The FairTax Basics

The FairTax happens to be the most thoroughly researched tax reform plan in recent history. Below is a quick introduction to the FairTax and tax reform. Note also that the implementation of the FairTax and the subsequent increase in economic activity that ensues will all happen without increasing the debt or selling bonds to foreign countries. It is a pure economic stimulus all on its own.

Scholarly research tells us that . . .

  • 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.  [1]
  • The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan.  [2]
  • 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.  [3]
  • 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.  [4]
  • 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.  [4]
  • 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.  [4]
  • 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.  [4]
  • 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. [4]
  • 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. [5]
  • 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.  [6]
  • Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax.  [7]
  • 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.  [8]
  • 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.  [9]
  • The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent.  [10]

References

[1] Bachman, Paul, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck, “Taxing Sales under the FairTax:  What Rate Works?” published in Tax Notes, November 13, 2006. Click here to read the full paper.

[2] Tuerck, David G., Jonathan Haughton, Paul Bachman, and Alfonso Sanchez-Penalver, “A Comparison of the FairTax Base and Rate with Other National Tax Reform Proposals,” The Beacon Hill Institute at Suffolk University, February 2007.  Click here to read the full paper.

[3] Tuerck, David G., Jonathan Haughton, Keshab Bhattarai, Phuong Viet Ngo, and Alfonso Sanchez-Penalver, “The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model,” The Beacon Hill Institute at Suffolk University, February 2007. Click here to read the full paper.

[4] Arduin, Laffer & Moore Econometrics, “A Macroeconomic Analysis of the FairTax Proposal,” July 2006.  Click here to read the full paper.

[5] Kotlikoff, Laurence J. and David Rapson, “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation,” NBER Working Paper No. 12533, revised October 2006.  Click here to read the full paper.

[6] Jokisch, Sabine and Laurence J. Kotlikoff, “Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax,” National Tax Journal, June 2007.  Click here to read the full paper.

[7] Tuerck, David G., Jonathan Haughton, Paul Bachman, Alfonso Sanchez-Penalver, and Phuong Viet Ngo, “A Distributional Analysis of Adopting the FairTax:  A Comparison of the Current Tax System and the FairTax Plan,” The Beacon Hill Institute at Suffolk University, February 2007.  Click here to read the full paper.

[8] Tuerck, David G., Jonathan Haughton, Alfonso Sanchez-Penalver, Sara Dinwoodie, and Paul Bachman, “The FairTax and Charitable Giving,” The Beacon Hill Institute at Suffolk University, February 2007.  Click here to read the full paper.

[9] Tuerck, David G., Paul Bachman, and Sylvia Jacob, “Fiscal Federalism:  The National FairTax and the States,” The Beacon Hill Institute at Suffolk University, June 2007.  Click here to read the full paper.

[10] Walby, Karen, and Dan Mastromarco, “Promoting home ownership:  How the FairTax’s benefits for homeowners exceed the mortgage interest deduction,” Americans For Fair Taxation White Paper, August 2006. Click here to read the full paper.

Karen Walby, Ph.D., Director of Research, Americans For Fair Taxation, Jan. 5, 2008.

5 thoughts on “The FairTax Basics”

  1. Sorry, Beacon Hill is a for hire advocacy group — you PAY them to say what you want. . . . The Prebate plan from Fairtax would cost 800 billion alone. greater than Social Security and Medicare COMBINED. Incredibly Fairtax goof balls just count the 800 billion as free money — since people will pay their taxes with that. Goofy doesn’t being to describe that farce. Fairtax does not count that as a “cost”!!

    I think the people at Suffolk University will disagree with your characterization of the Beacon Hill Institute. As per usual Mark, you have your facts wrong. Your spin is right-on though. If Social Security and Medicare COMBINED amounted to 800 billion dollars, our grandkids might have a chance at a life without the debt we are leaving them, unless we make some drastic changes real soon. Fact is, Mark, as of 2009 those programs are into the American people for over $42 Trillion dollars. Check this chart: http://bit.ly/b9nzB2 The chart is from the Department of the Treasury. If consistent, you might think of Treasury Department as Obama’s advocacy group. ??

    The dollar amount of the prebate is, frankly, irrelevant for two reasons. First, it is built-in to the plan and thusly is funded by the plan. It is like a continuously revolving amount of money that is replenished on a monthly basis as the tax revenue is collected. Second, it is this prebate that serves the function of untaxing the poor, totally. Under the current tax code, the poor pay taxes beginning with the first dollar they make. And if they get a second or third job to make ends meet, they are taxed the same on those earnings too! This prebate is what makes the FairTax a truly progressive tax. The more people have, the more they spend. The more they spend, the more taxes they pay. Could a tax plan be any more simple and transparent at the same time?

    Not to change the subject but besides all that, you sound like $800 billion is a lot of money. Have you seen any program that the Obama administration has come up with recently that cost less than $800 billion? They seem to start at $900 billion and go up from there into the trillions. And none of them end up costing what they were promised. It’s always way more. And I’ll include Bush’s prescription drug entitlement program in that mix.

