FairTax is a fixed rate sales tax proposal introduced as bill H.R. 25 in the United States Congress every year since 2005. The Fair Tax Act calls for elimination of the Internal Revenue Servicehttps://fairtax.org/faq FAQ: Is there any provision in the FAIRtax bill to prevent both an income tax and a sales tax? and sets the stage for repeal of the Sixteenth Amendment to the United States Constitution. H.R. 25 would eliminate all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes, replacing every extant federal taxes with a single consumption tax levied on retail sales.
The Fair Tax Act (/) would apply a fixed rate sales tax at the point of sale on all new, final goods and services purchased for household consumption. The proposal also specifies a monthly payment made to all households based on household size. Called a "prebate," the monthly payment offsets the regressive nature of a sales tax up to the poverty level. First introduced into the United States Congress in 1999, a number of congressional committees have heard testimony on the bill; however, it did not move from committee. A campaign in 2005 for the FairTax proposalLinbeck statement, 2005 involved Leo Linbeck and the Fairtax.org. Talk radio personality Neal Boortz and Georgia Congressman John Linder published The FairTax Book 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% (i.e. a purchase of $100 would incur a sales tax of $30, resulting in a total price to the consumer of $130). Advocates promote this as a 23% tax inclusive rate based on the total amount paid including the tax, 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, but would still be regressive on income (since consumption as a percentage of income falls at higher income levels).Gale, 1998 Opponents argue this would accordingly decrease the tax burden 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, increase purchasing power and decrease tax burdens by broadening the tax base.
Advocates expect a consumption tax to increase savings and investment, ease tax compliance and increase economic growth, increase incentives for international business to locate in the United States and increase U.S. competitiveness in international trade.The FairTax BookOpen Letter to the PresidentAuerbach, 2005 The plan would provide transparency for funding the federal government. Supporters believe it would increase civil liberties, benefit the environment, and effectively tax illegal activity and illegal aliens present in the country, as well as tourists' expenditures.Sipos, 2007 Critics contend that a consumption tax of this size would be extremely difficult to collect, would lead to pervasive tax evasion, and raise less revenue than the current tax system, leading to an increased budget deficit.Gale, 2005 The proposed Fairtax might cause removal of tax deduction 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 U.S. Constitution is not repealed within seven years of its enactment.
Legislative overview and history
The legislation would remove the Internal Revenue Service (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, an advocacy group 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 (1999–2010) and Rob Woodall (2011–2014), while being introduced in the Senate by Georgia Republican Saxby Chambliss (2003–2014).
Linder first introduced the Fair Tax Act () on July 14, 1999, to the 106th United States Congress and a substantially similar bill has been reintroduced in each subsequent session of Congress. The bill attracted a total of fifty-six House and Senate cosponsors in the 108th Congress,H.R.25 108th CosponsorsS.1493 108th Cosponsors sixty-one in the 109th,H.R.25 109th CosponsorsS.25 109th Cosponsors 76 in the 110th,H.R.25 110th CosponsorsS.1025 110th Cosponsors 70 in the 111th,H.R.25 111th CosponsorsS.296 111th Cosponsors 78 in the 112th,H.R.25 112th CosponsorsS.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 Dennis Hastert (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 of Minnesota and Democratic Senator Zell Miller of Georgia cosponsored and introduced the bill in the 108th Congress, but Peterson has left the House of Representatives and Miller has left the Senate. In the 109th–111th Congress, Representative Dan Boren was 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 and his Secretary of the Treasury Henry M. Paulson.
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, pass both the House and the Senate, and finally be signed by the President. 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, 2007CBS News, 2007 A poll in 2009 by Rasmussen Reports 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 Independents.Rasmussen Reports, 2009 President Barack Obama did not support the bill,Obama, 2008 arguing for more progressive changes to the income and payroll tax systems.
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 and services. 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, unless government spending were equally reduced.
Sales tax rate During the first year of implementation, the FairTax legislation would apply a 23% federal retail sales tax on the total transaction value of a purchase; in other words, consumers pay to the government twenty-three cents of every dollar spent in total (sometimes called tax-inclusive, 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 + Proposed 2015 FairTax Prebate ScheduleOne adult householdTwo adult household Family Size Annual Consumption Allowance Annual Prebate Monthly Prebate Family Size Annual Consumption Allowance Annual Prebate Monthly Prebate 1 person$11,770$2,707$226 couple$23,540$5,414$451 and 1 child$15,930$3,664$305 and 1 child$27,700$6,371$531 and 2 children$20,090$4,621$385 and 2 children$31,860$7,328$611 and 3 children$24,250$5,578$465 and 3 children$36,020$8,285$690 and 4 children$28,410$6,534$545 and 4 children$40,180$9,241$770 and 5 children $32,570 $7,491 $624 and 5 children $44,340 $10,198 $850 and 6 children $36,490 $8,393 $699 and 6 children $48,500 $11,155 $930 and 7 children $40,890 $9,405 $784 and 7 children $52,660 $12,112 $1,009The annual consumption allowance is based on the 2015 DHHS Poverty Guidelines as published in the Federal Register, January 22, 2015. There is no marriage penalty as the couple amount is twice the amount that a single adult receives. For families/households with more than 8 persons, add $4,160 to the annual consumption allowance for each additional person. The annual consumption allowance is the amount of spending that is "untaxed" under the FairTax.