The ''

Fair Tax Act FairTax was a flat tax, single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of the Internal Revenue Service. The proposal would eliminate all Income tax in the United States, federal income ta ...

'' (/) is a

bill Bill(s) may refer to: Common meanings * Banknote, paper cash (especially in the United States) * Bill (law), a proposed law put before a legislature * Invoice, commercial document issued by a seller to a buyer * Bill, a bird or animal's beak Plac ...

in the

United States Congress The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...

for changing tax laws to replace the

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...

(IRS) and all

federal Federal or foederal (archaic) may refer to: Politics General *Federal monarchy, a federation of monarchies *Federation, or ''Federal state'' (federal system), a type of government characterized by both a central (federal) government and states or ...

income taxes An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

(including

Alternative Minimum Tax The alternative minimum tax (AMT) is a tax imposed by the United States federal government in addition to the regular income tax for certain individuals, estates, and trusts. As of tax year 2018, the AMT raises about $5.2 billion, or 0.4% of all ...

payroll taxes Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...

(including Social Security and Medicare taxes),

corporate taxes A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at ...

capital gains tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, Bond (finance), bonds, precious metals, real estate, and property. Not all count ...

es,

gift tax In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...

es, and

estate taxes An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died. International tax law distinguishes between an es ...

with a national retail

sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...

, to be levied once at the point of purchase on all new

goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...

and

services Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a pu ...

. The proposal also calls for a monthly payment to

household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...

s of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level. A key question surrounding the FairTax rate is the ability to be revenue-neutral; that is, whether its proposed monetary numbers would result in an increase or reduction in overall federal tax revenues, and if so how large this disparity would be. Economists, advisory groups, and political advocacy groups disagree about the tax rate required for the FairTax to be truly revenue-neutral. Researchers can use a different

tax base A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...

, time frame, or methodology that make direct comparison among estimates difficult. The choice between

static Static may refer to: Places *Static Nunatak, a nunatak in Antarctica United States * Static, Kentucky and Tennessee *Static Peak, a mountain in Wyoming **Static Peak Divide, a mountain pass near the peak Science and technology Physics *Static el ...

dynamic scoring Dynamic scoring is a forecasting technique for government revenues, expenditures, and budget deficits that incorporates predictions about the behavior of people and organizations based on changes in fiscal policy, usually tax rates. Dynamic scoring ...

further complicates any estimate of revenue-neutral rates. Proponents offer studies that calculate the

tax rate In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be p ...

consistent with the legislation (23% inclusive), while critics argue that the rate would need to be much higher and offer competing estimates. Supporters argue that if the rate seems too high or is otherwise higher, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer.

Bruce Bartlett Bruce Reeves Bartlett (born October 11, 1951) is an American historian and author. He served as a domestic policy adviser to Ronald Reagan and as a Treasury official under George H. W. Bush. Bartlett also writes for the New York Times Economix ...

has stated that "public opinion polls have long shown that support for flat-rate

tax reform Tax reform is the process of changing the way taxes are collected or managed by the government and is usually undertaken to improve tax administration or to provide economic or social benefits. Tax reform can include reducing the level of taxatio ...

s is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%." If the FairTax is presented like all real world U.S. sales taxes and foreign VATs (tax-exclusive), the rate would be presented as 30%. Opponents argue the 30% tax-exclusive figure is better understood by the general populace and that the use of the 23% tax-inclusive number is deceptive and misleading. Proponents state that the 23% presentation is easier to compare to the inclusive income tax rates being replaced.

Tax rate for revenue neutrality

The primary rate presented adheres to the legislative framework of the FairTax bill in rate presentation, which is calculated as a percentage of total spending, sometimes called a

tax-inclusive In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be p ...

rate. The rate presentation of a traditional sales tax may also be included and is referred to as the

tax-exclusive In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be p ...

rate ''(see Presentation of tax rate)''.

Early research

Americans For Fair Taxation Americans For Fair Taxation (AFFT), also known as FairTax.org, is a U.S. political advocacy group based in Clearwater, Florida that is dedicated to fundamental tax code replacement.

(AFFT) states that early research at

Stanford University Stanford University, officially Leland Stanford Junior University, is a private research university in Stanford, California. The campus occupies , among the largest in the United States, and enrolls over 17,000 students. Stanford is consider ...

, the

Heritage Foundation The Heritage Foundation (abbreviated to Heritage) is an American conservative think tank based in Washington, D.C. that is primarily geared toward public policy. The foundation took a leading role in the conservative movement during the presiden ...

, the

Cato Institute The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Indust ...

, and Fiscal Associates have calculated revenue-neutral rates between 22.3% and 24%. Jim Poterba of the

Massachusetts Institute of Technology The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the ...

estimated a rate of 23.1% and

Laurence Kotlikoff Laurence Jacob Kotlikoff (born January 30, 1951) is a Professor of Economics at Boston University, a William Warren Fairfield Professor at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the Natio ...

