FairTax 534060 226165345 2008-07-17T03:07:31Z Famspear 600513 /* Distribution of tax burden */ General copyedit :''Throughout this article, the unqualified term "dollar" and the $ symbol refer to the [[United States dollar]].''<!-- Disclaimer is as per Wikipedia:Manual of Style (dates and numbers) #Currency --> {{UStaxation}} The '''FairTax''' is a proposed change to the [[Taxation in the United States|tax laws of the United States]] that would replace the [[Internal Revenue Service]] (IRS) and all [[Federal government of the United States|federal]] [[Income tax in the United States|income taxes]] (including [[corporate tax in the United States|corporate taxes]] and [[Capital gains tax in the United States|capital gains taxes]]), as well as [[payroll tax#United States|payroll taxes]] (including [[Federal Insurance Contributions Act tax|Social Security and Medicare taxes]]), [[gift tax]]es, and [[Estate tax in the United States|estate taxes]] with a national retail [[sales tax]]. The ''Fair Tax Act'' ({{USBill|110|HR|25}}/{{USBill|110|S|1025}}) was introduced in the [[110th United States Congress]] in 2007 but has not been voted out of committee. The tax would be levied once at the point of purchase on all new [[Good (economics)|goods]] and [[Service (economics)|services]]. The proposal also calls for a monthly payment to all [[household]]s of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.<ref name="billtext"/><ref name="Kotlikoff">{{cite news| url=http://people.bu.edu/kotlikoff/WSJ%20Op%20Ed%203-7-05.pdf| format = PDF | last=Kotlikoff| first=Laurence| coauthors=|title=The Case for the 'FairTax'| publisher=The Wall Street Journal| date=[[2005-03-07]]| accessdate=2006-07-23}}</ref> The sales tax rate, as defined in the legislation, is 23 percent of the total price including the tax ($23 of every $100 spent&mdash;calculated similar to income taxes). This is equivalent to a 30 percent traditional [[Sales taxes in the United States|sales tax]] ($23 on top of every $77 spent).<ref name="money">{{cite news| url=http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/| last=Regnier| first=Pat| title=Just how fair is the FairTax?| work=| publisher=Money Magazine| date=[[2005-09-07]]| accessdate=2006-07-20}}</ref> With the rebate taken into consideration, the [[effective tax rate]] would be [[progressive tax|progressive]] on [[Consumption (economics)|consumption]].<ref name="Kotlikoff"/> Opponents of the tax argue that while progressive on consumption, the tax would be [[regressive tax|regressive]] on [[income]],<ref name="wgale">{{cite web| url=http://www.brookings.edu/papers/1998/03taxes_gale.aspx| last=Gale| first=William| title=Don't Buy the Sales Tax| work=| publisher=The Brookings Institution|date=March 1998| accessdate=2007-12-22}}</ref><ref name="BHItaxburden"/> and would accordingly decrease the [[Tax incidence|tax burden]] on [[American upper class|high income earners]] and increase the tax burden on the [[American middle class|middle class]].<ref name="money"/><ref name="finalreport">{{cite web| url=http://www.taxreformpanel.gov/final-report/TaxReform_Ch9.pdf| format = PDF | title=National Retail Sales Tax| publisher=President's Advisory Panel for Federal Tax Reform| date=[[2005-11-01]]| accessdate=2006-07-23}}</ref> The plan's supporters in turn claim that it would increase [[purchasing power]],<ref name="dynamiceffects">{{cite web| url=http://people.bu.edu/kotlikoff/FairTax%20NTJ%20Final%20Version,%20April%2024,%202007.pdf| format = PDF | last=Kotlikoff| first=Laurence| coauthors=Jokisch, Sabine|title=Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax| publisher=Boston University & Centre for European Economic Research| date=[[2007-04-24]]| accessdate=2007-05-13}}</ref> and decrease tax burdens by broadening the tax base and effectively taxing [[wealth]].<ref name="comparerates">{{cite web| url=http://people.bu.edu/kotlikoff/Comparing%20Average%20and%20Marginal%20Tax%20Rates%2010-17-06.pdf| format = PDF | last=Kotlikoff| first=Laurence| coauthors=Rapson, David|title=Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation|publisher=Boston University|date=November 2006| accessdate=2006-11-04}}</ref><ref name="Kotlikoff"/> Supporters of the FairTax argue that a consumption tax would have a positive impact on [[Saving (money)|savings]] and [[investment]] (not taxed), that it would ease tax compliance, and that the tax would result in increased [[economic growth]], incentives for [[international business]] to locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in [[International trade|global trade]]).<ref name="fairtaxbook">{{cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2006 | title=[[The FairTax Book]] | edition=Paperback | publisher=[[Regan Books]]|id=ISBN 0-06-087549-6 }}</ref><ref name="endorsement">{{cite web| url=http://www.fairtax.org/PDF/Open_Letter.pdf| format = PDF | title=An Open Letter to the President, the Congress, and the American people| publisher= Americans For Fair Taxation| accessdate=2006-07-23}}</ref><ref name="consumptiontax">{{cite news | url=http://online.wsj.com/article/SB112492381500022421.html | title=A Consumption Tax | publisher=[[The Wall Street Journal]] | last=Auerbach | first=Alan J | date=2005-08-25 | accessdate=2008-02-05}}</ref> Opponents contend that a consumption tax of this size would be extremely difficult to collect, and would lead to pervasive [[tax evasion]].<ref name="wgale"/><ref name="money"/> They also argue that the proposed sales tax rate would raise less revenue than then current tax system, leading to an increased budget deficit.<ref name="money"/><ref name="taxnotes">{{cite web| url=http://www.brookings.edu/views/articles/gale/20050516.pdf | format = PDF | last=Gale| first=William|title=The National Retail Sales Tax: What Would The Rate Have To Be?| work=Tax Break| publisher=Tax Analysis| date=[[2005-05-16]]| accessdate=2005-06-15}}</ref> In recent years, a large [[tax reform]] movement has formed behind the FairTax proposal.