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FairTax was a single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of 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 ...
. The proposal would eliminate all federal income taxes (including the
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 ...
,
corporate income 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 ...
, and
capital gains taxes 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, bonds, precious metals, real estate, and property. Not all countries impose a c ...
),
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),
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 ...
, replacing them with a single
consumption tax A consumption tax is a tax levied on consumption spending on goods and services. The tax base of such a tax is the money spent on Consumption (economics), consumption. Consumption taxes are usually indirect, such as a sales tax or a value-added ta ...
on retail sales. The proposed ''Fair Tax Act'' (/) would apply a tax, 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 p ...
for personal consumption. The proposal also specified a monthly welfare payment for low-income earners to offset the
regressive tax A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high t ...
impact. This was styled by advocates as an "advance rebate", or "prebate", of tax on purchases up to the poverty level. Kotlikoff, 2005 First introduced into 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 ...
in 1999, a number of congressional committees have heard testimony on the
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 ...
; however, it did not move from committee. A campaign in 2005 for the FairTax proposal Linbeck statement, 2005 involved Leo E. Linbeck and the Fairtax.org.
Talk radio Talk radio is a radio format containing discussion about topical issues and consisting entirely or almost entirely of original spoken word content rather than outside music. Most shows are regularly hosted by a single individual, and often featur ...
personality
Neal Boortz Neal A Boortz Jr. (born April 6, 1945) is an American author, former attorney, and former conservative radio host. His nationally syndicated talk show, ''The Neal Boortz Show'', which ended in 2013, was carried throughout the United States. The ...
and
Georgia Georgia most commonly refers to: * Georgia (country), a country in the Caucasus region of Eurasia * Georgia (U.S. state), a state in the Southeast United States Georgia may also refer to: Places Historical states and entities * Related to the ...
Congressman
John Linder John Elmer Linder (born September 9, 1942) is an American politician who was a member of the United States House of Representatives from 1993 to 2011. His district was numbered the from 1993 to 1997, the from 1997 to 2003, and the from 2003 u ...
published ''
The FairTax Book ''The FairTax Book'' is a non-fiction book by libertarian radio talk show host Neal Boortz and Congressman John Linder, published on August 2, 2005, as a tool to increase public support and understanding for the FairTax plan. Released by Rega ...
'' in 2005 and additional visibility was gained in the 2008 presidential campaign. As defined in the proposed legislation, the initial sales tax rate is 30%. Advocates promote this as a 23% ''tax inclusive'' rate based on the total amount paid including the tax ($23 out of every $100 spent in total), which is the method currently used to calculate income tax liability. Regnier, 2005 In subsequent years the rate could adjust annually based on federal receipts in the previous fiscal year. Fair Tax Act, 2009, Chapter 1 With the rebate taken into consideration, the FairTax would be progressive on
consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...
, but would also be regressive on
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
at higher income levels (as consumption falls as a percentage of income). Gale, 1998 Opponents argue this would accordingly decrease the
tax burden In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The tax ...
on high-income earners and increase it on the lower class earners. Tax Reform Panel Report, Ch. 9 Supporters contend that the plan would effectively tax
wealth Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
, increase
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 ...
Kotlikoff and Rapson, 2006 Kotlikoff and Jokisch, 2007 and decrease tax burdens by broadening the tax base. Advocates expect a consumption tax to increase
savings Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
and
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
, ease tax compliance and increase
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 ...
, increase incentives for
international business International business refers to the trade of goods, services, technology, capital and/or knowledge across national borders and at a global or transnational scale. It involves cross-border transactions of goods and services between two or more ...
to locate in the US and increase US competitiveness in
international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significant ...
.
The FairTax Book ''The FairTax Book'' is a non-fiction book by libertarian radio talk show host Neal Boortz and Congressman John Linder, published on August 2, 2005, as a tool to increase public support and understanding for the FairTax plan. Released by Rega ...
Open Letter to the President Auerbach, 2005 The plan would provide transparency for funding the federal government. Supporters believe it would increase
civil liberties Civil liberties are guarantees and freedoms that governments commit not to abridge, either by constitution, legislation, or judicial interpretation, without due process. Though the scope of the term differs between countries, civil liberties may ...
, benefit the
environment Environment most often refers to: __NOTOC__ * Natural environment, all living and non-living things occurring naturally * Biophysical environment, the physical and biological factors along with their chemical interactions that affect an organism or ...
, and effectively tax
illegal activity In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
and
undocumented immigrants Illegal immigration is the migration of people into a country in violation of the immigration laws of that country or the continued residence without the legal right to live in that country. Illegal immigration tends to be financially upwar ...
. Sipos, 2007 Critics contend that a consumption tax of this size would be extremely difficult to collect, would lead to pervasive
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 ...
, and raise less revenue than the current tax system, leading to an increased
budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
. Gale, 2005 The proposed Fairtax might cause removal of
tax deduction Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
incentives, transition effects on after-tax savings, incentives on credit use and the loss of tax advantages to state and local bonds. It also includes a sunset clause if the 16th Amendment to the US Constitution is not repealed within seven years of its enactment.