Boston University Boston University (BU) is a private research university in Boston, Massachusetts. The university is nonsectarian, but has a historical affiliation with the United Methodist Church. It was founded in 1839 by Methodists with its original campu ...

found a rate of around 24%.

Dale Jorgenson Dale Weldeau Jorgenson (May 7, 1933 – June 8, 2022) was the Samuel W. Morris University Professor at Harvard University, teaching in the department of economics and John F. Kennedy School of Government. He served as chairman of the department ...

, a professor of economics at

Harvard University Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of higher le ...

and past President of the

American Economic Association The American Economic Association (AEA) is a learned society in the field of economics. It publishes several peer-reviewed journals acknowledged in business and academia. There are some 23,000 members. History and Constitution The AEA was esta ...

, purportedly estimated the revenue-neutral rate to be 22.9% but indicated in his 2002 book that he believes the rate would need to be higher. The research was commissioned by AFFT and they have not made these studies public. The studies are also not published by the economists that conducted those studies. Critics have stated that the early studies failed to properly account for the additional revenue required for the increased government spending needed pay the FairTax on their purchases.

Recent studies

One of the leading economists supporting the FairTax is Dr.

of Boston University. A detailed 2006 study published in '' Tax Notes'' by Beacon Hill Institute at Suffolk University and Dr. Kotlikoff concluded the FairTax would be revenue-neutral for the tax year 2007 at a rate of 23.82% (31.27% tax-exclusive) assuming full taxpayer compliance. The study states that

purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...

is transferred to state and local taxpayers from state and local governments. To recapture the lost revenue, state and local governments may raise taxes in order to continue collecting the same real revenues from their taxpayers. State and local governments would be able to maintain their real spending levels, despite the requirement that they pay the FairTax on their purchases. The

Argus Group Argus is the Latinized form of the Ancient Greek word '' Argos''. It may refer to: Greek mythology * See Argus (Greek myth) for mythological characters named Argus **Argus (king of Argos), son of Zeus (or Phoroneus) and Niobe **Argus (son of A ...

and Arduin, Laffer & Moore Econometrics each published an analysis that defended the 23% rate. While proponents of the FairTax concede that the above studies did not explicitly account for

tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...

, they also claim that the studies did not altogether ignore tax evasion under the FairTax. These studies implicitly incorporated some degree of tax evasion in their calculations simply by using National Income and Product Account based figures that presumably understate total household consumption. Moreover, these studies did not account for the expected capital gains that would result from a reduction in the real nominal value of U.S. government debt and the increased

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

that economists believe would occur. In contrast to the above studies, one of the leading economists opposing the FairTax, William Gale of the

Brookings Institution The Brookings Institution, often stylized as simply Brookings, is an American research group founded in 1916. Located on Think Tank Row in Washington, D.C., the organization conducts research and education in the social sciences, primarily in ec ...

, published a detailed 2005 study in ''Tax Notes'' that estimated a rate of 28.2% (39.3% tax-exclusive) for 2007 assuming full taxpayer compliance and an average rate of 31% (44% tax-exclusive) from 2006–2015 (an increase that accounts for the replacement of an additional $3 trillion in revenue collected through the

(AMT) impacting the

middle class The middle class refers to a class of people in the middle of a social hierarchy, often defined by occupation, income, education, or social status. The term has historically been associated with modernity, capitalism and political debate. Commo ...

over the 10-year period). The study also concluded that if the tax base were eroded by 10% due to tax evasion, tax avoidance, and/or legislative adjustments, the average rate would be 34% (53% tax-exclusive) for the 10-year period. The study did not take into consideration the increase in economic activity that Gale expects would result from the imposition of the FairTax.

Additional sales tax studies

Additional studies have been performed on national retail sales tax plans that may not conform to the tax base as defined in the FairTax legislation but are often considered when discussing FairTax rates. These studies are often of prior sales tax legislation, similar tax models, or based on the assumption that the tax base used in the FairTax legislation is illogical or likely to be modified by Congress before passage. The

President's Advisory Panel for Federal Tax Reform On January 7, 2005, President George W. Bush announced the establishment of the President's Advisory Panel on Federal Tax Reform, a bipartisan panel to advise on options to reform the United States income tax code to make it simpler, fairer, and mo ...

performed a 2006 analysis to replace the individual and corporate

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

(excluding other taxes) with a retail sales tax and found the rate to be 25% (34% tax-exclusive) assuming 15% tax evasion, and 33% (49% tax-exclusive) with 30% tax evasion. The rate would need to be substantially higher to replace the additional taxes replaced by the FairTax (payroll, estate, and gift taxes). The Chairman of the President's Advisory Panel, former U.S. Senator

Connie Mack Cornelius McGillicuddy (December 22, 1862 – February 8, 1956), better known as Connie Mack, was an American professional baseball catcher, manager, and team owner. The longest-serving manager in Major League Baseball history, he holds untoucha ...