<ref name="movement">{{cite web|url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4429 |title=Committee on Ways and Means Hearing – Statement of Leo Linbeck| publisher=Committee on Ways and Means|date=2005|accessdate=2007-01-25}}</ref> Increased support was created after [[talk radio]] personality [[Neal Boortz]] and [[Georgia (U.S. state)|Georgia]] Congressman [[John Linder]] published ''[[The FairTax Book]]'' in 2005 and additional visibility was gained in the [[United States presidential election, 2008|2008 presidential campaign]]. 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. A number of congressional committees have heard testimony on the [[Bill (proposed law)|bill]]; however, it has not been voted on in either Chamber since its introduction in 1999. The plan is expected to increase cost transparency for funding the federal government, and supporters believe it would have positive effects on [[Civil liberties of the United States|civil liberties]], the [[Natural environment|environment]], and advantages with taxing [[Crime|illegal activity]] and [[Illegal immigration to the United States|illegal immigrants]].<ref name="fairtaxbook"/><ref name="Sipos">{{cite web|url=http://www.americanchronicle.com/articles/viewArticle.asp?articleID=31824|title=A Fair Tax for Progressives and Conservatives|publisher=American Chronicle|last=Sipos|first=Thomas|date=2007-07-10|accessdate=2007-07-13}}</ref> Because the FairTax plan would remove taxes on income, tax deductions would have no meaning or value. The loss of this method of social incentive concerns some law makers. There are also concerns regarding the proposed repeal of the [[Sixteenth Amendment to the United States Constitution|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 [[municipal bonds|state and local bonds]]. ==Legislative history== The FairTax plan was originally created by [[Americans For Fair Taxation]], an [[advocacy group]] formed to change the tax system. The group states that, together with economists, it developed the plan and the name "Fair Tax", based on interviews, polls, and focus groups of the general public.<ref name="ABKS">{{cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | id=ISBN 1-4033-9189-0 }}</ref><ref name="money"/> 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 Party (United States)|Republican]] [[John Linder]] first introduced the ''Fair Tax Act'' ({{USBill|106|HR|2525}}) on [[July 14]], [[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]] ({{USBill|108|HR|25}}/{{USBill|108|S|1493}}),<ref name="hrcosponsors2003">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d108:HR00025:@@@P| title=H.R.25 108th Cosponsors| work=108th U.S. Congress| publisher=The Library of Congress| date=[[2003-01-07]]| accessdate=2006-08-22}}</ref><ref name="scosponsors2003">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d108:SN01493:@@@P| title=S.1493 108th Cosponsors| work=108th U.S. Congress| publisher=The Library of Congress| date=[[2003-07-30]]| accessdate=2006-08-22}}</ref> 61 in the [[109th Congress]] ({{USBill|109|HR|25}}/{{USBill|109|S|25}}),<ref name="hrcosponsors">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d109:HR00025:@@@P| title=H.R.25 109th Cosponsors| work=109th U.S. Congress| publisher=The Library of Congress| date=[[2005-01-04]]| accessdate=2006-08-22}}</ref><ref name="scosponsors">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00025:@@@P| title=S.25 109th Cosponsors| work=109th U.S. Congress| publisher=The Library of Congress| date=[[2005-01-24]]| accessdate=2006-08-22}}</ref> and 76 in the [[110th United States Congress]] ({{USBill|110|HR|25}}/{{USBill|110|S|1025}}),<ref name="hrcosponsors2007">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR00025:@@@P| title=H.R.25 110th Cosponsors| work=110th U.S. Congress| publisher=The Library of Congress| date=[[2007-01-04]]| accessdate=2007-01-14}}</ref><ref name="s1025cosponsors2007">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d110:SN01025:@@@P| title=S.1025 110th Cosponsors| work=110th U.S. Congress| publisher=The Library of Congress| date=[[2007-03-29]]| accessdate=2007-04-04}}</ref> it has not been voted on by any 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 of the United States|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 [[United States Secretary of the Treasury|Secretary of the Treasury]] [[Henry M. Paulson]].<ref name="ConfCall">{{cite web|url=http://www.fairtax.org/pdf/LinbeckConfCall02-100306.pdf| format = PDF | title=Grassroots Leadership Council Conference Call|publisher=Americans For Fair Taxation|last=Linbeck|first=Leo|date=[[2006-10-03]]|accessdate=2007-02-04}}</ref> 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 [[United States Democratic Party|Democratic]] leadership, which now controls Congress.<ref name="hrcosponsors2007"/><ref name="scosponsors"/><ref name="support">{{cite news| url=http://www.heartland.org/Article.cfm?artId=17042| last=Bender| first=Merrill| title=Economists Back FairTax Proposal| work=Budget & Tax News| publisher=The Heartland Institute| date=[[2005-06-01]]| accessdate=2006-07-20}}</ref> 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.<ref name="hrcosponsors2003"/><ref name="scosponsors2003"/> In the 109th and 110th Congress, Representative [[Dan Boren]] has been the only Democrat to cosponsor the bill.<ref name="hrcosponsors"/><ref name="hrcosponsors2007"/> Linder claims that [[Nancy Pelosi]] has instructed House Democrats not to cosponsor the bill.<ref name="americansolutions">{{cite web|url=http://www.webcastgroup.com/client/start.asp?wid=0840929073673| title=The Fair Tax: Saying Goodbye to the Income Tax and the IRS[[Image:Film reel.svg|20px]]| last=Linder | first=John | coauthors=Boortz, Neal | publisher=American Solutions |date=2007-09-27 | accessdate=2007-10-04}}</ref> Other proposals to replace the U.S. tax system have attracted fewer cosponsors. The ''[[flat tax|Freedom Flat Tax]]'' ({{USBill|110|HR|1040}}), sponsored by [[Texas]] Republican [[Michael C. Burgess]], has 6 cosponsors, with no other proposal in Congress having as many.