    Meanwhile, you haven’t answered my question to you about why you think government entities should not have to contribute to the government kitty like everyone else? To quote a famous community organizer, making them have some ‘skin in the game’ would also make them more responsible with the people’s money.

  2. Oh, it’s you again. Nothing against you personally Mark, but you typify the need for educating the public about the FairTax. Forget the book crap. HR 25 is all there is. And it is as plain as the nose on your face.

    There is a very good reason Mark, that every mayor and governor are not fully aware of the FairTax. Hopefully with this new congress, that will soon change. But to explain why it isn’t a household word that everyone understands (ha, as if everyone understands the current tax code) is that since its introduction in congress in 2007, the Democrat majority and Charles Rangel (D-NY) as chairman of the House Ways and Means Committee, HR 25 has been buried in committee. Which means he had no intention of bringing it out for discussion or debate. I’m hopeful that the new chairman Dave Camp (R-MI) will entertain it during his meetings on tax reform.

    But the main reason the FairTax isn’t a household word yet is that it takes the tax hammer away from the politicians and neuters the lobbyists efforts to gain tax breaks for campaign contributions. In that respect, it would represent the greatest shift in power from the government to the people since the Declaration of Independence.

    ‘Transparency’ in the context of taxes and the FairTax Mark, means that the person paying the tax will see exactly how much he is paying, every time. They know it because it will be printed on their receipt, every time. With the current system, know one knows. All you see is deductions from your paycheck which get greater with the more you make. The term ‘take-home pay’ is something Americans have been conditioned to accept. Under the FairTax, your gross pay IS your take-home pay. Not counting for State and local taxes. That’s where transparency comes in.

    Consider too that the states can, if they want to, pass a similar law on the state level to replace their state income tax structure with their own consumption tax.

    The ‘massive tax’ on government entities you keep referring to isn’t anything more than what you, I, and everyone else will have to shoulder. We all, as in ALL, will share the burden in financing the federal government and all its entitlement programs, national defense, the arts, and everything else. There are no exemptions to supporting these programs.

    It’s new. Like what happened in 1913 when the income tax was born, people got used to it. The dirty little secret about that was that the people were told that only the rich people would be taxed. That’s what made the 16th Amendment so attractive to most of the country. Sound familiar? Government entities will get used to it too. And will, like we have to do, manage their budgets accordingly.

  3. HR 25 is clear? To who?

    Not one mayor knows about this massive tax on city governments, If Fairtax were “clear” virtually all mayors would know that Fairtax is basically a massive tax on city and state goverments

    SO it’s not clear,

    HR 25 is clear? To who? IF it were clear, every governor and virtually every legislator would know that Fairtax includes a massive tax on state government. Not a single governor knows about this massive tax.

    Therefore, Fairtax is not clear.

    Transparency means people know it — transparency does not men some confusing double talk in section 709C paragraph 4, about “subject to Fairtax”.

    Fairtax is a farce, and it’s own leaders know it. YOu clearly are not one of their leaders, you are a guy fooled by this utter nonsense into thinking it’s rational. It’s not rational.

    They may as well claim they can tax moon beams and baby farts for a trillion dollars — they have exactly the same likelihood of taxing city and state governments, for a trillion dollars, as they do of taxing moonbeams for a trillion. And they know that.

    They know they can’t tax city and state governments. Do you grasp that? Otherwise, they have have said this up front, in book one, chapter one. In fact, the name would have been “City and State government will pay the Federal government tax” Because that is what is it, it’s certainly not fair.

    Its not even rational — do you grasp that? So it’s not an economic stimulous — it’s garbage.

    If this is the level of your “intelligence” — you can’t tell BS from a legit idea.

    Don’t feel bad — you have a lot of company.

  4. It’s not been debunked as far as I can see. It is subject to a load of mis-understanding due to the lack of knowledge about it, which is so easily done when conflating and confusing an inclusive rate with an exclusive rate like the factcheck.org website has done. Their expertise in a taxing system that is designed to REPLACE (which means that these will all go away, and you won’t file any more tax returns by April 15th) all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes, is sorely lacking.

    Frankly, I trust the $22 million of research that went into the FairTax by economists and scholars than whatever factcheck.org has. Some of the research that went into the determination of the tax inclusive rate of 23%, or about 30% if you’re talking exclusive, can be found in the links in this post above. I recommend you take the time to do your own research, if you want to, before you decide that it has been ‘debunked.’

    If you live in the Pensacola area, I also recommend that you come to one of our meetups and learn more about it. Again, if you want to. But there is tons of information, including the supporting research, on fairtax.org’s website, and in the 133 pages of H.R.25 itself, which would replace the 70,000+ pages of Internal Revenue Code if it is passed.

    The bill, H.R.25 is clear. What is apparent is that those who do understand it come away believing it is a good idea, a better way to fund the government, a fairer and more progressive way to acquire taxes, and an economic stimulus all wrapped up in one.

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