FairTax

You must add a |reason= parameter to this Cleanup template – replace it with {{Cleanup|reason=<Fill reason here>}}, or remove the Cleanup template.

The FairTax is a proposal in the United States of America for a consumption tax designed to replace the entire federal tax system, including personal income taxes, payroll taxes, corporate taxes, capital gains taxes, gift taxes and inheritance taxes. In order to ensure that no American will pay tax on necessities, the FairTax plan also provides a monthly rebate or prebate equal to the consumption tax spent on necessities up to the federal poverty level.

It is essentially a national sales tax that includes a fixed monthly exemption.

The FairTax legislation has been introduced in the House of Representatives as HR 25 and in the Senate as S 25. As of May 7, 2005, HR 25 has 36 co-sponsors. All of the sponsors are Republicans.⁶

Proposed changes to the tax system

One argument for the FairTax is that it would eliminate embedded taxes in consumer products. Payroll and corporate taxes and the costs of compliance (over $250 billion each year) are "embedded" in all consumer products and services. Basically, the providers of goods and services pass along the cost of doing business to the consumer (the direct cost of corporate taxes, as well as the cost of withholding income taxes) in the form of higher prices. If these taxes are eliminated, it is argued that free market pressures will force prices down to adjust for the lower cost of doing business - an average of 22% for goods and 25% for services. Supporters state that the net change will be near zero to the consumers bottom line; they feel that the government can collect the same tax revenue in ways that are less damaging to the economy.

The reported goal of the "FairTax" proponents is to make the tax system more "fair" and to vastly reduce the cumbersome process and associated bureaucracy of collecting taxes, for example the large Internal Revenue Service processing and enforcement infrastructure. It is claimed that by collecting taxes from retailers, the cost of compliance will be lower than individual tax returns.

Because the current (2005) US federal tax system is progressive, and sales and consumption taxes are inherently regressive, the plan would radically alter the government's source of funds. However, the FairTax, with it's universal rebate, makes the plan progressive. Because the FairTax would eliminate the regressive payroll tax (Social Security and Medicare), available spending levels for all income levels will increase. Economist William G. Gale at the Brookings Institute writes: "Under the AFT proposal, taxes would rise for households in the bottom 90 percent of the income distribution, while households in the top 1 percent would receive an average tax cut of over $75,000."⁵ Many, many other economists disagree with Mr. Gale. It is because of the additional tax base, such as tourists, illegal aliens, tax cheats, prostitutes, and drug dealers, that will make the FairTax revenue neutral. It is not a shift from the rich to the poor.

Effects on Black Markets

A key benefit of the FairTax is that underground industries in the United States (for example illegal drugs), which are estimated to total over $1 trillion each year, will be for the first time taxed (in the sense that even if the drugs themselves are not taxed, drug dealers will need to buy food, cars, etc, which will be taxed). Because of this, those who have honestly paid their taxes would essentially receive a tax cut because those involved in tax evasion or unreported/illegal work would be paying Federal taxes for the first time.

However, it is also argued that imposing a national sales tax will drive transactions underground, creating a vast black market. Further, since the proposed tax is not a value added tax, business expenses would be untaxed, and false claims of business expenses would make tax evasion much simpler, more pervasive, and more difficult to prevent and prosecute.^{3, 4, 5}

The tax rate

In its current form, the FairTax legislation, sponsored by John Linder R-GA and supported by House Majority Leader Tom DeLay and Speaker of the House Dennis Hastert, would impose a 23% across-the-board sales tax and completely eliminate the income tax. Every family would receive prebate checks on a monthly basis to cover the estimated amount of taxes paid on necessities, with the net result that families living or spending at or below the federal poverty line would pay no federal taxes of any sort. Proponents estimate that this tax would easily equal current tax levels. It is also claimed that savings, investments, charitable giving and businesses would benefit, and that all of these (untaxed) activities produce real economic growth, which (taxed) consumption does not.

Supporters claim that the FairTax would be a 23% tax, while opponents state that expressed as a sales tax it would be 30%. This issue needs clarification. A purchase of $1.00 to the retailer under the FairTax would cost the customer $0.30 in taxes (in addition to state sales tax, if any, which are expressed in this way). Alternatively, a customer who spends $1.00 would be giving $0.77 to the merchant and paying $0.23 in tax. Supporters claim that this is more nearly comparable with an income tax, which is assessed from gross income before purchases are made. However, payment of the tax at the cash register would be expressed by a 30% increase in the price.

Penalty on Savers

The FairTax proposal would have the effect of double taxation on retirees and anyone who has accumulated any significant savings from after-tax dollars. Most Americans earn more throughout their lives before they turn 65, saving for retirement. Although some of these savings are set aside from pre-tax income, a large portion of retirement savings are from after-tax dollars. Under the FairTax proposal, this money would be fully taxed again as it is spent.^{3, 4, 5}