Fair Tax

"No, No! Not That Way"—Political cartoon from 1933 commenting on a general sales tax over an income tax

The FairTax is a proposed change to the federal government tax laws of the United States intended to replace all federal income taxes. Corporations currently pay corporate taxes of 15 to 35% on earnings. FairTax does not tax their spending at all, from the data available; Exports and Business-to-business transactions would not be taxed, nor would investments. The whole movement would appear to be an attempt, so far quite successful, to convince thousands of people to support giving a 100% tax cut to corporations.

The taxes that would be replaced include personal income taxes (including the alternative minimum tax), corporate income taxes, capital gains taxes, payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes, with a single broad national consumption tax on retail sales. 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. Exports and intermediate business transactions would not be taxed, nor would savings, investments, or education tuition expenses as they would be considered an investment (rather than final consumption). The plan has been introduced into the United States Congress as the Fair Tax Act (USBill|111|HR|25) (USBill|111|S|296).

The tax would be levied once at the point of purchase on all new goods and services for personal consumption. 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). The rate would then be automatically adjusted annually based on federal receipts in the previous fiscal year.

FairTax rates

During the first year of implementation, the FairTax legislation would apply a 23 percent 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). The equivalent assessed tax rate is 30 percent if the FairTax is applied to the pre-tax price of a good like traditional U.S. state sales taxes (sometimes called tax-exclusive). 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.

The tax would be levied once at the final retail sale 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 intermediate business transactions 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, and auto repairs would be subject to the FairTax, as would renting apartments and other real property. In comparison, the current system taxes income prior to purchasing such personal services. State sales taxes generally exempt certain goods and services in an effort to reduce the tax burden on low-income families. The FairTax would use a monthly "prebate" system on purchases up to the poverty level. 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 and Border Protection).

Current tax rates

Percentile (2001 CBO data)	Earnings Share		Federal Tax Share		Federal Tax Share (incl. Social Security)		Federal Tax Rate (incl. Social Security)
Top 1%	14.8%	52.4%	34.4%	82.5%	22.7%	65.3%	33.0%	26.8%
95%–98%	12.7%		20.8%		15.8%		na
90%–94%	10.1%		12.5%		11.5%		na
80%–89%	14.8%		14.8%		15.3%		na
60–79%	20.7%		14.3%		18.5%		19.3%
40–59%	14.2%		5.2%		10.0%		15.2%
20–39%	9.2%		0.3%		4.9%		11.6%
0–19%	4.2%		−2.3%		1.0%		5.4%

Corporations

Corporations currently pay corporate taxes of 15 to 35% on earnings. FairTax does not tax their spending at all, from the data available; Exports and intermediate business transactions would not be taxed, nor would investments.

Hybrid taxation

If the FairTax bill were passed, permanent elimination of income taxation would not be guaranteed; the FairTax bill would repeal much of the existing tax code, but the Sixteenth Amendment would remain in place. Preventing new legislation from reintroducing income taxation would require a repeal of the Sixteenth Amendment to the United States Constitution along with expressly prohibiting a federal income tax.* This is referred to as an "aggressive repeal". Separate income taxes enforced by individual states would be unaffected by the federal repeal. Since passing the FairTax would only require a simple majority in each house of the United States Congress along with the signature of the President, whereas enactment of a constitutional amendment must be approved by two thirds of each house of the Congress, and three-quarters of the individual U.S. states, it is possible that passage of the FairTax bill would simply add another taxation system. If a new income tax bill were passed after the FairTax passage, a hybrid system could develop; albeit, there is nothing preventing a bill for a hybrid system today. To address this issue and preclude that possibility, in the 111th Congress John Linder introduced a contingent sunset provision in H.R. 25. It requires the repeal of the Sixteenth Amendment within 8 years after the implementation of the FairTax or, failing that, the FairTax expires and goes away. Critics have also argued that a tax on state government consumption could be unconstitutional.*Allen Buckley, ({{{year}}}). "'Fair Tax' Ignores Economic, Mathematical, and Legal Realities to Buy Votes," Bureau of National Affairs, {{{volume}}}, J1–J24.