What is the FairTax

The FairTax is a bill before the US House of Representatives (HR25) and the US Senate. It repeals the personal and corporate income, gift, estate, capital gains, AMT, self-employment, Social Security and Medicare Taxes. In its place it would establish an approximately 23% National Retail Sales Tax (NRST) on all new goods and services. The 23% rate is calculated to be revenue neutral. Under the FairTax the Federal Government will bring in the same amount of money as under the current tax system.

The NRST applies only to new goods and services. Used goods including automobiles and homes are not taxed. Neither are the raw material used to construct end products. In this way the NRST differs from a VAT tax. Only end-user purchases are charged the NRST.

One argument against a NRST is that is places a heavier tax burden on the poor. However the FairTax has a method for dealing with that issue. It is called the FairTax because it will refund to every family the total amount of tax they pay on their basic needs. You can read more on the prebate here.

The current FairTax plan also calls for a constitutional amendment repealing the 16th amendment, thus ending the Income Tax.

Why the FairTax is good for the US

The FairTax is good for the US, because it is good for the economy. It will increase exports, increase jobs and encourage savings.

The current Income Tax system places a tax on each step of the economy. Iron is more expensive because of the taxes on the mines and on miner's labor. Steel is more expensive because of taxes on the mill companies and their employees, in addition to the tax costs embedded in the iron. Automobiles are more expensive because of the taxes on the car manufacturers, their assembly people, AND the additional costs pass up the chain from the mines and the steel mills. Economists calculate that as much as 30% of some products are due to the taxation that occurs at each stage of manufacturing. And every automobile we ship overseas includes that 30% tax - making our cars more expensive to foreign buyers. This is why we have such a trade imbalance.

The FairTax removes all of those embedded costs. Economists predict many commodity goods will drop 20% in price after the FairTax is passed. Suddenly a $30,000 automobile costs $24,000 to a foreign buyer. Under the FairTax US companies will no longer see the tremendous financial advantage to out-sourceing.

Under the FairTax all income, social security, medicare taxes are repealed. You take home 100% of your paycheck every two weeks. Do you find it hard to save for retirement? Imagine how much easier it will be when you get that 33% raise. With more money coming in people will be able to save up to buy that house, car, or put the kids through college. By not punishing saving, Americans will become more financially self reliant, and need fewer government handouts. What about the additional 23% sales tax? Remember the price of most goods will drop 20%. You will pay a little more at the store, but no where near the 33% you never even see from your paycheck.

Since the FairTax plan is revenue neutral, the same amount of money is extracted from the economy as is extracted under current law. These funds are, however, extracted in a less economically damaging way. Every known economic projection shows the economy doing better, often much better, under the FairTax.

Because the economy grows, is more efficient, and more productive, while investment, wages and consumption are higher than they are under the income tax.

Finally the FairTax turns an entire new segment of the population into taxpayers. People who earn their income via illegal activities like drugs will now pay taxes, as will illegal immigrants.

Why the FairTax is good for Libertarians

Libertarians should support the FairTax. It is a real world method for accomplishing many of the party's goals, including ending the abuses against American citizens conducted by the IRS, forcing a reduction in government spending, and ending inequitable taxation.

HR25 requires the IRS to destroy all collected tax records by the end of the first year it has been passed (Title III Sec 301b). It completely defunds the IRS. No longer will the Federal Government be sticking its nose into our lively-hoods. Harry Browne's vision of a wrecking ball taking down the IRS head quarters will be realized.

The FairTax will make funding of the Federal Government visible. Every day, every American will see a 23% charge on every receipt. They will start to demand to know what this money is being used for. Pressure will mount on Congress to do something about run away spending. Democrats and Republicans who ignore their constituents will be vulnerable to Libertarians running on a cut the unconstitutional spending platform.

Nearly every American will be paying this tax. There will no longer be the possibility of a small percentage of citizens paying the bill for everyone else.

Most states already charge Sales Tax. The FairTax plan will use the existing state infrastructure to collect the NRST. No new massive federal bureaucracies will be created.

Most spending is optional. Should Congress decide to raise the NRST rate too high, people will spend less. Unlike the Income Tax, a raise in the NRST rate will not increase the amount the Federal Government has to spend. It acts as a natural revenue break.

The most important thing about the FairTax is that is enjoys support from Libertarians, Republicans and even some Democrats. This bill crosses party lines. It has the most chance of passage than any other income tax reform program.