Legislative overview and history

The legislation would remove 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 ...
(after three years), and establish Excise Tax and Sales Tax bureaus in the Department of the Treasury. The states are granted the primary authority for the collection of sales tax revenues and the remittance of such revenues to the Treasury. The plan was created by
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.
, an
advocacy group Advocacy groups, also known as interest groups, special interest groups, lobbying groups or pressure groups use various forms of advocacy in order to influence public opinion and ultimately policy. They play an important role in the developm ...
formed to change the tax system. The group states that, together with economists, it developed the plan and the name "Fair Tax", based on interviews, polls, and focus groups of the general public. The FairTax legislation has been introduced in the House by Georgia Republicans
John Linder John Elmer Linder (born September 9, 1942) is an American politician who was a member of the United States House of Representatives from 1993 to 2011. His district was numbered the from 1993 to 1997, the from 1997 to 2003, and the from 2003 u ...
(1999–2010) and
Rob Woodall William Robert Woodall III (born February 11, 1970) is an American attorney and politician who was the U.S. representative for from 2011 to 2021. The district included most of Gwinnett County, a suburban county northeast of Atlanta. A Republica ...
(2011–2014), while being introduced in the Senate by Georgia Republican
Saxby Chambliss Clarence Saxby Chambliss (born November 10, 1943) is an American lawyer and retired politician who was a United States Senator from Georgia from 2003 to 2015. A member of the Republican Party, he previously served as a U.S. Representative from ...
(2003–2014). Linder first introduced the ''Fair Tax Act'' () on July 14, 1999, to the
106th United States Congress The 106th United States Congress was a meeting of the legislative branch of the United States federal government, composed of the United States Senate and the United States House of Representatives. It met in Washington, D.C., from January 3, 1 ...
and a substantially similar bill has been reintroduced in each subsequent session of Congress. The bill attracted a total of 56 House and Senate cosponsors in the
108th Congress The 108th United States Congress was a meeting of the legislative branch of the United States federal government, composed of the United States Senate and the United States House of Representatives from January 3, 2003 to January 3, 2005, during ...
, H.R.25 108th Cosponsors S.1493 108th Cosponsors 61 in the 109th, H.R.25 109th Cosponsors S.25 109th Cosponsors 76 in the 110th, H.R.25 110th Cosponsors S.1025 110th Cosponsors 70 in the 111th, H.R.25 111th Cosponsors S.296 111th Cosponsors 78 in the 112th, H.R.25 112th Cosponsors S.13 112th Cosponsors 83 in the 113th (/), 81 in the 114th (/), 51 in the 115th (/), 33 in the 116th (), and 30 in the 117th (). Former
Speaker of the House The speaker of a deliberative assembly, especially a legislative body, is its presiding officer, or the chair. The title was first used in 1377 in England. Usage The title was first recorded in 1377 to describe the role of Thomas de Hungerf ...
Dennis Hastert John Dennis Hastert (; born January 2, 1942) is an American former politician and convicted felon who represented from 1987 to 2007 and served as the 51st speaker of the United States House of Representatives from 1999 to 2007. The longest-se ...
(Republican) had cosponsored the bill in the 109th–110th Congress, but it has not received support from the Democratic leadership. Bender, 2005 Democratic Representative
Collin Peterson Collin Clark Peterson (born June 29, 1944) is an American accountant and politician who served as the U.S. representative for from 1991 to 2021. A member of the Minnesota Democratic–Farmer–Labor Party, or the DFL. he was chairman of the Ho ...
of Minnesota and Democratic Senator
Zell Miller Zell Bryan Miller (February 24, 1932 – March 23, 2018) was an American author and politician from the state of Georgia. A Democrat, Miller served as lieutenant governor from 1975 to 1991, 79th Governor of Georgia from 1991 to 1999, and as U.S ...
of Georgia cosponsored and introduced the bill in the 108th Congress, but Peterson is no longer cosponsoring the bill and Miller has left the Senate. In the 109th–111th Congress, Representative
Dan Boren David Daniel Boren (born August 2, 1973) is the Secretary of Commerce for the Chickasaw Nation, based in Oklahoma. He is a retired American politician, who served as the U.S. Representative for from 2005 to 2013. The district included most of th ...
has been the only Democrat to cosponsor the bill. A number of congressional committees have heard testimony on the FairTax, but it has not moved from committee since its introduction in 1999. The legislation was also discussed with President
George W. Bush George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
and his
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 ...
. To become law, the bill will need to be included in a final version of tax legislation from the
U.S. House Committee on Ways and Means The Committee on Ways and Means is the chief tax-writing committee of the United States House of Representatives. The committee has jurisdiction over all taxation, tariffs, and other revenue-raising measures, as well as a number of other program ...
, pass both the House and the Senate, and finally be signed by the
President President most commonly refers to: *President (corporate title) *President (education), a leader of a college or university *President (government title) President may also refer to: Automobiles * Nissan President, a 1966–2010 Japanese ful ...
. In 2005, President Bush established an advisory panel on tax reform that examined several national sales tax variants including aspects of the FairTax and noted several concerns. These included uncertainties as to the revenue that would be generated, and difficulties of enforcement and administration, which made this type of tax undesirable to recommend in their final report. The panel did not examine the FairTax as proposed in the legislation. The FairTax received visibility in the 2008 presidential election on the issue of taxes and the IRS, with several candidates supporting the bill. Davis, 2007 A poll in 2009 by
Rasmussen Reports Rasmussen Reports is an American polling company founded in 2003. The company engages in political commentary and the collection, publication, and distribution of public opinion polling information. Rasmussen Reports conducts nightly tracking, ...
found that 43% of Americans would support a national sales tax replacement, with 38% opposed to the idea; the sales tax was viewed as fairer by 52% of Republicans, 44% of Democrats, and 49% of unaffiliateds. Rasmussen Reports, 2009 President
Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
did not support the bill, Obama, 2008 arguing for more progressive changes to the income and payroll tax systems. President
Donald Trump Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who served as the 45th president of the United States from 2017 to 2021. Trump graduated from the Wharton School of the University of Pe ...
has proposed to lower overall income taxation and reduce the number of
tax brackets Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain poin ...
from seven to three.


Tax rate

The sales tax rate, as defined in the legislation for the first year, is 23% of the total payment including the tax ($23 of every $100 spent in total—calculated similar to income taxes). This would be equivalent to a 30% traditional U.S. sales tax ($23 on top of every $77 spent—$100 total, or $30 on top of every $100 spent—$130 total). After the first year of implementation, this rate is automatically adjusted annually using a predefined formula reflecting actual federal receipts in the previous fiscal year. The effective tax rate for any household would be variable due to the fixed monthly tax rebate that are used to rebate taxes paid on purchases up to the poverty level. The tax would be levied on all U.S. retail sales for personal consumption on 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 p ...
. Critics argue that the sales tax rate defined in the legislation would not be revenue neutral (that is, it would collect less for the government than the current tax system), and thus would increase the
budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, unless government spending were equally reduced.


Sales tax rate

During the first year of implementation, the FairTax legislation would apply a 23% federal
retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and t ...
sales tax on the total transaction value of a purchase; in other words, consumers pay to the government 23 cents of every dollar spent in total (sometimes called ''
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 ...
'', and presented this way to provide a direct comparison with individual income and employment taxes which reduce a person's available money ''before'' they can make purchases). The equivalent assessed tax rate is 30% if the FairTax is applied to the pre-tax price of a good like traditional U.S. state sales taxes (sometimes called '' tax-exclusive''; this rate is not directly comparable with existing income and employment taxes). After the first year of implementation, this tax rate would be automatically adjusted annually using a formula specified in the legislation that reflects actual federal receipts in the previous fiscal year.


