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FairTax History In 1994 three Houston businessmen were meeting together
for lunch. As was common, they began commiserating about the ridiculousness
of the Federal Income tax code. But at this particular lunch, they
decided to do something about it and each pledged $1.5 Million as
seed money to hire the best tax experts in the country to identify
the faults with the current system, to determine what American citizens
would like to see in tax reform, and then to design the best system
of taxation. With their initial infusion of $4.5 Million, the three
went on to raise an additional $17 Million. That money funded focus
groups with citizens around the country and studies with nationally
prominent experts in tax policy. Pennsylvania's FairTax Volunteer Team
Pennsylvania's FairTax Action Team is a group of concerned Pennsylvania citizens. Our express mission is to educate our fellow Pennsylvanians on the merits of changing the federal tax system from direct taxation of income to indirect taxation through a national consumption tax as outlined in the HR 25. Currently 20,000 Pennsylvanians have signed a petition in support of The FairTax Plan. » Back to index Quick Facts Discussions with focus groups of Americans showed
that what citizens want is a tax system that provides
Simplicity, Visibility and Fairness within a pro-growth plan. The FairTax achieves these objectives
through: Facts on effects of the Fair Tax What exactly will be taxed?
A single rate, single-stage tax will be applied to the sale of all new consumer goods and services at the final point of consumption. This will result in 23% of a purchase being represented by tax. (For a discussion of Tax Inclusive vs. Tax Exclusive Rates,
see below.) Used items will not be taxed. Business-to-business
purchases for the production of goods and services will not be taxed.
Most importantly, you will keep 100% of your paycheck — there
will be no more income, capital gains, self-employment, gift or
corporate taxes. In addition, prices will drop by an estimated 20–30%
and all households will receive a monthly rebate check. Under the
FairTax, no American will pay taxes on necessities. The rebate will
be equivalent to the tax paid on essential goods and services. The
rebate will be mailed before the tax is actually paid. The rebate
will be paid in equal installments at the beginning of the month.
The size of the monthly rebate will be determined by the federal
poverty level for a particular household size. (Household is defined
here as one or more individuals.) How will the FairTax affect the various income
brackets? The FairTax is fairly distributed amongst all income
brackets and in fact, much more fairly than the current income tax
system. How to calculate your individual household's FairTax net effective annual tax rate. The FairTax is on spending not income. Use the instructions provided online to compare your projected FairTax annual rate after tax free spending deductions, compared to your actual current income tax rate + FICA social security payments you pay today. Remember FairTax 23% inclusive rate includes your social security contributions. A Flat Tax rate of 17% does not include FICA either, so to compare FairTAx to the proposed Flat Tax, you need to add 7.65 FICA to any FlatTax rate you use. About 85% of Americans will find their FairTax rate will be equal to or lower than what they actually pay under the income tax or projected FlatTax plus FICA. The figure calculated does not take into consideration price drops expected under FairTax of approximately 20% do to a totally free market economy. How will the FairTax affect the costs of good
and services? The FairTax will dramatically reduce the costs of
goods and services by as much as 20 to 30%. All goods and services
already contain the embedded costs of the current tax system in
their prices. When these embedded taxes are removed, prices will
come down. Dr. Dale Jorgenson, Chairman of the Economics Department
at Harvard University, has projected a producer price reduction
of 20 to 30% in just the first year after adoption of the FairTax.
Dr. Jorgenson also estimated that service prices would decline by
25% because of the repeal of the income tax. In addition, the FairTax
will lower compliance costs by more than 90%, and the removal of
these costs will force prices down even lower. »
Back to index How will the FairTax affect my investments? The stock market, mutual funds and retirement funds
will prosper under the FairTax for both small and large investors,
because corporations will face lower operating costs and individuals
will have more money to save and invest. The FairTax will significantly
enhance the retirement savings of all Americans. Tax-free bonds
will still be tax-free. And in addition, all stocks, bonds and other
investments will be tax-free as well! How will the FairTax affect Social Security, seniors and retirees? The FairTax will ensure funding of Social Security
and Medicare. The FairTax will make the economy much more dynamic
and prosperous. Consequently, federal tax revenues will grow. This
makes it less likely that federal budget pressures will require
Medicare or Social Security benefit cuts. Under the FairTax, Social
Security will operate exactly as it does today, except that its
funds will come from the FairTax. And, research shows that consumption
is a more stable revenue source than income. How will the FairTax be collected and how will
that affect the retail industry? Retail businesses will collect the tax from the consumer
— 45 states already have a sales tax system, and the FairTax
will simply be an additional line on the current sales tax reporting
form. In rare cases, businesses that produce products or services
that are not currently taxed under state sales tax codes will have
to begin collecting the FairTax for the first time. Businesses will
simply collect the tax and send it to the state taxing authority.