<ref>{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01040:| title=H.R. 1040 110th Cosponsors| work=110th U.S. Congress| publisher=The Library of Congress| date=[[2007-02-14]]| accessdate=2007-03-14}}</ref> The [[United States presidential election, 2008|2008 presidential nominees]] of the two major parties, Republican [[John McCain]] and Democrat [[Barack Obama]], do not support the bill,<ref name="McCain">{{cite web|url=http://linderfairtax.house.gov/index.cfm?FuseAction=Letters.View&ContentRecord_id=312 | title=A response from Senator McCain on the ''Fair Tax Act'' |last=McCain | first=John| date=2008-06-10| publisher=U.S. House of Representatives|accessdate=2008-06-18}}</ref><ref name="Obama">{{cite web | url=http://linderfairtax.house.gov/index.cfm?FuseAction=Letters.View&ContentRecord_id=313 | title=A response from Senator Obama on the ''Fair Tax Act'' | last=Obama | first=Barack | date=2008-06-10 | accessdate=2008-06-18 | publisher=U.S. House of Representatives}}</ref> but McCain has stated that if passed by Congress, he would sign it.<ref>{{cite web | url=http://www.cbsnews.com/stories/2007/10/05/politics/main3333938.shtml | title=McCain Wants Greenspan, Dead Or Alive | publisher=CBS News | date=2007-10-04 | accessdate=2008-07-15 }}</ref> Libertarian nominee [[Bob Barr]] has endorsed the plan.<ref name="Issues">{{cite web |url = http://www.bobbarr2008.com/issues/ |title = Bob Barr – Issues |accessdate= 2008-05-27 |work = Barr '08 – Liberty for America |publisher= Barr 2008 Presidential Committee}}</ref> ==Tax rate== The sales tax rate, as defined in the legislation, is 23 percent of the total amount paid, including 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. Calculated in this way, the proposed sales tax rate is 30 percent.<ref name="money"/> The [[effective tax rate]] for any household would be variable due to the fixed monthly [[tax refund|tax rebates]] that are used to "untax" purchases up to the poverty level.<ref name="Kotlikoff"/> The tax would be levied on all U.S. retail sales for personal consumption on new [[Good (economics)|goods]] and [[Service (economics)|services]]. Critics argue that the sales tax rate defined in the legislation would not be revenue neutral (that is, it would collect significantly less for the government than the current tax regime), and thus would increase the [[budget deficit]], given the current amount of government spending.<ref name="money"/> ===Sales tax rate=== The FairTax legislation would apply a 23 percent federal [[Retailing|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 percent if the FairTax is applied to the pre-tax price of a good like traditional [[Sales taxes in the United States|U.S. state sales taxes]] (sometimes called ''[[tax-exclusive]]'').<ref name="money"/> 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.<ref name="billtext"/> American sales taxes have historically been expressed as a percentage of the original sale price (tax-exclusive); items priced at $77 pre-tax cost $100 with the tax added.<ref name="ludwigvonmises">{{cite news| url=http://www.mises.org/story/1975| last=Vance| first=Laurence| title=There is No Such Thing as a Fair Tax| publisher=Ludwig von Mises Institute| date=[[2005-12-12]]| accessdate=2006-07-20}}</ref> The use of the tax-inclusive number in presenting the rate has been criticized as deceptive and misleading by the plan's opponents.<ref name="ludwigvonmises"/><ref name="FactCheck">{{cite web |title=Unspinning the FairTax | publisher=FactCheck.org | url=http://www.factcheck.org/taxes/unspinning_the_fairtax.html |format=html | accessdate=2008-01-17 | date=2007-05-31| last=Miller | first=Joe}}</ref> Proponents argue that the 23% number represents a better comparison to income tax rates, which are presented as inclusive rates (see below, [[FairTax#Presentation of tax rate|Presentation of tax rate]]).<ref name="fairtaxbook"/> Critics also argue that the sales tax rate would need to be higher to be revenue neutral (see below, [[FairTax#Revenue neutrality|Revenue neutrality]]).<ref name="finalreport" /> 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,<ref name="ABKS" /> which may be different than the item being sold previously. [[Export]]s and the purchase of intermediate business sales would not be taxed, nor would [[Saving (economics)|savings]], [[investments]], or [[Tuition|education tuition]] expenses as they would be considered an investment (rather than final consumption).<ref name="billtext">{{cite web| title=H.R. 25: Fair Tax Act of 2007| work=110th U.S. Congress| publisher=The Library of Congress| date=[[2007-01-04]]| url=http://thomas.loc.gov/cgi-bin/query/zRetailing?c110:H.R.25:|accessdate=2007-01-14}}</ref> 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]].<ref name="money"/> In comparison, the current tax system also taxes such consumption indirectly by taxing the income used for purchase. [[U.S. state|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 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 and Border Protection]]).<ref name="billtext"/> === Effective tax rate === {{details|Distribution of the FairTax burden}} 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.<ref name="NRSACalc">{{cite web| url=http://www.salestax.org/FairTaxCalculator.htm| title=The FairTax Calculator| publisher=National Retail Sales Tax Alliance| accessdate=2006-07-23}}</ref> For example, a household of three persons spending $30,000 a year on taxable items would devote about six percent of total spending to the FairTax after the rebate. A household spending $125,000 on taxable items would spend around 19% on the FairTax.<ref name="money"/> 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 in the United States#Current poverty rate and guidelines|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.