Effective tax rate

A household's effective tax rate on consumption would vary with the annual expenditures on taxable items and the fixed monthly tax rebate. The rebate would have the greatest effect at low spending levels, where they could lower a household's effective rate to zero or below. The lowest effective tax rate under the FairTax could be negative due to the rebate for households with annual spending amounts below poverty level spending for a specified household size. At higher spending levels, the rebate has less impact, and a household's effective tax rate would approach 23% of total spending. A person spending at the poverty level would have an effective tax rate of 0%, whereas someone spending at four times the poverty level would have an effective tax rate of 17.2%. Buying or otherwise receiving items and services not subject to federal taxation (such as a used home or car) can contribute towards a lower effective tax rate. The total amount of spending and the proportion of spending allocated to taxable items would determine a household's effective tax rate on consumption. If a rate is calculated on income, instead of the tax base, the percentage could exceed the statutory tax rate in a given year.


Monthly tax rebate

Under the FairTax,
family Family (from la, familia) is a Social group, group of people related either by consanguinity (by recognized birth) or Affinity (law), affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its ...
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 lawful U.S. residents would be eligible to receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on
poverty Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...
level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services. Fair Tax Act, 2009, Chapter 3 The FCA is a tax rebate (known as a "prebate" as it would be an advance) paid in twelve monthly installments, adjusted for
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
. The rebate is meant to eliminate the taxation of household necessities and make the plan progressive. Households would register once a year with their sales tax administering authority, providing the names and social security numbers of each household member. The
Social Security Administration The United States Social Security Administration (SSA) is an Independent agencies of the United States government, independent agency of the Federal government of the United States, U.S. federal government that administers Social Security (United ...
would disburse the monthly rebate payments in the form of a paper check via U.S. Mail, an
electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of b ...
to a bank account, or a "smartcard" that can be used like a
debit card A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term '' plastic card'' includes the above and as an identity document. These are similar to a credit card, but u ...
. Opponents of the plan criticize this tax rebate due to its costs. Economists at the Beacon Hill Institute estimated the overall rebate cost to be $489 billion (assuming 100% participation). Rebuttal to Tax Panel Report, 2006 In addition, economist
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 argued that the rebate would create a large opportunity for
fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
, Bartlett, 2007 treats children disparately, and would constitute a Social welfare provision, welfare payment regardless of need.#refBartlettTaxNotes, Bartlett, 2007, Tax Notes The President's Advisory Panel for Federal Tax Reform cited the rebate as one of their chief concerns when analyzing their national sales tax, stating that it would be the largest entitlement program in American history, and contending that it would "make most American families dependent on monthly checks from the federal government".#refYin, Yin, 2006, Fla. L. Rev. Estimated by the advisory panel at approximately $600 billion, "the Prebate program would cost more than all budgeted spending in 2006 on the Departments of Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Housing and Urban Development, and Interior combined." Proponents point out that income
tax deduction Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
s, tax preferences, tax avoidance, loopholes, tax credit, credits, etc. under the current system was estimated at $945 billion by the United States Congress Joint Committee on Taxation, Joint Committee on Taxation. They argue this is $456 billion more than the FairTax "entitlement" (tax refund) would spend to cover each person's tax expenses up to the poverty level. In addition, it was estimated for 2005 that the Internal Revenue Service was already sending out $270 billion in refund checks.


Presentation of tax rate

Sales and income taxes behave differently due to differing definitions of tax base, which can make comparisons between the two confusing. Under the existing individual income plus employment (Social Security; Medicare; Medicaid) tax formula, taxes to be paid are included in the base on which the tax rate is imposed (known as ''
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 ...
''). If an individual's gross income is $100 and the sum of their income plus employment tax rate is 23%, taxes owed equals $23. Traditional state sales taxes are imposed on a tax base equal to the pre-tax portion of a good's price (known as '' tax-exclusive''). A good priced at $77 with a 30% sales tax rate yields $23 in taxes owed. To adjust an inclusive rate to an exclusive rate, divide the given rate by one minus that rate (i.e. 0.23/(1 - 0.23) = 0.23/0.77 = 0.30 ). The FairTax statutory rate, unlike most U.S. Sales taxes in the United States, state-level sales taxes, is presented on a tax base that includes the amount of FairTax paid. For example, a final after-tax price of $100 includes $23 of taxes. Although no such requirement is included in the text of the legislation, Congressman John Linder has stated that the FairTax would be implemented as an inclusive tax, which would include the tax in the retail price, not added on at checkout—an item on the shelf for five dollars would be five dollars total.#refBoortz2008, Boortz and Linder, 2008#refLinder2007, Linder and Boortz, 2007 The legislation requires the receipt to display the tax as 23% of the total. Linder states the FairTax is presented as a 23% tax rate for easy comparison to income and employment tax rates (the taxes it would be replacing). The plan's opponents call the semantics deceptive. FactCheck called the presentation misleading, saying that it hides the real truth of the tax rate.#refMiller2007, Miller, 2007
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 ...
stated that polls show tax reform support is extremely sensitive to the proposed rate, and called the presentation confusing and deceptive based on the conventional method of calculating sales taxes.#refBartlettWSJ, Bartlett, 2007, Wall Street Journal Proponents believe it is both inaccurate and misleading to say that an income tax is 23% and the FairTax is 30% as it implies that the sales tax burden is higher.


