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Frequently Asked Questions
Please read through our FAQ’s and let us know if you have any questions.
What is the FairTax®?
The FairTax is a consumption tax, a national retail sales tax. Instead of determining and paying tax based on income (our current system), the FairTax assesses tax based on consumption, or what people spend. It completely replaces the personal income tax, payroll taxes, estate and gift taxes, and corporate income taxes.
The FairTax does not affect how government funds are spent – only the manner in which they are collected. This is one reason that the FairTax appeals to people from all political parties.
The FairTax would be charged to consumers on all purchases of new goods and services. Used goods would not be subject to the tax. Under the FairTax, everyone would get a monthly prebate (a rebate paid in advance) equal to the amount of tax that would be assessed on spending up to the poverty level.
The FairTax will stimulate the economy, increase jobs, and encourage savings and investment.
Is the FairTax a progressive tax system?
Yes, the FairTax is progressive! Even though the tax rate paid at the time of purchase is the same for everyone, the rich will pay a far larger percentage tax on their total purchases than the poor. When the prebate (tax rebate paid in advance to everyone) is taken into account, the poor will actually pay a zero-percent retail sales tax. Their prebate will offset their retail sales tax. And if they are careful with their spending and buy mostly used goods, which are not subject to the FairTax, they could actually receive more in the prebate than they spend on retail sales taxes.
On the other hand, the prebate (the same dollar amount received by the poor) will represent the tax on a tiny fraction of the amount of spending done by the rich, so their taxes will be much closer to the 23% maximum retail sales tax on their spending.
How will the Social Security system be affected by the FairTax?
Social Security will operate the same as it does today. The only difference will be the source of the funds used to pay the benefits. The money will come from a progressive sales tax, rather than from regressive payroll taxes. Employers will report wages for each employee to the Social Security Administration, as they currently do, for the determination of benefits. However, they will not have to withhold any Social Security taxes from employee paychecks, nor will they have to pay the employer share of Social Security taxes. Self-employed individuals also will not have to pay any self-employment taxes.
Social Security will no longer be taxed when the employee earns the income, nor will it be taxed when the benefits are received.
How will the Medicare system be affected by the FairTax?
Medicare will operate the same as it does today. The only difference will be the source of the funds used to pay the benefits. The money will come from a progressive sales tax, rather than from regressive payroll taxes. Employers will no longer have to withhold any Medicare taxes from employee paychecks, nor will they have to pay the employer share of Medicare taxes.
Medicare will no longer be taxed when the employee earns the income.
What is the FairTax rate?
The FairTax rate is 23% when calculated in comparison to current income taxes. That is equivalent to 30% added on to the price of the product at the retail counter. Let’s explain the difference.
Income tax rates are considered tax-inclusive. If someone says that they paid 23% in taxes, this means that for every $100 earned, $23 went to pay taxes. That person got to keep $77.
Sales taxes are usually considered tax exclusive. They are calculated on and added to the price of the product. A $77 jacket would have a tax of $23 under the FairTax, for a total cost of $100. That $23 of tax is a 30% sales tax on the $77 jacket. You could say that you spent $100, $77 for the jacket and $23 for the tax. The tax is 23% of the total cost of $100.
When talking about the FairTax, we use the tax-inclusive rate of 23% because we are comparing the FairTax to the tax-inclusive income tax. Regardless of which way we calculate the tax, the amount of tax is the same – $23 in our example.
Is the FairTax just a tax scheme supported by people with special interests?
Absolutely not! The FairTax is essentially the People’s Tax Plan. It is based on research conducted among people from all different walks of life. A large, widely diversified group of people were surveyed and asked what they wanted in a tax plan. The results were then given to a group of economists with the directive to develop a tax plan that gave the people what they wanted. The result was the FairTax.
Over $20 million dollars was raised and spent to develop and evaluate the plan. It has been studied and reviewed by respected economists, many of whom were initially skeptical about the concept. Those economists who have really delved into the details have concluded that the FairTax will work.
The FairTax has support from people in both major political parties and several third parties. The supporters all believe that the FairTax is a better, fairer, simpler, more transparent, more efficient way to raise federal revenue. All people will benefit from the FairTax.
Will the FairTax bill prevent the possibility of having both national sales tax and an income tax?