<ref name="fairtaxfaq">{{cite web| url=http://www.fairtax.org/PDF/FairTaxFAQ.pdf| format = PDF | title=FairTax Frequently Asked Questions|publisher=Americans For Fair Taxation| accessdate=2006-10-18}}</ref> :To determine the effective tax rate on consumption: * Let <math>t</math> be the statutory tax rate. For a 23% rate, then <math>t = 0.23</math> * Let <math>i</math> be the annual income spent on new goods and services. * Let <math>r</math> be the annual rebate. ::<math>\frac{t \times (i - r)}{i}</math> === Monthly tax rebate === {| class="wikitable" align="right" style="margin:0 0 1em 1em; font-size: 80%;" |- |+ 2008 FairTax prebate schedule |- ! colspan=4 align="center"|One adult household ! colspan=4 align="center"|Two adult household |- ! Family <br />Size ! Annual <br />Consumption <br />Allowance ! Annual <br />Prebate ! Monthly <br />Prebate ! Family <br />Size ! Annual <br />Consumption <br />Allowance ! Annual <br />Prebate ! Monthly <br />Prebate |- | 1 person | align=center | $10,400 | align=center | $2,392 ! align=center | $199 | couple | align=center | $20,800 | align=center | $4,784 ! align=center | $399 |- | and 1 child | align=center | $14,000 | align=center | $3,200 ! align=center | $268 | and 1 child | align=center | $24,400 | align=center | $5,612 ! align=center | $468 |- | and 2 children | align=center | $17,600 | align=center | $4,048 ! align=center | $337 | and 2 children | align=center | $28,000 | align=center | $6,440 ! align=center | $537 |- | and 3 children | align=center | $21,200 | align=center | $4,876 ! align=center | $406 | and 3 children | align=center | $31,600 | align=center | $7,268 ! align=center | $606 |- | and 4 children | align=center | $24,800 | align=center | $5,704 ! align=center | $475 | and 4 children | align=center | $35,200 | align=center | $8,096 ! align=center | $675 |- | and 5 children | align=center| $28,400 | align=center| $6,532 ! align=center| $544 | and 5 children | align=center| $38,800 | align=center| $8,924 ! align=center| $744 |- | and 6 children | align=center| $32,000 | align=center| $7,360 ! align=center| $613 | and 6 children | align=center| $42,400 | align=center| $9,752 ! align=center| $813 |- | colspan=8 style="font-size: 90%;"|''Note: Alaska and Hawaii have different poverty levels and different FairTax rebates.'' |} Under the FairTax, households of citizens and legal [[resident alien]]s would receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on [[poverty]] level spending according to the [[Poverty in the United States#Current poverty rate and guidelines|poverty guidelines]] published by the [[U.S. Department of Health and Human Services]].<ref name="billtext" /> The poverty level guidelines vary by family size and represent the cost to purchase household necessities. The FCA is a tax rebate (known as a "prebate" as it would be paid in advance) paid in twelve monthly installments equal to 23 percent of poverty level spending for each household size. The rebate is meant to eliminate the taxation of necessities and make the plan [[progressive tax|progressive]].<ref name="money" /> The formula used to calculate rebate amounts would be adjusted for [[inflation]]. To become eligible for the rebate, households would register once a year with their sales tax administering authority, providing the names and social security numbers of each household member. The [[Social Security Administration]] would disburse the monthly rebate payments in the form of a paper check via U.S. Mail, an [[electronic funds transfer]] to a bank account, or a “[[smartcard]]” that can be used much like a bank debit card.<ref name="billtext" /> Opponents of the plan criticize this tax rebate due to its costs. Economists at [[Suffolk University]] and [[Boston University]] estimated the overall rebate cost to be $489 billion (assuming 100 percent participation).<ref name="taxpanelrebuttal">{{cite web| title=Rebuttal to the tax panel report and recommendations|publisher=Americans for Fair Taxation|date=November 2006| url=http://www.fairtax.org/PDF/Excerpts_from_response_to_tax_panel-103006.pdf| format = PDF | accessdate=2006-11-02}}</ref> In addition, economist [[Bruce Bartlett]] has argued that the rebate would create a large opportunity for [[fraud]],<ref name="TFBarlett">{{cite web | url=http://www.taxfoundation.org/blog/show/22815.html | title=FairTax Podcast with Bruce Bartlett | last=Bartlett | first=Bruce | publisher=[[The Tax Foundation]] |date=2007-12-08 | accessdate=2007-12-20}}</ref> treats children disparately, and would constitute a [[welfare]] payment regardless of need.<ref name="Bartletttaxnotes">{{cite web|url=http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf | title=Why the FairTax Won’t Work | last=Bartlett | first=Bruce | publisher=[[Tax Analysts]] | date=2007-12-24 | accessdate=2007-12-30}}</ref> The [[President's Advisory Panel for Federal Tax Reform]] cited the rebate as one of their chief concerns when analyzing their national sales tax, stating that it would be "the largest ([[entitlement program]]) in American history", and contending that it would "make most American families dependent on monthly checks from the federal government".<ref name="finalreport"/> Based on the advisory panel's tax rate (which differs from the FairTax legislation),<ref name="taxpanelrebuttal" /> "the Prebate program would cost more than all budgeted spending in 2006 on the Departments of Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Housing and Urban Development, and Interior combined."<ref name="finalreport"/> Proponents point out that income [[tax deduction]]s, tax preferences, [[tax avoidance|loopholes]], [[tax credit|credits]], etc. under the current system was estimated at $945 billion by the [[United States Congress Joint Committee on Taxation|Joint Committee on Taxation]].<ref name="taxpanelrebuttal"/> This is $456 billion more than the FairTax "[[entitlement]]" (tax refund) would spend to cover each person's tax expenses up to the poverty level. In addition, it was estimated for 2005 that the Internal Revenue Service was already sending out $270 billion in refund checks.<ref name="taxpanelrebuttal"/> ===Presentation of tax rate=== Sales and income taxes behave differently due to differing definitions of tax base, which can make comparisons between the two confusing. For direct rate comparisons between sales and income taxes, one rate must be manipulated to look like the other. A 30% sales tax rate approximates a 23% income tax rate after adjustment. The current U.S. tax system imposes taxes primarily on income. The tax base is a household's pre-tax income. The appropriate income tax rate is applied to the tax base to calculate taxes owed. Under this formula, taxes to be paid are included in the base on which the tax rate is imposed (known as ''tax-inclusive''). If an individual's gross income is $100 and income tax rate is 23 percent, taxes owed equals $23. The tax base of $100 can be treated as two parts—$77 of after-tax spending money and $23 of income taxes owed. The income tax is taken "off the top", so the individual is left with $77 in after-tax money.