Pennsylvanians for the FairTax
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"There is no crueler tyranny than that which is perpetrated under the shield of law and in the name of justice."

— Montesquieu, French social commentator, 1742

FAIRTAX FACTS

THE FAIRTAX PLAN

    Several descriptions of the FairTax with increasing amounts of detail:
  • One Word
    Revolutionary (as in "markedly new or introducing radical change")
     
  • One Phrase
    Potential restored - ambition rewarded!
     
  • One Sentence
    The FairTax promotes freedom, fairness, and economic opportunity by repealing the federal income tax and other taxes including payroll withholding taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax paid at the cash register.
     
  • One Paragraph
    The FairTax plan replaces all federal income and payroll-based taxes with a national retail sales tax that is fair, simple, and understandable. Under this plan, no one pays any federal taxes on the purchase of basic necessities; yet it raises the same amount of revenue as does the income tax system. The FairTax Act of 2013 (H.R. 25/S. 122) is nonpartisan legislation that 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, 23% (inclusive) federal retail sales tax paid at the cash register. Individuals no longer file federal income tax returns and the IRS is eliminated through companion legislation. The FairTax applies to everyone in America, including illegal immigrants, foreign visitors (about 50,000 each year), and those who evade paying taxes under the income tax system. This innovative, extensively researched, grassroots supported tax system is a fair, efficient, transparent, and intelligent replacement of the frustrating, inequitable income tax system.
     
  • One Page
    FairTax Benefits — Brief list of benefits (PDF format, 1 page)
     
  • Two Pages
    What Americans Want... — Concise FairTax summary (PDF format, 2 pages)
     
  • Six Pages
    FairTax Overview — Print and distribute (PDF format, 6 pages)
     
  • H.R. 25 Bill - Fair Tax Act of 2013
       * Summary
       * Full text (PDF format, 131 pages)
       * Details — sponsors, co-sponsors, bill status, all congressional action and related bills
     
  • S. 122 Bill - Fair Tax Act of 2013
       * Summary
       * Full text (PDF format, 133 pages)
       * Details — sponsors, co-sponsors, bill status, all congressional action and related bills
     
  • H.J. Res. 16 Bill - Repeals the 16th Amendment (companion legislation)
       * Summary
       * Full text (PDF format, 2 pages)
       * Details — sponsors, co-sponsors, bill status, all congressional action and related bills
     
  • Comparison of Three Tax Systems
    Simplified Chart — FairTax / Flat Income Tax / Present Income Tax (PDF format, 2 pages)  

Index

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. These studies make the FairTax the most thoroughly researched tax plan ever.

    Some of the experts hired to reseach and develop the FairTax 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 H.R. 2525, “The Fair Tax of 1999,” it was most recently resubmitted as the “Fair Tax Act of 2013" in the 113th Congress as H.R. 25 by Rob Woodall (R-GA) and S. 122 by Saxby Chambliss (R-GA).

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
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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 H.R. 25. Currently 20,000 Pennsylvanians have signed a petition in support of The FairTax Plan.
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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:

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 investments totally tax free, both principal and interest earned (capital gains). FairTax does that.

    And in addition, the FairTax:
  • Lets every worker keep their entire pay check — no payroll or income taxes
  • Rewards hard work, ingenuity and entrepreneurship
  • Encouragess people to live within their means by taxing what is consumed
  • Removes the federal tax on basic neccessities — for all Americans
  • Helps Americans at or below the poverty level by giving them zero or negative taxes
  • Retirees keep their full pension or Social Security checks — untaxed
  • Lets everyone keep their capital gains and investment income — untaxed
  • Encourages savings and investment — creating greater national growth and productivity
  • Encourages return of American capital from foreign tax havens
  • Stimulates exports — leading to greater U.S. employment
  • Stimulates economic growth and job formation
  • Eliminates gift and inheritance taxes
  • Has a lower cost of enforcement than the current tax system
  • Makes the federal tax rate very visible, and therefore, politically risky to increase
  • Ends all personal and corporate income tax filings
  • Eliminates the IRS and frees $10 billion for productive uses
  • Eliminates nearly $300 billion in individual and corporate tax compliance costs
  • Frees the tax accounting/law industry for more productive employment
  • Eliminates tax loopholes — no filings, no exemptions, just uniformity for all
  •    Back to index

Facts on Effects of the Fair Tax


Exactly what 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.)
   View a chart on the rebate amounts
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How will the FairTax affect the various income brackets?

The FairTax is fairly distributed among all income brackets and in fact, much more fairly than the current income tax system.

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
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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.
   Calculate your FairTax effective tax rate after spending and savings deductions
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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.
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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!

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.
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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.

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
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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.

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
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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.

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.
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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.

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?
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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.
   Find out more about the impact of the FairTax on charitable giving
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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.

The tax rate contained in H.R. 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% confusion with examples
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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.

Bringing the FairTax to a vote in both houses requires only 32 votes! When 21 members of the House Ways and Means Committee and 11 members of the Senate Finance 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 House Ways and Means Committee has 40 members and the Senate Finance Committee has 20 members. We must work together to inform those 60 legislators and 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 with a unified voice in large numbers! We must be enthusiastic, consistent and relentless 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.
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