The FairTax bill (HR 25) itself does not prevent having both a national sales tax and an income tax. There is a separate bill (HJR 16) which will repeal the 16th amendment and thereby eliminate the income tax. HJR 16 has to go through a more stringent adoption process than the FairTax bill. To repeal the constitutional amendment, two-thirds of the members of both the House and the Senate would have to pass the bill, and three-fourths of all of the state legislatures would have to approve the repeal. That is a lengthy process, but the national FairTax organization is already laying the groundwork to repeal the 16th amendment.
In the meantime, the FairTax bill will effectively eliminate the income tax in three ways. First, it will abolish the IRS. Second, it will repeal the tax code by repealing all language having to do with income and payroll taxes. Third, it will eliminate the requirement to file annual tax returns to the federal government. So, in effect, there will be no income tax once the FairTax is enacted. Furthermore, once the income tax is eliminated and people realize just how wonderful it is to not have taxes withheld from their paychecks and not to file annual tax returns, the people will fight any attempt to bring back the income tax.
When you think about it, we already have both an income tax and a quasi-sales tax. We just don’t see the quasi-sales tax. Every product we purchase has embedded within the price, the payroll and income taxes from every stage of production and delivery. Those taxes are part of the cost to produce the product. Every time we buy a product, we are paying these taxes, which makes them like a sales tax. The FairTax will eliminate these hidden embedded taxes and replace them and the income tax with a very visible national sales tax.
How will the FairTax affect compliance costs?
Compliance costs are the costs in time and money for taxpayers to comply with the income tax code. Americans spend at least $265 billion in compliance costs each year. Some estimates of these costs are far higher. This is wasted money. It provides no value. The FairTax will eliminate about 95% of these compliance costs. Individuals will have no compliance costs. Their taxes will be paid automatically every time they purchase a new product or service. Businesses will just have to collect the sales tax, which is much less costly than determining income taxes. And the FairTax provides for businesses to be paid for the tax collection costs.
Won’t the FairTax impose taxes on the service industry?
Yes, it will. Why should the service industry be exempt from a national sales tax? Why should it get favored treatment over the retail industry? We buy goods and we buy services. Both are currently subject to the income tax and both should be subject to the national sales tax. The FairTax is about fairness – treating everyone the same. So, all businesses selling goods or services to the public should be subject to the FairTax.
Are used goods taxed under the FairTax?
No. The FairTax only applies to the sale of new goods and services, not used items. The tax is only to be paid once, not every time the item is sold. To prevent cheating, the FairTax bill contains a definition of the term “used.” To be considered used, the item must be purchased before the FairTax is enacted, or the FairTax must have been previously paid on the item.
If the item was purchased before the enactment of the FairTax, it has all of the taxes from the current income tax system embedded in the price. So, no FairTax would be due upon its sale to another buyer.
If the item was purchased after enactment of the FairTax, there are two taxing possibilities. In the first possibility, the FairTax was already paid. This would be the case if a consumer bought an item, paid the FairTax, and then later decided to sell it. This later sale would not be subject to the tax, since it was paid once on the first purchase.
In the second possibility, the FairTax had not been previously paid on the item. If a business purchased an item for use in its business after enactment of the FairTax, it would not have paid the tax on that purchase. If it later decides to sell that item to a customer or some other individual, that later sale would be subject to the FairTax because it had never been paid on the item.
The good news is that people can reduce the amount of national sales tax they pay by purchasing used items rather than new goods.
Why doesn’t the FairTax just exempt necessities from the tax rather than provide the prebate?
If the FairTax exempted necessities, the tax rate would have to be much higher. The prebate is really the fairest and most efficient way to make the tax progressive. A major problem with exempting necessities is defining what those necessities are. People spend their money differently and have different priorities. Having exemptions for necessities would also give legislators the ability to tinker with the list of necessities and buy votes by offering more exemptions. The FairTax prebate eliminates this possibility.
Is the FairTax really fair?
Yes. The FairTax is fair. Wealthy people tend to spend more money than other people, purchasing large estates, airplanes, yachts, expensive cars, jewels, etc. They stay in expensive hotels, eat expensive foods, wear designer dresses, and purchase only the best of everything. And every time they make such purchases, they will be paying the FairTax. The wealthy will be contributing far more in national sales tax than average individuals.
Many wealthy people also spend their money building businesses, creating and developing new products, or funding charities. These activities are not subject to the FairTax, but they do provide benefits to the rest of us in the form of jobs and improved standards of living.