<ref name="ABKS" /> Traditional state sales tax laws impose taxes on a tax base equal to the pre-tax portion of a good's price (known as ''tax-exclusive''). Unlike income taxes, U.S. sales taxes do not include actual taxes owed as part of the base. A good priced at $77 with a 30 percent sales tax rate yields $23 in taxes owed. Since the sales tax is added "on the top", the individual pays $23 of tax on $77 of pre-tax goods.<ref name="ABKS" /> By including taxes owed in the tax base, a sales tax rate can be directly compared to an income tax rate. The FairTax [[statutory rate]], unlike most U.S. [[Sales taxes in the United States|state-level sales taxes]], is calculated on a tax base that includes the amount of FairTax paid. In this manner, the FairTax, like [[Value added tax#European Union|European sales taxes]], more closely resembles an income tax calculation. A final price of $100 includes $23 of taxes. Like the income tax example above, the taxes to be paid would be included in the base on which the FairTax is imposed. Congressman John Linder has stated that the FairTax would be implemented as an inclusive tax, which would include the tax in the retail price, not added on at checkout&mdash;an item on the shelf for five dollars would be five dollars total and the receipt would display the tax as 23 percent of the total.<ref name="thetruth">{{cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2008 | title=[[FairTax: The Truth: Answering the Critics]] | edition=Paperback | publisher=[[HarperCollins]] | id=ISBN 978-0061540462}}</ref><ref name="americansolutions"/> The FairTax is presented as a 23 percent tax rate for easy comparison to income tax rates (the taxes it would be replacing). Proponents believe it is both inaccurate and misleading to say that an income tax is 23 percent and the FairTax is 30 percent as it implies that the sales tax burden is higher, when in fact the burden of the two taxes is precisely the same—either both taxes are 23 percent or both taxes are 30 percent. A common reverse comparison is for supporters to quote the income tax system exclusively; a 25 percent income tax and 7.65 percent FICA tax, a total 33 percent inclusive tax, is equal to a 50 percent exclusive tax. The plan's opponents call the [[semantics]] deceptive. [[FactCheck]] called the presentation misleading, saying that it hides the real truth of the tax rate.<ref name="FactCheck"/> Laurence Vance, writing for the [[Ludwig von Mises Institute]], goes so far as to call the rate presentation a "lie".<ref name="ludwigvonmises" /> [[Bruce Bartlett]] stated that polls show tax reform support is extremely sensitive to the proposed rate,<ref name="Bartletttaxnotes"/> and called the presentation confusing and deceptive based on the conventional method of calculating sales taxes.<ref name="BartlettWSJ">{{cite news|url=http://www.opinionjournal.com/extra/?id=110010523 | title=Fair Tax, Flawed Tax| publisher=Wall Street Journal | date=[[2007-08-26]]| accessdate=2007-08-30 |last=Bartlett |first=Bruce}}</ref> :Comparison to a typical sales rate: *Let <math>t</math> be the FairTax rate. For a 23 percent rate, then <math>t = 0.23</math> *Let <math>a</math> be the rate in terms of a typical sales tax. *Let <math>p</math> be the price of the good (including the tax). :The revenue that would go to the government: ::<math>t \times p</math> :The revenue remaining for the seller of the good: ::<math>p - t \times p</math> :To convert the tax, divide the money going to the government by the money the company nets: ::<math>a = \frac{t \times p}{p - t \times p} = \frac{t}{1 - t}</math> :Therefore, to adjust any rate below to that of a traditional sales tax, divide the given rate by 1 minus that rate. ===Revenue neutrality=== {{main|Revenue neutrality of the FairTax}} A key question surrounding the FairTax is whether the tax has the ability to be revenue-neutral; that is, whether the tax would result in an increase or reduction in overall federal tax revenues.<ref name="ABKS"/> Economists, advisory groups, and political advocacy groups disagree about the tax rate required for the FairTax to be truly revenue-neutral. Various analysts use different assumptions, time-frames, and methods resulting in dramatically different [[tax rates]] making direct comparison among the studies difficult. The choice between [[Static analysis|static]] or [[dynamic scoring]] further complicates any estimate of revenue-neutral rates.<ref name="scoring">{{cite press release| url=http://www.ipi.org/ipi/IPIPressReleases.nsf/0/34899156780cc5fe85257088005d0294?OpenDocument| last=Gingrich| first=Newt| coauthors=Ferrara, Peter |title=Doesn't Anyone Know the Score?| work=Institute for Policy Innovation| publisher=Institute for Policy Innovation| date=[[2005-09-26]]| accessdate=2006-07-20}}</ref> One of the leading economists supporting the FairTax is Dr. [[Laurence Kotlikoff]] of Boston University. A detailed 2006 study published in ''[[Tax Notes]]'' by the [[Beacon Hill Institute]] at Suffolk University and Kotlikoff concluded the FairTax would be revenue-neutral for the tax year 2007 at a rate of 23.82 percent (31.27 percent tax-exclusive) assuming full taxpayer compliance.<ref name="beaconhill">{{cite web| url=http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf| format = PDF |last=Bachman| first=Paul| coauthors=Haughton, Jonathan; Kotlikoff, Laurence J.; Sanchez-Penalver, Alfonso; Tuerck, David G.| title=Taxing Sales under the FairTax – What Rate Works?| work=Beacon Hill Institute| publisher=Tax Analysts|date=November 2006| accessdate=2007-03-06}}</ref> The study states that [[purchasing power]] is transferred to state and local taxpayers from state and local governments. To recapture the lost revenue, state and local governments would have to raise taxes in order to continue collecting the same real revenues from their taxpayers.<ref name="beaconhill"/> The [[Argus Group]] and [[Arduin, Laffer & Moore Econometrics]] each published an analysis that defended the 23% rate.