Revenue neutrality

A key question surrounding the FairTax is whether the tax has the ability to be revenue-neutral; that is, whether the tax would result in an increase or reduction in overall federal tax revenues. Economists, advisory groups, and political advocacy groups disagree about the tax rate required for the FairTax to be truly revenue-neutral. Various analysts use different assumptions, time-frames, and methods resulting in dramatically different tax rates making direct comparison among the studies difficult. The choice between Static analysis, static or dynamic scoring further complicates any estimate of revenue-neutral rates.#refGingrich2005, Gingrich and Ferrara, 2005 A 2006 study published in ''Tax Notes'' by the Beacon Hill Institute at Suffolk University and Dr. Laurence Kotlikoff estimated the FairTax would be revenue-neutral for the tax year 2007 at a rate of 23.82% (31.27% tax-exclusive).#refBachman2006, Bachman et al., 2006 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 would have to raise tax rates or otherwise change tax laws in order to continue collecting the same Real versus nominal value (economics), real revenues from their taxpayers. The Argus Group and Arduin, Laffer & Moore Econometrics each published an analysis that defended the 23% rate.#refBurton1998, Burton and Mastromarco, 1998#refBurton1998JCT, Burton and Mastromarco, 1998a#refALME2006, Arduin, Laffer & Moore Econometrics, 2006 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 presumably incorporated some degree of tax evasion in their calculations by using National Income and Product Accounts, National Income and Product Account based figures, which is argued to understate total household consumption. The studies also did not account for capital gains that may be realized by the U.S. government if consumer prices were allowed to rise, which would reduce the real value of nominal U.S. government debt. Nor did these studies account for any 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 many economists researching the plan believe would occur.#refAltig2001, Altig et al., 2001 In contrast to the above studies, William G. Gale of the Brookings Institution published a 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 to 2015 (assumes that the Bush tax cuts expire on schedule and accounts for the replacement of an additional $3 trillion collected through the Alternative Minimum Tax).#refEsenwein2005, Esenwein, 2005 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. A dynamic analysis in 2008 by the Baker Institute For Public Policy concluded that a 28% (38.9% tax-exclusive) rate would be revenue neutral for 2006.#refDiamond2008, Diamond and Zodrow, 2008 The President's Advisory Panel for Federal Tax Reform performed a 2006 analysis to replace the individual and corporate Income tax in the United States, income tax with a retail sales tax and estimated 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). Beacon Hill Institute, FairTax.org, and Kotlikoff criticized the President's Advisory Panel's study as having allegedly altered the terms of the FairTax, using unsound methodology, and/or failing to fully explain their calculations.#refKotlikoff2008, Kotlikoff, 2008


Taxable items and exemptions

The tax would be levied once at the final retail sale for personal consumption on new goods and services. Purchases of used items, exports and business-to-business, all business transactions would not be taxed. Also excluded are investments, such as purchases of stock, corporate mergers and acquisitions and capital investments. Saving (economics), Savings and Tuition, education tuition expenses would be exempt as they would be considered an investment (rather than final consumption).#refFairTaxAct, Fair Tax Act, 2009 A good would be considered "used" and not taxable if a consumer already owns it before the FairTax takes effect or if the FairTax has been paid previously on the good, which may be different from the item being sold previously. Personal services such as health care, legal services, financial services, and auto repairs would be subject to the FairTax, as would renting apartments and other real property. Food, clothing, prescription drugs, and medical services would be taxed. (U.S. state, State sales taxes generally exempt these types of basic-need items in an effort to reduce the tax burden on low-income families. The FairTax would use a monthly rebate system instead of the common state exclusions.) Internet purchases would be taxed, as would retail international purchases (such as a boat or car) that are imported to the United States (collected by the U.S. Customs and Border Protection).


Distribution of tax burden

The FairTax's effect on the distribution of taxation or tax incidence (the effect on the distribution of Welfare economics, economic welfare) is a point of dispute. The plan's supporters argue that the tax would broaden the tax base, that it would be progressive, and that it would decrease tax burdens and start taxing wealth (reducing the economic inequality, economic gap). Opponents argue that a national sales tax would be inherently regressive and would decrease tax burdens paid by high-income individuals. A person earning $2 million a year could live well spending $1 million, and as a result pay a mere 11% of that year's income in taxes. Households at the lower end of the income scale spend almost all their income, while households at the higher end are more likely to devote a portion of income to saving. Therefore, according to economist William G. Gale, the percentage of
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
taxed is regressive at higher income levels (as consumption falls as a percentage of income). Income earned and saved would not be taxed until spent under the proposal. Households at the extreme high end of consumption often finance their purchases out of savings, not income. Economist Laurence Kotlikoff states that the FairTax could make the tax system much more progressive and generationally equitable, and argues that taxing consumption is effectively the same as taxing wages plus taxing
wealth Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
. A household of three persons (this example will use two adults plus one child; the rebate does not consider marital status) spending $30,000 a year on taxable items would devote about 3.4% of total spending ([$6,900 tax minus $5,888 rebate]/$30,000 spending) to the FairTax after the rebate. The same household spending $125,000 on taxable items would spend around 18.3% ([$28,750 tax minus $5,888 rebate]/$125,000 spending) on the FairTax. At higher spending levels, the rebate has less impact and the rate approaches 23% of total spending. Thus, according to economist Laurence Kotlikoff, the effective tax rate is progressive on
consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...
. An unreviewed paper by Kotlikoff and David Rapson states that the FairTax would significantly reduce marginal taxes on work and saving, lowering overall average remaining lifetime tax burdens on current and future workers.#refKotlikoffRapson2006, Kotlikoff and Rapson, 2006 A study by Kotlikoff and Sabine Jokisch concluded that the long-term effects of the FairTax would reward low-income households with 26.3% more
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 ...
, middle-income households with 12.4% more purchasing power, and high-income households with 5% more purchasing power. The Beacon Hill Institute reported that the FairTax would make the federal tax system more progressive and would benefit the average individual in almost all expenditures deciles.#refTuerk2007, Tuerk et al., 2007 In another study, they state the FairTax would offer the broadest tax base (an increase of over $2 trillion), which allows the FairTax to have a lower tax rate than current tax law.#refTuerk2007Chart, Tuerk et al., 2007 Gale analyzed a national sales tax (though different from the FairTax in several aspects) and reported that the overall tax burden on middle-income Americans would increase while the tax burden on the top 1% would drop. A study by the Beacon Hill Institute reported that the FairTax may have a negative effect on the well-being of mid-income earners for several years after implementation. According to the President's Advisory Panel for Federal Tax Reform report, which compared the individual and corporate income tax (excluding other taxes the FairTax replaces) to a sales tax with rebate, the percentage of federal taxes paid by those earning from $15,000–$50,000 would rise from 3.6% to 6.7%, while the burden on those earning more than $200,000 would fall from 53.5% to 45.9%. The report states that the top 5% of earners would see their burden decrease from 58.6% to 37.4%.#refZodrow2006, Zodrow and McClure, 2006 FairTax supporters argue that replacing the regressive Federal Insurance Contributions Act tax, payroll tax (a 15.3% total tax not included in the Tax Panel study; payroll taxes include a 12.4% Social Security (United States), Social Security tax on wages up to $97,500 and a 2.9% Medicare (United States), Medicare tax, a 15.3% total tax that is often split between employee and employer) greatly changes the tax distribution, and that the FairTax would relieve the tax burden on middle-class workers.