All businesses serving as collection agents will receive a fee for
collection services, and the states themselves will also be paid
a collection fee. The tax revenues from the states will then be
sent to the U.S. Treasury. State participation in the FairTax collection
system is voluntary and states can choose to outsource their collections
to another state. How will the FairTax reduce tax evasion? The old aphorism that nothing is certain except death
and taxes should be modified to include tax evasion under the current
tax code! The IRS estimates that at least 40% of Americans no longer
comply with the current tax code. Most of this non-compliance is
unintentional and due to the enormous complexity of the present
system. However, what this non-compliance costs the IRS raises taxes
by over 33 percent for those of us who do comply! These IRS figures
do not include taxes lost on illegal sources of income. Disrespect
for the tax system and the law has reached dangerous levels, and
makes for a system based on taxpayer self-assessment less and less
viable. How will the FairTax affect federal government
funding? The FairTax plan is devised to be revenue-neutral
for the first year of operation. It will raise the same amount of
revenue as is raised by current law. After the first year, revenue
is expected to rise because of the growth generated by this plan.
At that time the American people, Congress, and the President will
have to decide whether to lower the tax rate or to spend the additional
revenue. How will the FairTax affect charitable giving? The FairTax will allow people to make charitable contributions
out of pre-tax dollars. With more money to spend, more people will
give. Most taxpayers today cannot deduct their contributions, and
only the relatively few who itemize may deduct their contributions
with after-tax payroll dollars. For those generally less affluent
taxpayers who do not itemize, the cost of charitable giving will
actually go down under the FairTax, because they will be able to
make contributions from pre-tax dollars. What are “Tax Inclusive” and “Tax
Exclusive” Rates? When discussing tax rates, it’s important to understand
whether the “tax inclusive” or ”tax exclusive”
rate is being quoted in order to fairly compare “apples with
apples.” One describes the rate with the tax included in the
total, and the other, with the tax excluded from it. How will we pass the FairTax? Did you know that passing the FairTax requires the
votes of only 32 Members of Congress? Over the last five years Americans
for Fair Taxation has grown to be one of the largest and most powerful
tax reform organizations in our country. Getting the FairTax to
the floor of the House and Senate is the critical point in the evolution
of the FairTax. However, once the FairTax reaches the floor, it
cannot be ignored. All members will have to vote “yea”
or “nay” and be held accountable to their constituents
for those votes.
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Some of the experts funded include:
Professors David Burton & Dan Mastromarco, University of Maryland
& The Argus Group
Professor Larry Kotlikoff, Boston University
Stephen Moore, The Cato Institute
Professor Dale Jorgenson, Harvard University
Bill Beach, The Heritage Foundation
Jim Poterba, The National Bureau of Economic Research
Professor George Zodrow, Rice University and the Baker Institute
for Public Policy
Professor Joseph Kahn, Massachusetts Institute of Technology
The final result became a bi-partisan bill sponsored by John Linder
(R-GA) and Collin Peterson (D-MN). Originally submitted to the House
of Representatives as HR 2525, “The Fair Tax of 1999,”
it was recently resubmitted in the 109th Congress as HR 25 / S25 the “Fair
Tax Plan.” These studies make the FairTax the most well-researched
tax plan ever.