<ref name="galerebuttal">{{cite web| url=http://www.fairtax.org/PDF/GaleRebuttal.pdf| format = PDF | last=Burton| first=David| coauthors=Mastromarco, Dan| title=Rebuttal of the William Gale papers| publisher=The Argus Group| date=[[1998-03-16]]| accessdate=2006-10-26}}</ref><ref name="jctrebuttal">{{cite web| url=http://www.fairtax.org/PDF/JCTRebuttal.pdf| format = PDF | last=Burton| first=David| coauthors=Mastromarco, Dan| title=Rebuttal of the Joint Committee on Taxation (JCT) letter| publisher=The Argus Group| date=[[1998-02-04]]| accessdate=2006-10-26}}</ref><ref name="ALME">{{cite web| url=http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf| format = PDF | title=A Macroeconomic Analysis of the FairTax Proposal| publisher=Arduin, Laffer & Moore Econometrics |date=February 2006| accessdate=2006-11-07}}</ref> While proponents of the FairTax concede that the above studies did not explicitly account for [[tax evasion]], they also claim that the studies did not altogether ignore tax evasion under the FairTax. These studies implicitly incorporated some degree of tax evasion in their calculations simply by using [[National Income and Product Accounts|National Income and Product Account]] based figures that presumably understate total household consumption.<ref name="beaconhill"/> Moreover, these studies did not account for the expected capital gains that would result from a reduction in the real nominal value of [[U.S. government debt]] and the increased [[economic growth]] that most economists believe would occur.<ref name="money"/><ref name="endorsement" /><ref name="beaconhill"/><ref name="AFFTeconomicgrowth">{{cite web | url=http://www.fairtax.org/PDF/TheFairTaxAndEconomicGrowth.pdf | publisher=Americans For Fair Taxation | title=The FairTax and economic growth | format=PDF | last=Walby | first=Karen | date=2006-04-18 | accessdate=2007-01-21}}</ref> In contrast to the above studies, one of the leading economists opposing the FairTax, [[William Gale]] of the [[Brookings Institution]], published a detailed 2005 study in ''Tax Notes'' that estimated a rate of 28.2 percent (39.3 percent tax-exclusive) for 2007 assuming full taxpayer compliance and an average rate of 31 percent (44 percent tax-exclusive) from 2006-2015 (an increase that accounts for the replacement of an additional $3 trillion in revenue collected through the [[Alternative Minimum Tax]] (AMT) impacting the [[American middle class|middle class]] over the 10 year period).<ref name="money"/><ref name="taxnotes"/><ref name="CBO">{{cite web |url=http://opencrs.cdt.org/rpts/RS22200_20050719.pdf |format = PDF | title=The Potential Distributional Effects of the Alternative Minimum Tax |accessdate=2007-05-30 |author=Gregg Esenwein |date=[[2005-07-19]] |publisher=Center for Democracy and Technology}}</ref> The study also concluded that if the tax base were eroded by 10 percent due to tax evasion, tax avoidance, and/or legislative adjustments, the average rate would be 34 percent (53 percent tax-exclusive) for the 10 year period. The study did not take into consideration the increase in economic activity that Gale expects would result from the imposition of the FairTax. A dynamic analysis in 2008 by the [[Baker Institute For Public Policy]] at [[Rice University]] concluded that a 28 percent (38.9 tax-exclusive) rate would be revenue neutral for 2006.<ref name="Baker">{{cite web|url=http://www.bakerinstitute.org/publications/ImpactofHR25-TEPP.pdf | title=The Impact of H.R. 25 on Housing and the Homebuilding Industry | publisher=James A. Baker III Institute For Public Policy | last=Diamond | first=John W. | coauthors=Zodrow, George R. | date=2008-05-05 | accessdate=2008-07-03}}</ref> The [[President's Advisory Panel for Federal Tax Reform]] performed an analysis to replace the individual and corporate [[Income tax in the United States|income tax]] with a retail sales tax and found the rate to be 25% (34% tax-exclusive) for 2006 assuming at least 10% evasion.<ref name="finalreport"/> The rate would need to be substantially higher to replace the additional taxes replaced by the FairTax (payroll, estate, and gift taxes). The [[United States Department of the Treasury|Treasury Department]] has refused to release for [[peer review]] the detailed figures and methodology used in the tax panel analysis.<ref name="taxpanelrebuttal"/><ref name="KotlikoffBartlett">{{cite web| url=http://people.bu.edu/kotlikoff/New%20Kotlikoff%20Web%20Page/Revised%20Kotlikoff%20on%20Barlett%201-15-08.pdf | title=Why the Fair Tax Will Work | publisher=Boston University | format=PDF | last=Kotlikoff | first=Laurence J. | date=2008-01-15 | accessdate=2008-01-17}}</ref> FairTax proponents, including the Beacon Hill Institute and Kotlikoff, have criticized the President's Advisory Panel's study as having altered the terms of the FairTax and using unsound methodology.<ref name="beaconhill"/><ref name="taxpanelrebuttal"/><ref name="KotlikoffBartlett"/> ==Distribution of tax burden== {{main|Distribution of the FairTax burden}} [[Image:FairTax married.png|right|thumb|300px|[[Boston University]] study of the FairTax. Lower rates claimed on workers from a larger tax base, replacing regressive taxes, and wealth taxation.]] [[Image:NRST-percentile.png|right|thumb|300px|[[President's Advisory Panel for Federal Tax Reform|President's Advisory Panel's]] analysis of a hybrid National Sales Tax. Higher rates claimed on the middle-class for an income tax replacement (excludes payroll, estate, and gift taxes replaced under the FairTax plan).]] The FairTax's impact on the distribution of taxation or [[tax incidence]] (the effect on the distribution of [[Welfare economics|economic welfare]]) is a point of dispute. The plan's supporters argue that the tax would broaden the tax base, that it would be [[progressive tax|progressive]], and that it would decrease tax burdens and start taxing wealth. Opponents argue that a national sales tax would be inherently [[regressive tax|regressive]] and would decrease tax burdens paid by high-income individuals.<ref name="money"/><ref name="Taranto"/> Although sales taxes are normally considered regressive, the FairTax provides a rebate that supporters argue would create a progressive [[effective rate]] on consumption. For example, a family of four (a couple with two children) earning about $25,000 and spending this on taxable goods and services, would consume 100% of their income. A higher income family of four making about $100,000, spending $75,000, and saving $25,000, would consume only 75 percent of their income on taxable goods and services. According to economist [[William G. Gale]] of the [[Brookings Institution]], the percentage of income taxed is regressive (using a cross-section time frame).