Predicted effects

The predicted effects of the FairTax are a source of disagreement among economists and other analysts.#refTaranto2007, Taranto, 2007 According to ''Money (magazine), Money'' magazine, while many economists and tax experts support the idea of a
consumption tax A consumption tax is a tax levied on consumption spending on goods and services. The tax base of such a tax is the money spent on Consumption (economics), consumption. Consumption taxes are usually indirect, such as a sales tax or a value-added ta ...
, many of them view the FairTax proposal as having serious problems with evasion and revenue neutrality. Some economists argue that a consumption tax (the FairTax is one such tax) would have a positive effect on
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 ...
, incentives for international business to locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in International trade, global trade). The FairTax would be tax-free on mortgage interest (up to a basic interest rate) and donations, but some lawmakers have concerns about losing tax incentives on home ownership and charitable contributions.#refGiuliani, Giuliani, 2007 There is also concern about the effect on the income tax industry and the difficulty of repealing the Sixteenth Amendment to the United States Constitution, Sixteenth Amendment (to prevent Congress from re-introducing an income tax).#refVance2005b, Vance, 2005


Economic

Americans For Fair Taxation states the FairTax would boost the United States economy and offers a letter signed by eighty economists, including Nobel Prize in Economics, Nobel Laureate Vernon L. Smith, that have endorsed the plan. The Beacon Hill Institute estimated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%.#refTuerk2007Economic, Tuerk et al., 2007 Arduin, Laffer & Moore Econometrics projected the economy as measured by GDP would be 2.4% higher in the first year and 11.3% higher by the 10th year than it would otherwise be. Economists Laurence Kotlikoff and Sabine Jokisch reported the incentive to work and save would increase; by 2030, the economy's capital stock would increase by 43.7% over the current system, output by 9.4%, and real wages by 11.5%. Economist John Golob estimates a consumption tax, like the FairTax, would bring long-term interest rates down by 25–35%.#refGolob1995, Golob, 1995 An analysis in 2008 by the Baker Institute For Public Policy indicated that the plan would generate significant overall macroeconomic improvement in both the short and long-term, but warned of transitional issues. FairTax proponents argue that the proposal would provide tax burden visibility and reduce compliance and efficiency costs by 90%, returning a large share of money to the productive economy. The Beacon Hill Institute concluded that the FairTax would save $346.51 billion in administrative costs and would be a much more efficient taxation system.#refTuerk2007Costs, Tuerk et al., 2007 William Reynolds Archer, Jr., Bill Archer, former head of the House Ways and Means Committee, asked Princeton University Econometrics to survey 500 European and Asian companies regarding the effect on their business decisions if the United States enacted the FairTax. 400 of those companies stated they would build their next plant in the United States, and 100 companies said they would move their corporate headquarters to the United States.#refGaver2006, Gaver, 2006 Supporters argue that the U.S. has the highest combined statutory corporate income tax rate among OECD countries along with being the only country with no border adjustment element in its tax system.#refLinbeck2006a, Linbeck, 2006a Proponents state that because the FairTax eliminates corporate income taxes and is automatically border adjustable, the competitive tax advantage of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home.#reflinbeck2007b, Linbeck, 2007 Opponents point to a study commissioned by the National Retail Federation in 2000 that found a national sales tax bill filed by Billy Tauzin, the ''Individual Tax Freedom Act'' (), would bring a three-year decline in the economy, a four-year decline in employment and an eight-year decline in consumer spending.#refVargas2005, Vargas, 2005 ''The Wall Street Journal'' columnist James Taranto states the FairTax is unsuited to take advantage of supply-side effects and would create a powerful disincentive to spend money. John Linder states an estimated $11 trillion is held in foreign accounts (largely for tax purposes), which he states would be repatriated back to U.S. banks if the FairTax were enacted, becoming available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States. Attorney Allen Buckley states that a tremendous amount of wealth was already repatriated under law changes in 2004 and 2005.#refBuckley2008, Buckley, 2008 Buckley also argues that if the tax rate was significantly higher, the FairTax would discourage the consumption of new goods and hurt economic growth.


Transition

During the transition, many or most of the employees of the IRS (105,978 in 2005)#refirslabor, IRS Labor Force, 2005 would face loss of employment. The Beacon Hill Institute estimate is that the federal government would be able to cut $8 billion from the IRS budget of $11.01 billion (in 2007), reducing the size of federal tax administration by 73%. In addition, income tax preparers (many seasonal), tax lawyers, tax compliance staff in medium-to-large businesses, and software companies which sell tax preparation software could face significant drops, changes, or loss of employment. The bill would maintain the IRS for three years after implementation before completely decommissioning the agency, providing employees time to find other employment. In the period before the FairTax is implemented, there could be a strong incentive for individuals to buy goods without the sales tax using credit. After the FairTax is in effect, the credit could be paid off using untaxed payroll. If credit incentives do not change, opponents of the FairTax worry it could exacerbate an existing consumer debt problem. Proponents of the FairTax state that this effect could also allow individuals to pay off their existing (pre-FairTax) debt more quickly, and studies suggest lower interest rates after FairTax passage. Individuals under the current system who accumulated savings from ordinary income (by choosing not to spend their money when the income was earned) paid taxes on that income before it was placed in savings (such as a Roth IRA or Certificate of deposit, CD). When individuals spend above the poverty level with money saved under the current system, that spending would be subject to the FairTax. People living through the transition may find both their earnings and their spending taxed.#refTaranto2007a, Taranto, 2007a Critics have stated that the FairTax would result in unfair double taxation for savers and suggest it does not address the transition effect on some taxpayers who have accumulated significant savings from after-tax dollars, especially retirees who have finished their careers and switched to spending down their life savings. Supporters of the plan argue that the current system is no different, since compliance costs and "hidden taxes" embedded in the prices of goods and services cause savings to be "taxed" a second time already when spent. The rebate would supplement accrued savings, covering taxes up to the poverty level. The income taxes on capital gains, estates, social security and pension benefits would be eliminated under FairTax. In addition, the FairTax legislation adjusts Social Security (United States), Social Security benefits for changes in the price level, so a percentage increase in prices would result in an equal percentage increase to Social Security income.#refFairTaxAct, Fair Tax Act, 2009, Title III Supporters suggest these changes would offset paying the FairTax under transition conditions.


