(HR 25/S 1025) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax, corporate taxes, and capital gains taxes), as well as payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes with a national retail sales tax. The FairTax would be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to all households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level. The sales tax rate, as defined in the legislation, is 23% of the total price including tax (23¢ of every $1—calculated like income taxes), which is comparable to a 30% traditional sales tax (30¢ on top of every $1). Because the U.S. tax system has a hidden effect on prices, it is expected that moving to the FairTax would decrease associated production costs due to the removal of business taxes and compliance costs, which is predicted to offset a portion of the FairTax effect on prices.
With the rebate taken into consideration, the effective tax rate would be progressive on consumption and could result in a tax burden of zero or less for some taxpayers. However, opponents of the tax argue that while progressive on consumption, the tax could be regressive on income, and would accordingly decrease the tax burden on high income earners and increase the tax burden on the middle class. The plan's supporters in turn claim that it would increase purchasing power, and decrease tax burdens by broadening the tax base and effectively taxing wealth. Many mainstream economists and tax experts like the idea of a consumption tax. Economists argue that a consumption tax, such as the FairTax, would have a positive impact on savings and investment (not taxed), ease of tax compliance, increased economic growth, incentives for international business to locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in global trade). Others argue that a consumption tax of this kind could be difficult to collect, having challenges with tax evasion, and that it may not yield enough money for the government, resulting in cutbacks in spending, a larger deficit, or a higher sales tax rate.
The FairTax has generated a large grassroots tax reform movement in recent years, led by the non-partisan group Americans For Fair Taxation. Increased support was created after 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, with candidate Mike Huckabee being the most vocal supporter. While the proposed bill has yet to have a major effect on the tax system, the Fair Tax Act has the highest number of cosponsors among tax reform proposals (attracting 74 in the 110th United States Congress), gathering much stronger support than popular flat tax legislation. A number of congressional committees have heard testimony on the FairTax; however, it has not been voted on in either Chamber. The plan is expected to increase cost transparency for funding the federal government and supporters believe it would have positive effects on civil liberties, the environment, and advantages with taxing illegal activity and illegal immigrants. Because the FairTax plan would remove taxes on income, tax deductions would have no meaning or value, which concerns some law makers about losing this method of social incentive. There are also concerns regarding the repeal of the Sixteenth Amendment, transition effects on after-tax savings, impact to the income tax industry, incentives on credit use, and the loss of tax advantages to state and local bonds.
The FairTax plan was created by Americans For Fair Taxation, an advocacy group formed for tax reform. The group developed the plan and the name "Fair Tax" with economists based on interviews, polls, and focus groups of the general public. Since the term "fair" is subjective, the name of the plan has been criticized as deceptive marketing by some while being touted as true to its name by others. Georgia Republican John Linder first introduced the Fair Tax Act (HR 2525) in July 1999 to the 106th United States Congress. He has reintroduced substantially the same bill in each subsequent session of Congress. While the bill attracted a total of 56 House and Senate cosponsors in the 108th Congress (HR 25/S 1493),[16[17 61 in the 109th Congress (HR 25/S 25), and 74 in the 110th United States Congress (HR 25/S 1025), it has not been voted on by either committee in the House or Senate. 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.
The FairTax legislation has been introduced by Linder in the House and by Georgia Republican Senator Saxby Chambliss in the Senate. The legislation has been discussed with President George W. Bush and Secretary of the Treasury Henry M. Paulson. A number of congressional committees have also heard testimony on the FairTax. The bill is cosponsored by former Speaker of the House Dennis Hastert but has not received support from the Democratic leadership, which now controls Congress. Democratic Representative Collin Peterson of Minnesota and Democratic Senator Zell Miller of Georgia cosponsored and introduced the bill in the 108th Congress, but Peterson is no longer cosponsoring the bill and Miller has left the Senate.[ In the 109th and 110th Congress, Representative Dan Boren has been the only Democrat to cosponsor the bill. Linder claims that Nancy Pelosi has instructed House Democrats against cosponsoring the bill. Other attempts to replace the U.S. tax system have attracted fewer cosponsors. The Freedom Flat Tax (HR 1040), sponsored by Texas Republican Michael C. Burgess, has 6 cosponsors, with no other proposal in Congress having as many.
Tax rate
The sales tax rate, as defined in the legislation, is 23% of the total amount paid, which includes the tax payment itself. U.S. state sales taxes have historically been expressed as a percentage of the original sale price or pre-tax amount, which would be a tax rate of 30%. The effective tax rate for any household would be variable due to the fixed monthly tax rebates that are used to "untax" 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 may not be revenue neutral (that is, it would collect less for the government than the current tax regime), and thus would not yield enough money for the government.
Sales tax rate
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 23 cents of every dollar spent in total (sometimes called tax-inclusive—as income taxes are calculated). The 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). The FairTax legislation uses total transaction value (tax-inclusive) in presenting the rate; with an item purchased for $100 total, the retailer receives $77 and the remaining is collected for the federal government, with 23% being displayed on the receipt. However, American sales taxes have historically been expressed as a percentage of the original sale price (tax-exclusive); items priced at $100 pre-tax cost $130 with the tax added. The use of the tax-inclusive number in presenting the rate has been criticized as deceptive and misleading by the plan's opponents. Proponents argue that the 23% number represents a better comparison to income tax rates, which are presented as inclusive rates (see below, Presentation of tax rate). Critics also argue that the sales tax rate would need to be higher to be revenue neutral (see below, Revenue neutrality).
The tax would be levied on all U.S. retail sales for personal consumption on new goods and services. A good would be considered "used" and not taxable if a consumer already owns it before the FairTax takes effect or if the FairTax has been paid previously on the good, which may be different than the item being sold previously. Exports and the purchase of intermediate business sales would not be taxed, nor would savings, investments, or education tuition expenses as they would be considered an investment (rather than final consumption). Personal services such as health care, legal services, financial services, haircuts, and auto repairs would be subject to the FairTax, as would renting apartments and other real property. In comparison, the current tax system also taxes such consumption indirectly by taxing the income used for purchase. State sales taxes generally exempt these services in an effort to reduce the tax burden on low-income families. The FairTax would use a monthly "prebate" system instead of the common state exclusions. The FairTax would apply to Internet purchases and would tax retail international purchases (such as a boat or car) that are imported to the United States (collected by the U.S. Customs Service).
Effective tax rate
The effective tax rate for any household would be variable due to the fixed monthly tax rebates. The rebates would have the greatest impact at low spending levels, where they could lower a household's effective rate to zero or a negative rate. At higher spending levels, the rebate has less impact, and a household's effective tax rate would approach 23% of total spending. For example, a household of three spending $30,000 a year on taxable items would devote about 6% of total spending to the FairTax after the rebate. A household spending $125,000 on taxable items would spend around 19% on the FairTax. The lowest effective tax rate under the FairTax could be negative due to the rebate. This could occur when a household spends less and pays less in taxes than the average poverty level spending for a similar household size. The household's rebate would exceed actual taxes paid by that household. Buying or otherwise receiving used items can also contribute towards a lower rate. The total amount of spending and the proportion of spending allocated to taxable items would determine a household's effective tax rate.