<ref name="wgale">{{cite web| url=http://www.brookings.edu/comm/policybriefs/pb31.htm| last=Gale| first=William| title=Don't Buy the Sales Tax| publisher=The Brookings Institution|date=March 1998| accessdate=2006-07-23}}</ref> When presented with an estimated effective tax rate, the low-income family above would pay a tax rate of zero percent on the 100 percent of consumption. The higher income family would pay a tax rate of 15 percent on the 75 percent of consumption (with the other 25 percent taxed at a later point in time, as savings is [[tax-deferred]]).<ref name="whatisthedif">{{cite web|url=http://www.fairtax.org/PDF/WhatIsTheDifferenceBetweenTaxRates.pdf|format = PDF |title=What is the difference between statutory, average, marginal, and effective tax rates?|publisher=Americans For Fair Taxation|accessdate=2007-04-23}}</ref> The effective tax rate is progressive on consumption,<ref name="Kotlikoff" /> as a person spending at the poverty level would have an effective tax rate of 0%, whereas someone spending at four times the poverty level would have an effective tax rate of 17.2%.<ref name="whatisthedif"/> Households at the lower end of the income scale spend almost all their income, while households at the higher end are more likely to devote a portion of income to saving; households at the extreme high end of consumption often finance their purchases out of savings, not income.<ref name="wgale" /><ref name="Bartletttaxnotes"/> These savings would be taxed when they become purchases. Income earned and saved would not be taxed immediately under the proposal. In other words, savings would be spent at some point in the future and taxed according to that consumption. FairTax advocates state that this would improve taxing of wealth. Economist [[Laurence Kotlikoff]] of [[Boston University]] states that the FairTax could make the tax system much more progressive and generationally equitable.<ref name="Kotlikoff" /> "Their view that taxing sales is regressive is just plain wrong. Taxing consumption is effectively the same as taxing wages plus taxing wealth."<ref name="Kotlikoff" /> Kotlikoff finds that the FairTax significantly reduces marginal taxes on work and saving, which substantially lowers overall average remaining lifetime tax burdens on current and future workers at all income levels.<ref name="comparerates"/> The [[Beacon Hill Institute]] at [[Suffolk University]] concluded in a 2007 study on distributional effects that "replacing income and [[payroll tax]]es with the FairTax would make the United States federal tax system more progressive than it is now and would benefit the average individual in almost all expenditures deciles."<ref name="BHItaxburden">{{cite web|url=http://www.beaconhill.org/FairTax2007/DistributionalAnalysis%20FairTaxBHI4-25-07.pdf |title=A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the FairTax Plan | publisher=Beacon Hill Institute | last=Tuerck |first=David G.| coauthors=Haughton, Jonathan; Bachman, Paul; Sanchez-Penalver, Alfonso; Viet Ngo, Phuong|date=2007-02|accessdate=2007-09-16}}</ref> Economist William Gale analyzed a National Sales Tax (though different from the FairTax in several aspects<ref name="galerebuttal"/><ref name="BHItaxburden"/>) and reported that the overall tax burden on middle-income Americans would increase while the tax burden on the top 1% would drop.<ref name="wgale"/> A study by the Beacon Hill Institute reported that the FairTax may have a negative impact on the well-being of mid-income earners for several years after implementation.<ref name="BHIeconomic" /> According to the [[President's Advisory Panel for Federal Tax Reform]] report, which compared the individual and corporate income tax (excluding other taxes the FairTax replaces) to a sales tax with rebate,<ref name="finalreport"/><ref name="taxpanelrebuttal"/> the percentage of federal taxes paid by those earning from $15,000&ndash;$50,000 would rise from 3.6 percent to 6.7 percent, while the burden on those earning more than $200,000 would fall from 53.5 percent to 45.9 percent.<ref name="finalreport" /> FairTax supporters argue that replacing the regressive [[Federal Insurance Contributions Act tax|payroll tax]] (not included in the Tax Panel study)&mdash;a 12.4 percent [[Social Security]] tax on wages up to $97,500 and a 2.9 percent [[Medicare]] tax (a 15.3 percent total tax that is often split between employee and employer) greatly changes the tax distribution and that the FairTax would relieve the tax burden on middle-class workers.<ref name="finalreport"/><ref name="Kotlikoff"/><ref name="KotlikoffBartlett"/> The FairTax would broaden the tax base to include all 300 million Americans and an estimated 30 million to 40 million foreign tourists and visitors.<ref name="revisetaxlaw">{{cite news| url=http://www.washingtontimes.com/op-ed/20050926-092834-5516r.htm| last=Chambliss| first=Saxby| coauthors=Linder, John; King, Steve; Brady, Kevin|title=Revise the tax law| publisher=The Washington Times| date=[[2005-09-27]]| accessdate=2006-07-23}}</ref> In a study on tax base and rate, the Beacon Hill Institute concluded that the FairTax would offer the broadest tax base and increase the federal government's net base to $9.355 trillion from $7.033 trillion of taxable income, which allows the FairTax to have a lower tax rate than current tax law.<ref name="TaxComparisonChart">{{cite web| url=http://www.beaconhill.org/FairTax2007/FairTaxBaseandRate3-15-07FINAL.pdf|format=PDF|title=A Comparison of the FairTax Base and Rate with Other National Tax Reform Proposals| publisher=Beacon Hill Institute| last=Tuerck | first=David | coauthors=Haughton, Jonathan; Bachman, Paul; Sanchez-Penalver, Alfonso | date=2007-02| accessdate=2007-09-09}}</ref> A study on marginal and average tax rates by Kotlikoff concluded that the FairTax would reduce most households’ average lifetime tax rates.