Other indirect effects

The FairTax would be tax free on mortgage interest up to the Federal funds rate, federal borrowing rate for like-term instruments as determined by the United States Department of the Treasury, Treasury,#refFairTaxAct, Fair Tax Act, 2009, Chapter 8 but since savings, education, and other investments would be tax free under the plan, the FairTax could decrease the incentive to spend more on homes. An analysis in 2008 by the Baker Institute For Public Policy concluded that the FairTax would have significant transitional issues for the House, housing sector since the investment would no longer be Home mortgage interest deduction, tax-favored. In a 2007 study, the Beacon Hill Institute concluded that total charitable giving would increase under the FairTax, although increases in giving would not be distributed proportionately among the various types of charitable organizations.#refbhicharity, Tuerck et al., 2007 The FairTax may also affect state and local government debt as the federal income tax system provides tax advantages to municipal bonds.#refbonds, Types of Bonds Proponents believe environmental benefits would result from the FairTax through environmental economics and the re-use and re-sale of used goods. Advocates argue the FairTax would provide an incentive for illegal immigrants to Immigration to the United States, legalize as they would otherwise not receive the rebate. Proponents also believe that the FairTax would have positive effects on
civil liberties Civil liberties are guarantees and freedoms that governments commit not to abridge, either by constitution, legislation, or judicial interpretation, without due process. Though the scope of the term differs between countries, civil liberties may ...
that are sometimes charged against the income tax system, such as social inequality, economic inequality, financial privacy, self-incrimination, unreasonable search and seizure, Legal burden of proof, burden of proof, and due process. If the FairTax bill were passed, permanent elimination of income taxation would not be guaranteed; the FairTax bill would repeal much of the existing Internal Revenue Code, tax code, but the Sixteenth Amendment to the United States Constitution, Sixteenth Amendment would remain in place. Preventing new legislation from reintroducing income taxation would require a repeal of the Sixteenth Amendment to the United States Constitution with a separate provision expressly prohibiting a federal income tax. This is referred to as an "aggressive repeal". Separate income taxes enforced by individual states would be unaffected by the federal repeal. Passing the FairTax would require only a simple majority in each house of the United States Congress along with the signature of the President, whereas enactment of a constitutional amendment must be approved by two thirds of each house of the Congress, and three-quarters of the individual U.S. states. It is therefore possible that passage of the FairTax bill would simply add another taxation system. If a new income tax bill were passed after the FairTax passage, a hybrid system could develop; albeit, there is nothing preventing a bill for a hybrid system today. To address this issue and preclude that possibility, in the 111th Congress John Linder introduced a contingent sunset provision in H.R. 25. It would require the repeal of the Sixteenth Amendment within 8 years after the implementation of the FairTax or, failing that, the FairTax would expire.#refFairTaxAct, Fair Tax Act, 2009, Title IV Critics have also argued that a tax on state government consumption could be unconstitutional.


Changes in the retail economy

Since the FairTax would not tax used goods, the value would be determined by the supply and demand in relation to new goods. The price differential/margins between used and new goods would stay consistent, as the cost and value of used goods are in direct relationship to the cost and value of the new goods. Because the U.S. tax system has a hidden Effect of taxes and subsidies on price, effect on prices, it is expected that moving to the FairTax would decrease production costs from the removal of business taxes and compliance costs, which is predicted to offset a portion of the FairTax effect on prices.


Value of used goods

Since the FairTax would not tax used goods, some critics have argued that this would create a differential between the price of new and used goods, which may take years to equalize. Such a differential would certainly influence the sale of new goods like vehicles and homes. Similarly, some supporters have claimed that this would create an incentive to buy used goods, creating environmental benefits of re-use and re-sale. Conversely, it is argued that like the income tax system that contains embedded tax cost (see FairTax#Theories of retail pricing, Theories of retail pricing),#refForbes2007, Forbes, 2007 used goods would contain the embedded FairTax cost. While the FairTax would not be applied to the retail sales of used goods, the inherent value of a used good includes the taxes paid when the good was sold at retail. The value is determined by the supply and demand in relation to new goods.#refLandsburg1998, Landsburg, 1998 The price differential / margins between used and new goods should stay consistent, as the cost and value of used goods are in direct relationship to the cost and value of the new goods.


Theories of retail pricing

Based on a study conducted by Dale W. Jorgenson, Dale Jorgenson, proponents state that production cost of domestic goods and services could decrease by approximately 22% on average after embedded tax costs are removed, leaving the sale nearly the same after taxes. The study concludes that producer prices would drop between 15% and 26% (depending on the type of good/service).#refJorgenson1998, Jorgenson, 1998 Jorgenson's research included all income and payroll taxes in the embedded tax estimation, which assumes employee take-home pay (net income) remains unchanged from pre-FairTax levels.#refBoortz2005Confusion, Boortz, 2005 Price and wage changes after the FairTax would largely depend on the response of the Federal Reserve System, Federal Reserve monetary authorities.#refTuerckMemo, Tuerck, 2008 Non-accommodation of the money supply would suggest retail prices and take home pay stay the same—embedded taxes are replaced by the FairTax. Full accommodation would suggest prices and incomes rise by the exclusive rate (i.e., 30%)—embedded taxes become windfall gains. Partial accommodation would suggest a varying degree in-between. If businesses provided employees with gross income, gross pay (including income tax withholding and the employee share of payroll taxes), Arduin, Laffer & Moore Econometrics estimated production costs could decrease by a minimum of 11.55% (partial accommodation). This reduction would be from the removal of the remaining embedded costs, including corporate taxes, compliance costs, and the employer share of payroll taxes. This decrease would offset a portion of the FairTax amount reflected in retail prices, which proponents suggest as the most likely scenario. Bruce Bartlett states that it is unlikely that nominal wages would be reduced, which he believes would result in a recession, but that the Federal Reserve would likely increase the money supply to accommodate price increases. David Tuerck states "The monetary authorities would have to consider how the degree of accommodation, varying from none to full, would affect the overall economy and how it would affect the well-being of various groups such as retirees." Social Security (United States), Social Security benefits would be adjusted for any price changes due to FairTax implementation. The Beacon Hill Institute states that it would not matter, apart from transition issues, whether prices fall or rise—the relative tax burden and tax rate remains the same. Decreases in production cost would not fully apply to imported products; so according to proponents, it would provide tax advantages for domestic production and increase U.S. competitiveness in global trade (see Predicted effects of the FairTax#Border adjustability, Border adjustability). To ease the transition, U.S. retailers will receive a tax credit equal to the FairTax on their inventory to allow for quick cost reduction. Retailers would also receive an administrative fee equal to the greater of $200 or 0.25% of the remitted tax as compensation for compliance costs,#refFairTaxAct, Fair Tax Act, 2009, Chapter 2 which amounts to around $5 billion.