Won’t charities be hurt by the loss of a tax deduction for charitable gifts?
Only 30% of taxpayers itemize their deductions and are thus able to get a charitable deduction. The other 70% make charitable contributions without any tax benefit. There is no reason to expect that the 70% will reduce their charitable giving under the FairTax.
Also, under the FairTax, all people will receive their entire paychecks, giving them more money to spend as they wish. Some of that extra disposable income will likely go to charities.
The primary factor affecting charitable giving is the economy. When the economy is thriving, people give more money to worthy causes. When the economy is bad, charitable giving drops because people don’t have as much money to share with others. The FairTax will stimulate the economy and put more money in hands of workers.
Will the wealthy stop giving to charity? No. They will continue to support their favorite charitable causes, even without a tax deduction. Tax benefits are not the reason they donate money; they donate to causes which are close to their hearts. They want to help people. The wealthy just use the tax code to structure their gifts in a way that will reduce their taxes the most.
How will the states deal with the FairTax?
States will be affected by the FairTax is two basic ways. First, they will have the opportunity to collect the national sales tax. All but six states already collect a state sales tax, so collecting the national sales tax will be relatively easy for those states. If a state chooses to collect the FairTax, it will be paid a fee of one-quarter of one percent s compensation – a fee that will more than cover its collection expenses. If a state does not collect the tax, it can have another state or the federal government collect the tax.
Second, states with income taxes will be able to continue with their income tax systems, or they can choose to create a state consumption tax similar to the FairTax. To reduce administrative costs, most states will probably try to conform their tax systems to the federal FairTax system. If a state chooses to conform its tax system to the federal FairTax, it will likely be able to collect the same amount of tax revenue with a lower sales tax rate since the tax base will be broader than its current base.
How will illegal immigrants be affected by the FairTax?
Under our current income tax system, illegal immigrants generally do not pay any income tax or payroll taxes, even though they are legally required to do so. However, since they live in this country, they do receive benefits such as health care and education and the use of government-provided assets such as roads and bridges. These benefits are provided by our taxpaying residents.
Under the FairTax, everyone, including illegal immigrants, will be required to pay the FairTax every time they purchase a new product or service. However, illegal immigrants will not be eligible for the prebate, so they will be paying the tax on every purchase, not just those purchases above poverty level spending. In effect, they will be contributing to the cost of the benefits they receive.
Will the FairTax have any effect on government spending?
By itself, the FairTax will not have any effect on government spending. The FairTax is just a better way to collect taxes. Initially, government revenue will be the same as it is right now. As the economy improves, taxes collected by the FairTax will increase as people spend more. It will be up to the people of this country to make sure their legislators act in the interest of the people with regard to this increased tax income. It can be used to reduce and eliminate the huge government debt. Or, the 23% FairTax rate could be reduced. Or, people can let their legislators enact more spending programs.
With the FairTax, politicians will not be able to tinker with the tax code and provide hidden taxes and hidden tax benefits as they can under the current tax code. The politicians can be held more accountable for their actions.
Since businesses don’t have to pay the FairTax, won’t individuals try to avoid the tax either by pretending to be a business or by using a business they own to make all of their personal purchases?
Under the FairTax, it will be difficult and risky for people to try to cheat the system and use the business structure to avoid paying the FairTax for several reasons.
- The business must be registered with the state sales tax authority. It must file monthly or quarterly sales tax returns with the state. And, it must give vendors a copy of the registration certificate in order to be exempt from paying the FairTax when it makes purchases.
- The business will also have to keep invoices and receipts of its purchases to show that the purchases are legitimate business expenses if audited by the state sales tax authority. Since there are only about 20 million businesses versus 140 million tax filers under the current tax code, the chances of audit will be greater for the business than it is today. If the business cannot prove that the purchases were for legitimate business purposes (such as personal expenses), it will have to pay the tax that was due at the time of the purchase plus interest, fines, and/or penalties. The FairTax legislation also provides for the use of methods to report tax cheats and pay rewards.
- The FairTax prohibits the use of a phony family business to purchase items for family members on a tax-free basis. Purchases given to family members would be considered a conversion of property from business use to personal use and would be fully subject to the FairTax. The same would be true for gifts, prizes, rewards, or other remunerations made to a family member.
- Businesses will be allowed to provide employee discounts, as they do now. But if the discount exceeds 20% of the price charged to the general public, the amount of discount over 20% would be taxable.