The letter:
Thanks so much for your interest in this. Please allow me to give you some details. I will speak specifically about the FairTax, which is the national retail sales tax proposal residing in the House as HR25 and in the Senate as S1493.
First, about regressivity:
As you know �people� have �forever� said that sales taxes are regressive. And by that they mean that sales taxes cause the least advantaged among us to bear an �unfair� share of the cost of government. Depending upon an individual�s perspective, this assertion is some degree of true.
To address that assertion from the most charitable perspective, the FairTax includes a �pre-bate� to every American family of the amount of the FairTax that they would pay on the purchase of their necessities. Here�s how it works. See Pre-bate! Link at bottom of page.
The rate of the FairTax is calculated to provide the Fed with exactly the same revenue as is currently provided by the taxes which it will replace (personal income tax, corporate income tax, capital gains tax, self-employment tax, alternative minimum tax, gift tax, estate tax, and withholding for Social Security and Medicare). That rate is 23%, expressed on what economists call a �tax inclusive� basis, which is how income tax rates are quoted. The FairTax is levied only upon the purchase FOR PERSONAL CONSUMPTION of NEW goods and services. One rate. No exclusions. No exceptions.
Already the U.S. Dept. of Health and Human Services determines what an American family must spend on necessities. The amount is different for families of different sizes, and the annual amount is usually called the �poverty level�.
Under the FairTax, on the first day of each month, every American family will receive (by U.S.Mail or electronic funds transfer per the family head�s choice) an amount equal to 1/12th x 23% x the poverty level. That way, each family has in its �pocket� the amount of FairTax which it must pay when it buys necessities.
This method is far superior to the more common method used by states and local governments of exempting necessities from sales tax. That method is neither fair nor simple. Not fair because the wealthy spend more on �nicer� necessities than the poor do, giving the wealthy greater tax breaks. Not simple because there is constant lobbying and tweaking as makers/sellers of items beg/argue to have their items declared necessities.
The results of the pre-bate are that (1) families who spend at the poverty level do not fund the federal government; (2) families who spend at less than the poverty level are subsidized by the federal government; and (3) families who spend at greater than the poverty level fund the federal government at a rate exactly commensurate with the degree to which their spending exceeds the poverty level. Those who spend more pay more.
So via the pre-bate the poorest families have a negative effective FairTax rate; poverty level spending families have a zero effective FairTax rate; �average� spending families have progressively increasing FairTax rates above zero; and the biggest spending families have an effective FairTax rate of almost 23%. NO ONE has an effective FairTax rate greater than 23%. For ALL of these families their effective FairTax rate is lower than their effective tax rate under the current income tax system.
Other related effects of the FairTax:
The most regressive tax in existence is the �payroll tax� � withholding for Social Security and Medicare. It�s paid on the first dollar of earnings. That is one of the taxes eliminated by the FairTax. It is 7.65% paid by the worker and another 7.65% paid by the employer. That�s a total of 15.3%. Under today�s system, the poorest among us are paying this rate IN ADDITION to any income taxes.
Social Security is triple taxed under today�s system. The SS tax is deducted from your pay. Your income tax is calculated upon your gross pay BEFORE the SS tax is deducted, and then your SS benefits are taxed if you live long enough to receive them. Under the FairTax nothing is withheld from your pay, and your SS benefits are not taxed.
| Under the proposed FairTax you are NOT taxed for working... saving... investing... becoming educated... retiring... giving... gaining from the sale of your home... or dying.
Under today's Income Tax System, there is a tax penalty for each of these. |
Today 22% (average) of the price of every American-made product is embedded income taxes. When you buy one of these products, you pay the income tax of every business in the supply chain which helped bring the product to the point of sale � just as you pay every other element of the cost of bringing you the product. When the FairTax eliminates the income tax element of cost, that amount of purchase price will disappear. Why? That�s how competition works. Who will make GM lower their prices? Ford, of course. And Toyota, et al. This price reduction will just about offset the FairTax rate. So purchase prices with the FairTax included will change very little. AND you will go to the store with your GROSS paycheck, not your old net paycheck.
When the selling prices of American-made products decrease by 22%, they will become MUCH more competitive with foreign-made products, both here and abroad. This is when the high-paying manufacturing jobs we exported come back home. It�s when both American investors and foreign investors scramble to build their next manufacturing facilities in the U.S.A. This will fuel economic growth like no other action or proposal in history.
And who are the most affected by changes in economic growth rate? The poor. They are the first to lose jobs when the economy is bad and the least able to withstand periods of joblessness. They are the the group most in need of new jobs.
Let�s not forget income tax �compliance cost�. That is what we pay to account our income taxes. It�s the record keeping, the filling out of tax forms, the hiring of professionals to help us understand the rules, the lawyers we hire to defend our decisions, etc. In essence expenses that don�t feed, clothe, shelter, heal, protect or even entertain ANYONE. By the most conservative estimates this annual cost for Americans is $225 billion. Many estimates by very credible sources are substantially higher. More than 90% of this cost disappears when the FairTax becomes law, as does the IRS�s $10 billion/yr budget and, in fact, the IRS itself. These disappearing costs further lower the purchase prices of American-made products and services.
Americans For Fair Taxation:
AFFT is the volunteer, non-profit, non-partisan organization that researched, wrote and market tested the FairTax and whose sole mission is to make it become the law of the land. We are a half-million members strong. Our bill is now co-sponsored by 40 Congressmen, and it has just been introduced in the Senate. It is the most researched tax bill in the history of the world and the most supported fundamental tax reform bill in the country. But it will not beome law until we educate America of its many benefits, only a few of which I have touched on above, and Americans demand it of their Congressmen and Senators.
I have enjoyed writing to you. And I hope you have been able to enjoy reading this. I�m sorry that this message is so long. But it just isn�t an easy story to tell. It is a simple idea. But it replaces a system so complex that it can not be understood. And it�s the comparing that�s tough.
I would be happy � no, thrilled � to have the chance to discuss this with you further. But I will let you rest for now.
Thanks again for your interest and your attention.
May God bless our America!
James Baird
Tennessee Director
Americans For Fair Taxation
(615) 883-8542
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