Friday, January 25, 2008

What is the FairTax?

A comment left on our blog earlier today addressed the FairTax. Since Governor Huckabee is a strong supporter of the FairTax, I would like to take some time to explain it to those who may not have researched it.

So, what is the FairTax?

The following is taken from the FairTax website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.


The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.


The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.


The FairTax:

-Enables workers to keep their entire paycheck

-Enables retirees to keep their entire pension

-Refunds in advance the tax on purchases of basic necessities

-Allows American products to compete fairly

-Brings transparency and accountability to tax policy

-Ensures Social Security and Medicare funding

-Closes all loopholes and brings fairness to taxation

-Abolishes the IRS


The FairTax replaces our current, complicated tax system with a simple alternative, an easy-to-use sales tax. Instead of paying multiple taxes on your income, you are taxed only on spending.
The FairTax calls for a simple 23% sales tax. Compared to our current sales tax, this seems to be a huge tax. However, when you buy an item now you are paying more tax than you realize. Because the item has already been taxed several times before the consumer purchases it (the producer has been taxed, each individual item in the product has been taxed, etc.), the retail price has been raised to include those taxes. With the FairTax each item will be taxed once - when it is purchased. In addition, there will be no tax on used items (cars, items from resale shops, etc.).


Many people have been concerned about how the FairTax will affect the poor. Because of the monthly prebate, the FairTax actually ends up un-taxing the poor. Click here for a clear explanation of the prebate.


The FairTax website has a wealth of additional information and research, answers to critics of the FairTax, a list of which Presidential and Congressional candidates support or do not support the FairTax, and much, much more.

2 comments:

sbcjr said...

This would be huge.

I firmly believe that Governor Huckabee is the only candidate who is actually prepared to take action and make the FairTax a reality.

This would totally transform our economy!

Ian said...

Gov. Huckabee's advocacy of the FairTax is the single most important policy position in this election. Research findings explain why:

The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces [BHKPT].

The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan [THBP].

Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case [THBNP].

The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be [ALM].

Consumption benefits [ALM]:

• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.

• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.

Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system [KR].

Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively [JK].

Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax [THBPN].

Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20 [THPDB].

On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base [TBJ].

The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent [WM].

ALERT: Kotlikoff refutes Bruce Bartlett's shabby critiques of the FairTax.