Recognizing that for the Federal Government to take such a significant
step as to eliminate the Income Tax code in favor of a Consumption,
or National Sales tax, would require evidence of overwhelming support
of the American People, Americans for Fair Taxation was established
and has been developing organizations in each of the States to educate
people and encourage their support of the FairTax. Since it was
founded in 1995, Americans for Fair Taxation has grown to become
the largest tax reform organization in the United States with over
700,000 supporters and members. A subsidiary organization,
the Tax Leadership Council, was also formed to lead this effort. Herman
Cain, Chairman of Godfather's Pizza and a member of the Kemp Tax
Commission, was elected Chairman and President of the Tax Leadership
Council. This was important news since Mr. Cain is a widely respected
and charismatic leader!
» Read a letter from Congressmen
Linder and Peterson
» Visit
the Americans for Fair Taxation Website
» Visit
Congressman Linder's Website
» Back to index
Simplicity — one rate for everyone; no tax filings. This uniformity means all benefits, all regulations, all exceptions, are applied to all citizens equally.
Visibility — The current cost of Big Government as well as any change in the tax rate shows on every cash register receipt for a new good or service.
Fairness — it is progressive, protecting the poor through a tax rebate on the necessities of life; no loopholes, therefore everyone pays the same rate on every purchase, but those less able to pay will receive relief, until their life situation changes.
Pro Growth — In order to grow the economy, large amounts of capital at reasonable interest rates must be available. There is no better way to insure large amounts of capital, than to make all savings and investment totally tax free, both principal and interest earned (capital gains). FairTax does that
And in addition, the FairTax produces the following:
It lets every worker keep their entire pay check — no payroll or income taxes
It allows those at/below the poverty level to have zero or negative taxes
It lets retirees keep their full pension or Social Security checks — untaxed
It lets everyone keep their capital gains and investment income — untaxed
It encourages savings & investment — creating greater national growth & productivity
It encourages repatriation of wealth from tax havens
It stimulates exports — leading to greater U.S. employment
It stimulates economic growth and job formation
It eliminates gift and inheritance taxes
It has a lower cost of enforcement
It makes the federal tax rate very visible, and therefore, politically risky to increase
It ends all personal and corporate income tax filings
It eliminates the IRS and frees $12 Billion
It frees the $250 Billion tax accounting/law industry for more productive employment
It eliminates tax loopholes — no filings, no exemptions, just uniformity for all
» Back to index
» View a
chart on the Rebate Amounts
» back to index
The FairTax empowers those with low incomes. Under the FairTax plan,
no American will pay taxes on necessities. Every household will
receive a rebate that is equal to the FairTax paid on essential
goods and services, and wage earners will keep 100% of their paycheck.
More money will be available to spend, save and invest. Used items
will not be taxed, and prices will go down by 20–30%. Education
will be easier to obtain with the FairTax. Education costs will
go down by as much as 50%. This will allow for easier upward mobility
amongst lower income earning families. The FairTax is the only plan
that can legitimately claim to “untax” the poor. Not only
will they receive the rebate on necessities but hidden taxes, which
are especially hard on the poor, will be eliminated. Those spending
at twice the poverty level will pay a rate much lower than the income
and payroll tax burdens they bear today. The FairTax would dramatically
improve the economy, making jobs more plentiful and increasing wages.
Middle-income earners will benefit greatly under the FairTax. They
will receive a rebate based on household size, just as will those
in all other income brackets. The FairTax will eliminate all payroll
taxes, enabling wage earners to bring home 100% of their paycheck
to spend, save and invest. There will be no more tax on used items,
savings, investment and education. Education costs will be reduced
by as much as 50%. Small business compliance costs will virtually
disappear. There will be no more self-employment tax. Hidden taxes
will disappear! Prices will drop by 20–30%, and the tax rate
for the middle-income bracket will drop.
The wealthy will get a rebate based on household size, just as those
in other income brackets will. There will be no more corporate taxes,
business-to-business taxes, self-employment taxes, taxes on investment
or savings, and no more estate taxes. Wealthy people spend more
money than other individuals. The FairTax will tax them on their
new purchases only above the poverty level. When money is spent
on the development of job-creating factories, financing of research,
education, savings or investment, these expenditures will not be
taxed.
