look at the sales tax (especially those using credit cards), that the price they pay has drastically decreased. (Furthermore, as mentioned previously, there’s no Fair Tax on used items, which could in theory encourage MORE spending on used items.)

As for investments, while the ability to invest unlimited amounts of money with no taxes would certainly encourage those who are already inclined to invest (including myself), I’m not sure what effect it would have on people who primarily save in retirement accounts. Would companies stop offering 401(k)s if the tax code is changed? Would people who currently use a deductible IRA stop saving (or cut their savings) if they no longer get any tax benefit from the process? And what happens to Roth holders, who paid taxes on their contributions and would now be facing much higher taxes when they start withdrawing money? Would they get discouraged by essentially being taxed twice?

There are numerous issues that come into play, and frankly, I doubt there’s any way to truly predict how people will react under such a different system of taxation. I still think it would be a good change to our system, I just don’t feel there’s any way to be sure how people will change their behavior under the Fair Tax.

There’s one part you didn’t mention. The fair tax may actually encourage saving and investing. Since it is purely a consumption tax it may actually discourage rampant consumerism and encourage saving money.

Maybe we as a nation should consider this if our national savings rate drops back down to near zero after the recession ends.