Effects on tax code compliance

One avenue for non-compliance is the black market. FairTax supporters state that the black market is largely untaxed under the current tax system. Economists estimate the underground economy in the United States to be between one and three trillion dollars annually.#refMcTague2005, McTague, 2005#refSchlosser2004, Schlosser, 2004 By imposing a sales tax, supporters argue that black market activity would be taxed when proceeds from such activity are spent on legal consumption.#refTaranto2007c, Taranto, 2007 For example, the sale of illegal narcotics would remain untaxed (instead of being guilty of income tax evasion, drug dealers would be guilty of failing to submit sales tax), but they would face taxation when they used drug proceeds to buy consumer goods such as food, clothing, and cars. By taxing this previously untaxed money, FairTax supporters argue that non-filers would be paying part of their share of what would otherwise be uncollected income and payroll taxes.#refaei, American Enterprise Institute, 2007 Other economists and analysts have argued that the underground economy would continue to bear the same tax burden as before.#refMoffatt2006, Moffatt, 2006 They state that replacing the current tax system with a consumption tax would not change the tax revenue generated from the underground economy—while illicit income is not taxed directly, spending of income from illicit activity results in business income and wages that are taxed.


Tax compliance and evasion

Proponents state the FairTax would reduce the number of tax filers by about 86% (from 100 million to 14 million) and reduce the filing complexity to a simplified state sales tax form. The Government Accountability Office (GAO), among others, have specifically identified the negative relationship between compliance costs and the number of focal points for collection.#refbhistates, Tuerck at el, 2007 Under the FairTax, the federal government would be able to concentrate tax enforcement efforts on a single tax. Retailers would receive an administrative fee equal to the greater of $200 or 0.25% of the remitted tax as compensation for compliance costs. In addition, supporters state that the overwhelming majority of purchases occur in major retail outlets, which are very unlikely to evade the FairTax and risk losing their business licenses. Economic Census figures for 2002 show that 48.5% of merchandise sales are made by just 688 businesses (Big-box store, "Big-Box" retailers). 85.7% of all retail sales are made by 92,334 businesses, which is 3.6% of American companies. In the service sector, approximately 80% of sales are made by 1.2% of U.S. businesses. The FairTax is a national tax, but can be administered by the states rather than a federal agency, which may have a bearing on compliance as the states' own agencies could monitor and audit businesses within that state. The 0.25% retained by the states amounts to $5 billion the states would have available for enforcement and administration. For example, California should receive over $500 million for enforcement and administration, which is more than the $327 million budget for the state's sales and excise taxes.#refCaLAO2004, California Legislative Analyst's Office Because the federal money paid to the states would be a percentage of the total revenue collected, John Linder claims the states would have an incentive to maximize collections. Proponents believe that states that choose to conform to the federal tax base would have advantages in enforcement, information sharing, and clear interstate revenue allocation rules.#refFairTaxAct, Fair Tax Act, 2009, Chapter 4 A study by the Beacon Hill Institute concluded that, on average, states could more than halve their sales tax rates and that state economies would benefit greatly from adopting a state-level FairTax. FairTax opponents state that compliance decreases when taxes are not Tax withholding in the United States, automatically withheld from citizens, and that massive
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 ...
could result by collecting at just one point in the economic system. Compliance rates can also fall when taxed entities, rather than a third party, self-report their tax liability. For example, ordinary personal income taxes can be automatically withheld and are reported to the government by a third party. Taxes without withholding and with self-reporting, such as the FairTax, can see higher evasion rates. Economist Jane Gravelle of the Congressional Research Service found studies showing that evasion rates of sales taxes are often above 10%, even when the sales tax rate is in the single digits. Tax publications by the Organisation for Economic Co-operation and Development (OECD), IMF, and Brookings Institution have suggested that the upper limit for a sales tax is about 10% before incentives for evasion become too great to control. According to the GAO, 80% of state tax officials opposed a national sales tax as an intrusion on their tax base. Opponents also raise concerns of legal tax avoidance by spending and consuming outside of the U.S. (imported goods would be subject to collection by the U.S. Customs and Border Protection).#refKarvounis2007, Karvounis, 2007 Economists from the University of Tennessee concluded that while there would be many desirable macroeconomic effects, adoption of a national retail sales tax would also have serious effects on state and local government finances. Economist Bruce Bartlett stated that if the states did not conform to the FairTax, they would have massive confusion and complication as to what is taxed by the state and what is taxed by the federal government. In addition, sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles—Bartlett suggests that the state may not have sufficient incentive to enforce the tax. University of Michigan economist Joel Slemrod argues that states would face significant issues in enforcing the tax. "Even at an average rate of around five percent, state sales taxes are difficult to administer."#refSlemrod2005, Slemrod, 2005 University of Virginia School of Law professor George Yin states that the FairTax could have evasion issues with export and import transactions. The President's Advisory Panel for Federal Tax Reform reported that if the federal government were to cease taxing income, states might choose to shift their revenue-raising to income. Absent 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 ...
, it would be more difficult for the states to maintain viable income tax systems.#refFox2005, Fox and Murray, 2005