» Find out
more about the effect of the FairTax on the Average American
» back to index
» Calculate your FairTax effective tax rate after spending and savings deductions
» back to index
The FairTax will greatly benefit real estate in a number of ways,
starting with the non-taxability of mortgage interest, which doubles
the value of the mortgage interest deduction over today's allowable
deductions. Taxpayers will for the first time be able to pay interest
with pre-payroll and income tax dollars. Today, at best, taxpayers
must pay mortgage interest with after-payroll tax dollars. Under
the FairTax, mortgage interest rates will fall by 25 to 30%. For
example, on a $150,000, thirty-year home mortgage at an interest
rate of 8 percent, the monthly mortgage payment would be $1,112.64.
On that same mortgage at a 6 percent interest rate, the monthly
payment would be $907.64. The two-point decrease in interest rates
in this instance would result in a $73,800 cost savings!
Under the FairTax plan, home ownership will be a possibility for
many who don’t have that option under the current income tax system.
Lower interest rates, the repeal of the income tax, the repeal of
all payroll taxes, and the FairTax rebate will mean that people
will have more money to spend, as well as the opportunity to become
homeowners.
Interest rates will drop quickly by approximately 25% after passage
of the FairTax Bill. Interest rates include compensation to the
lender for the tax that they must pay on interest. That is why taxable
bonds bear a higher interest rate than tax-exempt bonds. When the
tax on interest is removed, interest rates will drop toward today's
tax-exempt rate. Under the current system, savings and investments
are taxed. Under the FairTax, savings and investments will not be
taxed at all. As Americans save more money, and businesses invest
more in the world's only “zero tax” advantaged country,
the pool of funds in lending institutions will grow, thereby causing
the cost of borrowing funds to drop. » Back
to index
Click to find out more how the FairTax will effect:
Stock and Bond Markets
Tax-Exempt Bondholders
Investment
Interest Rates
Home Ownership
As a group, seniors will do very well under the FairTax. Low-income
seniors will be much better off under the FairTax than under the
current income tax system. Seniors, like everyone else, will receive
a monthly rebate, in advance of purchases, for taxes paid on the
cost of necessities. There will be no more income tax on Social
Security. There will be no more income tax on investment income
and pension benefits or IRA withdrawals. Seniors who own existing
homes stand to experience large capital gains due to the repeal
of the income tax and implementation of the FairTax plan.
Prices at the cash register will go down under the FairTax (including
the cost of prescription drugs!). The price of every good or service
we buy today is inflated by the cost of income and payroll taxes
paid by workers and businesses. These costs are passed on to consumers
in the form of higher prices. When income and payroll taxes are
repealed, prices will come down 20 to 30 percent according to Dr.
Dale Jorgenson, Chairman of the Harvard University Economics Department.
Therefore senior citizens, like all Americans, will be able to buy
more.
Government benefits, Social Security and Medicare funding will be
ensured, tax deferred investments will now be tax-free, and savings,
invested in stock, real estate, and some bonds will increase substantially
in value. Most importantly, the FairTax will create wealth for all
Americans providing tax-free dollars for tax-free savings, and for
retirement, and thus providing money for future prescription drugs
and nursing care.
» Find out
more about how the FairTax will impact Seniors Citizens
» back to index
The retail industry will significantly save money from reduced compliance
costs under the FairTax. Retail businesses, along with other businesses,
are already tax collectors today. They are required to withhold
income and payroll taxes from their employees. Moreover, the vast
majority of retail businesses currently operating in states with
a sales tax (45 states currently use a sales tax) are already sales
tax collectors. Under the FairTax, retailers would have the responsibility
to collect and submit the tax. Those five states who do not have
a sales tax will find the FairTax easier and much less expensive
than the current confusing and cumbersome tax code. In addition,
retailers would be paid a fee equal to one-quarter of one percent
of the federal sales taxes they collect and remit. Retailers would
no longer need to bear the cost of complying with the income tax,
including the uniform capitalization requirements, the various depreciation
schemes and employee benefit and pension rules. The beneficial effects
of eliminating income tax compliance costs, no income taxes, and
a reasonable fee for collecting the FairTax, will ensure that retailers
will do quite well.
» Find out
more about the effect of the FairTax on Retailers
» back to index
The FairTax will greatly reduce the problem of tax evasion. The
FairTax is simple and straightforward. The increased fairness, transparency
and legitimacy of the system will induce more compliance. The roughly
90 percent reduction in filers will enable tax administrators to
more narrowly and effectively address non-compliance and will increase
the likelihood that tax evasion will be uncovered. The relative
simplicity of the FairTax will reduce confusion and promote compliance.