, stated that the panel did not evaluate H.R. 25 (the FairTax). The panel was not allowed to consider reforming regressive payroll taxes and they reduced the tax base by adding large exclusions. In determining the rate, the panel assumed that revenue generated from taxing federal spending would be canceled out by increased government expenditures required to pay such taxes, a factor the panel claims was neglected from early FairTax rate analysis. The Treasury Department has refused to release for

peer review Peer review is the evaluation of work by one or more people with similar competencies as the producers of the work (peers). It functions as a form of self-regulation by qualified members of a profession within the relevant field. Peer review ...

the detailed figures and

methodology In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...

used in the tax panel analysis. FairTax proponents, the Beacon Hill Institute, and Dr. Kotlikoff have criticized the President's Advisory Panel's study as having altered the terms of the FairTax and using unsound methodology. The Treasury Department estimates (prepared for the Tax Panel) excluded government consumption, significantly altering the tax base and therefore the tax rate. Other studies point out that the current system is also counting taxes the government would pay to itself by including matched payroll taxes of government employees, covering the corporate and payroll tax expenses of its contractors and their suppliers, and paying embedded tax costs under the current system (see Theories of retail pricing). The tax panel included large expenditures to local and state governments for the FairTax burden; however, the Beacon Hill Institute suggested a flaw in this logic and showed that the FairTax imposes no additional real fiscal burdens on state and local government. A similar level of taxation is required when shifting from taxing income to consumption in order to maintain the tax burden on government. Proponents assert that government needs to be taxed to keep a level playing field between government enterprises and private enterprises. Dr. Karen Walby, Director of Research for the Americans For Fair Taxation, discussed a recent study by Young & Associates on evasion and enforcement that identifies certain key variables which influence the level of compliance (marginal tax rates, likelihood of audit, severity of penalties, etc.) and concludes the FairTax is superior on most/all of these and would therefore have lower rates of evasion than alternatives. While the FairTax studies did not account for tax evasion, neither did they ignore it. The studies have implicitly incorporated a significant degree of tax evasion in calculations simply by using National Income and Product Account based figures that understate total household consumption. In addition, the studies did not account for the capital gain stemming from the reduction in the real nominal value of U.S. government debt and the increased economic growth that economists and FairTax supporters believe would occur. Congress's

bipartisan Bipartisanship, sometimes referred to as nonpartisanship, is a political situation, usually in the context of a two-party system (especially those of the United States and some other western countries), in which opposing political parties find co ...

Joint Committee on Taxation The Joint Committee on Taxation (JCT) is a Committee of the U.S. Congress established under the Internal Revenue Code at . Structure The Joint Committee is composed of ten Members: five from the Senate Finance Committee and five from the House W ...

(JCT) evaluated a proposal similar to FairTax that included additional exemptions and estimated a revenue-neutral rate of around 36%. In a 2004 study, the

Institute on Taxation and Economic Policy The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan think tank that works on state and federal tax policy issues. ITEP was founded in 1980, and is a 501(c)(3) tax-exempt organization. ITEP describes its mission as ...

(ITEP) compensated for factors which artificially enlarge the economic base prior to collection of American sales tax in reality (government transactions, non-financial transactions,

tax exempt Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, redu ...

ions, evasion, etc.) to the FairTax's supposed tax base, concluding that either the FairTax would have to be increased to 53%, or its originally proposed 30% rate would fall short of FY2005 federal revenues by 41%. Proponents charge that the Presidential Tax Panel, the JCT, and ITEP are motivated to maintain the "status quo" and thus modify the tax base from the proposed legislation to achieve higher rates, and conclude that since opponents could not kill the FairTax proposal based on merits or lack thereof; they create their own plan with an exaggerated rate to make it politically not feasible. The FairTax would apply to a purported gross base of $11.467 trillion, theoretically one-third larger than the income tax base of $9.706 trillion. For that reason, the average

marginal rate A marginal value is #a value that holds true given particular constraints, #the ''change'' in a value associated with a specific change in some independent variable, whether it be of that variable or of a dependent variable, or # hen underlying valu ...

of such a tax base under the FairTax would be, by definition, significantly lower than current law. If the rate is too high, no matter what the rate, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer (see Tax burden visibility). The

Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...

Henry M. Paulson Henry Merritt Paulson Jr. (born March 28, 1946) is an American banker and financier who served as the 74th United States Secretary of the Treasury from 2006 to 2009. Prior to his role in the Department of the Treasury, Paulson was the Chairman a ...

, stated in 2006 that he would investigate the FairTax in a very comprehensive way using resources outside the Treasury.

Notes

References

* * *

External links

FairTax.org
- Americans For Fair Taxation Legislation
H.R.25: ''Fair Tax Act of 2007''
- Text of House bill H.R.25
S.1025: ''Fair Tax Act of 2007''
{{Webarchive, url=https://web.archive.org/web/20160118045529/http://thomas.loc.gov/cgi-bin/query/z?c110:S.1025: , date=2016-01-18 - Text of Senate bill S.1025