Underground economy

Opponents of the FairTax argue that imposing a national retail sales tax would drive transactions underground and create a vast underground economy. Under a retail sales tax system, the purchase of intermediate goods and services that are factors of production are not taxed, since those goods would produce a final retail good that would be taxed. Individuals and businesses may be able to manipulate the tax system by claiming that purchases are for intermediate goods, when in fact they are final purchases that should be taxed. Proponents point out that a business is required to have a registered seller's certificate on file, and must keep complete records of all transactions for six years. Businesses must also record all taxable goods bought for seven years. They are required to report these sales every month (see FairTax#Personal versus business purchases, Personal vs. business purchases).#refFairTaxAct, Fair Tax Act, 2009, Chapter 5 The government could also stipulate that all retail sellers provide buyers with a written receipt, regardless of transaction type (cash, credit, etc.), which would create a paper trail for evasion with risk of having the buyer turn them in (the FairTax authorizes a reward for reporting tax cheats). While many economists and tax experts support a consumption tax, problems could arise with using a retail sales tax rather than a value added tax (VAT). A VAT imposes a tax on the value added at every intermediate step of production, so the goods reach the final consumer with much of the tax already in the price.#refWorstall, Worstall, 2015 The retail seller has little incentive to conceal retail sales, since he has already paid much of the good's tax. Retailers are unlikely to subsidize the consumer's tax evasion by concealing sales. In contrast, a retailer has paid no tax on goods under a sales tax system. This provides an incentive for retailers to conceal sales and engage in "arbitrage, tax arbitrage" by sharing some of the illicit tax savings with the final consumer. Citing evasion, Tim Worstall wrote in ''Forbes'' that Europe's 20-25% consumption taxes simply would not work if they were a sales tax: that's why they're all a VAT. Laurence Kotlikoff has stated that the government could compel firms to report, via Tax forms in the United States#1099 series, 1099-type forms, their sales to other firms, which would provide the same records that arise under a VAT. In the United States, a general sales tax is imposed in 45 states plus the District of Columbia (accounting for over 97% of both population and economic output), which proponents argue provides a large infrastructure for taxing sales that many countries do not have.


Personal versus business purchases

Businesses would be required to submit monthly or quarterly reports (depending on sales volume) of taxable sales and sales tax collected on their monthly sales tax return. During Sales Tax Audit, audits, the business would have to produce invoices for the "business purchases" that they did not pay sales tax on, and would have to be able to show that they were genuine business expenses. Advocates state the significant 86% reduction in collection points would greatly increase the likelihood of business audits, making
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 ...
behavior much more risky. Additionally, the FairTax legislation has several Fine (penalty), fines and Sentence (law), penalties for non-compliance, and authorizes a mechanism for reporting tax cheats to obtain a reward. To prevent businesses from purchasing everything for their employees, in a family business for example, goods and services bought by the business for the employees that are not strictly for business use would be taxable. Health insurance or medical expenses would be an example where the business would have to pay the FairTax on these purchases. Taxable property and services purchased by a qualified non-profit or religious organization "for business purposes" would not be taxable.#refFairTaxAct, Fair Tax Act, 2009, Chapter 7


FairTax movement

The creation of the FairTax began with a group of businessmen from Houston, Texas, who initially financed what has become the political advocacy group
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), which has grown into a large tax reform movement. This organization, founded in 1994, claims to have spent over $20 million in research, marketing, lobbying, and organizing efforts over a ten-year period and is seeking to raise over $100 million more to promote the plan.#refLinbeck2007, Linbeck, 2007 AFFT includes a staff in Houston and a large group of volunteers who are working to get the FairTax enacted. In 2007
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 ...
said the FairTax was devised by the Church of Scientology in the early 1990s, drawing comparisons between the tax policy and religious doctrine from the faith, whose creation myth holds that an evil alien ruler known as Xenu "used phony tax inspections as a guise for destroying his enemies." Representative John Linder told the ''Atlanta Journal-Constitution'' that Bartlett confused the FairTax movement with the Scientology-affiliated Citizens for an Alternative Tax System, which also seeks to abolish the federal income tax and replace it with a national retail sales tax. Leo Linbeck, AFFT Chairman and CEO, stated "As a founder of Americans For Fair Taxation, I can state categorically, however, that Scientology played no role in the founding, research or crafting of the legislation giving expression to the FairTax." Much support has been achieved by talk radio personality
Neal Boortz Neal A Boortz Jr. (born April 6, 1945) is an American author, former attorney, and former conservative radio host. His nationally syndicated talk show, ''The Neal Boortz Show'', which ended in 2013, was carried throughout the United States. The ...
. Boortz's book (co-authored by Georgia Congressman
John Linder John Elmer Linder (born September 9, 1942) is an American politician who was a member of the United States House of Representatives from 1993 to 2011. His district was numbered the from 1993 to 1997, the from 1997 to 2003, and the from 2003 u ...
) entitled ''
The FairTax Book ''The FairTax Book'' is a non-fiction book by libertarian radio talk show host Neal Boortz and Congressman John Linder, published on August 2, 2005, as a tool to increase public support and understanding for the FairTax plan. Released by Rega ...
'', explains the proposal and spent time atop The New York Times Best Seller list, ''The New York Times'' Best Seller list. Boortz stated that he donates his share of the proceeds to charity to promote the book.#refboortzbook, Boortz, 2005 In addition, Boortz and Linder have organized several FairTax rallies to publicize support for the plan. Other media personalities have also assisted in growing grassroots support including former radio and TV talk show host Larry Elder, radio host and former candidate for the 2012 GOP Presidential Nomination Herman Cain, Fox News and radio host Sean Hannity, and Fox Business Host John Stossel.#refBoortz2006, Boortz, 2006 The FairTax received additional visibility as one of the issues in the 2008 presidential election. At a debate on June 30, 2007, several 2008 Republican presidential candidates, Republican candidates were asked about their position on the FairTax and many responded that they would sign the bill into law if elected. The most vocal promoters of the FairTax during the 2008 primary elections were Republican candidate Mike Huckabee and Democratic candidate Mike Gravel. The Internet, blogosphere, and electronic mailing lists have contributed to promoting, organizing, and gaining support for the FairTax. In the 2012 Republican presidential primary, and his ensuing Libertarian Party (United States), Libertarian Party presidential run, former Governor of New Mexico and businessman Gary Johnson actively campaigned for the FairTax. Former CEO of Godfather's Pizza Herman Cain had promoted the FairTax as a final step in a multiple-phase tax reform. Outside of the United States, the Christian Heritage Party of Canada adopted a FairTax proposal as part of their 2011 election platform#ChristianHeritage, Christian Heritage, 2011 but has never been close to winning a seat in any election.


See also

*
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.
* Consumption tax * Debates within libertarianism * Georgism, Georgist land value tax * Hall–Rabushka flat tax * Optimal tax * Single tax * Tax reform * Tax shift


Notes


References

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Further reading

* * *


External links


H.R.25: "FairTax Act of 2013"
: Text of House bill H.R.25
S.122: ''Fair Tax Act of 2013''
: Text of Senate bill S.122
Rob Woodall on the Fair Tax
Rob Woodall, The current sponsor of the Fair Tax, on his bill {{DEFAULTSORT:Fairtax Political movements Tax reform in the United States United States proposed federal taxation legislation