Businesses will need to answer only one question to determine the
tax due: how much was sold to consumers? Those who are able
to easily evade taxes under the current income tax system will not
be able to do so under a federal sales tax.
Finally, because tax rates will decrease, tax evasion will become
less profitable, and because of the dramatic reduction in actual
tax filers, tax evaders will be more easily caught under the FairTax
system. » Back to index
Under the FairTax, citizens will better be able to determine if
their elected representatives are acting in their best interest.
Legislators will be held accountable for their decisions, because
the FairTax is highly visible. And because there is only one tax
rate, Congress will not be able to adopt the typical “divide-and-conquer,”
“hide-and-disguise” strategy employed today to promote
special interests. For the first time in decades, it will be simple
to see whether a politician is advocating an increase in taxes for
a program truly supported by the people in his district. This is
not the case with our current tax code. The FairTax has bi-partisan
support from people in all walks of life. Its supporters share one
common belief: that it is a fairer, simpler, more efficient way
to raise federal revenue.
» Find out more
about the impact of the FairTax on Government Revenues
» Find out more about the impact of the FairTax on Government Stability
» How is the 23% inclusive tax rate calculated?
» Back to index
» Find out more
about the impact of the FairTax on Charitable Giving
» Back to index
The tax rate contained in HR 25 is 23%. It is called the “Tax
Inclusive” rate and is comparable to the income tax, which
is always stated on a tax inclusive basis — that is, with the
tax “included” in the wages. For example, if a person
earns $40,000 and $9,200 in income tax and payroll withholding is
taken from his paycheck, the $9,200, which is "included"
in the wages, represents 23% of his income ($40,000 x .23 = $9,200).
This leaves that person with $30,800 after taxes. Divide the $9,200
of taxes by the $30,800 in after tax wages to get the exclusive
rate of 29.9%.
Now compare this to the FairTax. If a person who makes a $100 purchase
and $23 dollars of the purchase is tax, the tax inclusive rate is
23%. However, the $23 represents 29.9% of the $77 value of the goods
purchased ($100 – $23 = $77). The 29.9% rate is called the
“Tax Exclusive” rate. The two numbers are equivalent.
Under the current federal tax system, anyone with up to $80,000
of income pays the 7.65% employee half of payroll taxes. The minimum
marginal income tax rate is 15% of taxable income and increases
to 39% at higher income levels. This means that the lowest inclusive
payroll-withholding rate is 22.65% (rounded to 23%) and that most
people have federal tax withholdings of well in excess of 23%.
When comparing income tax rates with FairTax rates, it’s important
to compare tax inclusive with tax inclusive rates (or exclusive
with exclusive) to make a fair comparison.
» View Inclusive-Exclusive tax chart
» An alternative explanation of the 23%-30% controversy with examples
» Back to index
Bringing the FairTax to a vote in both houses requires only 32 votes!
If 11 members of the Senate Finance Committee and 21 members of
the House Ways and Means Committee support the FairTax, they can
bring the FairTax bill out of their respective committees and to
the floor of the House and Senate. At that point, it would be Leadership's
decision whether to bring it up for a vote of the full membership.
The Senate Finance Committee has 20 members and the House Ways and
Means Committee has 40 members. We must work together to inform
those 60 legislators, and to educate them about the many significant
advantages of the FairTax. When we achieve this reasonable and modest
goal, the FairTax will be well on its way to becoming a reality
and the IRS a thing of the past.
Only consistent grassroots enthusiasm and pressure will ensure that
these 60 key legislators, followed by the rest of congress, will
address the FairTax. Congressmen rarely hear from large numbers
of constituents on any one issue — and if there is one thing
that Congressmen listen to, it is when their constituents speak
in large numbers! We must be enthusiastic and consistent in contacting
our representatives about the FairTax. Your letters, emails and
phone calls will make a difference. Tell your elected leaders that
the FairTax is an idea whose time has come.
» Back
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©2004 Pennsylvanians for the Fair Tax. All Rights Reserved.