<ref name="Kotlikoff2">{{cite web| url=http://people.bu.edu/kotlikoff/w11831.pdf| format=PDF| last=Kotlikoff| first=Laurence| coauthors=Rapson, David|title=Would the FairTax Raise or Lower Marginal and Average Tax Rates| publisher=National Bureau of Economic Research|date=December 2005| accessdate=2006-10-10}}</ref> Economists from Boston University and the [[Centre for European Economic Research]] concluded that the long term effects of the FairTax would reward low-income households with 26.3 percent more [[purchasing power]], middle-income households with 12.4% more purchasing power, and high-income households with five percent more purchasing power.<ref name="dynamiceffects"/> ==Predicted effects== {{main|Predicted effects of the FairTax}} According to ''[[Money (magazine)|Money]]'' magazine, many mainstream economists and tax experts like the idea of a [[consumption tax]], but many of the same people point to serious evasion and revenue neutrality problems with the FairTax plan.<ref name="money"/> Economists argue that a consumption tax (the FairTax is one such tax) would have a positive impact on [[economic growth]], incentives for international business to locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in [[International trade|global trade]]).<ref name="fairtaxbook"/><ref name="endorsement"/><ref name="consumptiontax" /> The predicted effects of the FairTax are a source of disagreement among economists and other analysts.<ref name="FactCheck"/><ref name="BartlettWSJ"/><ref name="Taranto">{{cite news | url=http://www.opinionjournal.com/best/?id=110011009 | title=No Truck With Huck--II | publisher=[[Wall Street Journal]] | first=James | last=Taranto |date=2007-12-18 | accessdate=2007-12-20}}</ref> The FairTax is expected to increase cost transparency for funding the federal government and supporters believe it would have advantages with taxing illegal activity and illegal immigrants.<ref name="fairtaxbook"/> The FairTax would be tax-free on mortgage interest (up to the basic interest rate as determined by the Federal Reserve) and donations; some law makers have concerns about losing [[Social engineering (political science)|social incentives]] on [[home ownership]] and charitable contributions. There is also concern about the impact to the income tax industry and the difficulty with the aggressive repeal of the [[Sixteenth Amendment to the United States Constitution|Sixteenth Amendment]], which would prevent Congress from introducing new income tax legislation in the future.<ref name="fairtaxfaq"/> ===Economic=== :''For more details on this topic, see [[Predicted effects of the FairTax#Economic effects|Predicted effects of the FairTax: Economic effects]]'' [[Image:TaxCode.jpg|thumb|left|200px|U.S. Rep [[John Linder]] holding the 132 page ''Fair Tax Act'' in contrast to the more than 60,000 pages of [[Internal Revenue Code|tax code]] laws and regulations currently in effect.]] The FairTax proposal would have effects in many areas that influence the United States. FairTax proponents assert that the proposal would provide tax burden visibility and reduce compliance costs. The cost of federal government would be highly visible as consumers would see most of this cost in a single tax paid every time they purchase a good or service.<ref name="Kotlikoff" /> Under the current tax system, the federal government collects revenue through a wide variety of taxes on individuals and businesses, which may not be fully visible to individual citizens.<ref name="hiddentaxes">{{cite book | first=Chris| last=Edwards|year=2005| title=Downsizing the Federal Government| edition=Hardcover| publisher=Cato Institute| id=ISBN 1-930865-82-1}}</ref> The efficiency cost of the current tax system &mdash; the output that is lost over and above the tax itself &mdash; is between $240 billion and $600 billion every year, according to a 2005 report from the [[Government Accountability Office|U.S. Government Accountability Office]].<ref name="GAO">{{cite web| url=http://www.gao.gov/docdblite/summary.php?rptno=GAO-05-878&accno=A34598| title=Summary of Estimates of the Costs of the Federal Tax System| publisher=U.S. Government Accountability Office| date=[[2005-08-26]]| accessdate=2006-07-23}}</ref><ref name="townhall">{{cite news| url=http://www.freemarketnews.com/Analysis/32/2567/2005-10-11.asp?wid=32&nid=2567| last=Bartlett| first=Bruce| title=The Times is still wrong on taxation| publisher=Free-Market News Network| date=[[2005-10-11]]| accessdate=2006-07-23}}</ref> Supporters argue that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy.<ref name="Kotlikoff"/><ref name="lindersite">{{cite web| url=http://linder.house.gov/index.cfm?FuseAction=Resources.Home&Resource_id=04E511FD-7D87-4F50-B551-5996F29A075B| last=Linder| first=John| title=The FairTax| publisher=The Online Office of John Linder| accessdate=2007-07-17}}</ref> [[Beacon Hill Institute]] of Suffolk University concluded that the FairTax would save $346.51 billion in administrative costs and would be a much more efficient taxation system.<ref name="BHItaxcosts">{{cite web | format=PDF | url=http://www.beaconhill.org/FairTax2007/TaxAdminCollectionCosts071025%20.pdf | title=Tax Administration and Collection Costs: The FairTax vs. the Existing Federal Tax System | publisher=[[Beacon Hill Institute]] | accessdate=2008-01-13 | date=2007-09 | last=Tuerck | first=David | coauthors=Bachman, Paul; Sanchez-Penalver, Alfonso }}</ref> In addition, an estimated $11 trillion is held in foreign accounts (largely for tax purposes), which former [[Federal Reserve]] Chairman [[Alan Greenspan]] predicts would be repatriated back to U.S. banks if the FairTax were enacted, becoming available to U.S. [[capital market]]s, bringing down interest rates, and otherwise promoting economic growth in the United States.<ref name="fairtaxbook"/><ref name="Newnan">{{cite web|url=http://www.fairtax.org/site/PageServer?pagename=news_events_5|title=Rep. John Linder updates volunteers |publisher=Americans For Fair Taxation|last=Linder|first=John|date=[[2007-01-30]]|accessdate=2007-10-31}}</ref> Eighty economists, including [[Nobel Prize in Economics|Nobel Laureate]] [[Vernon L. Smith]], wrote an open letter to the President, the Congress, and the American people, stating that the FairTax would boost the United States economy.<ref name="endorsement" /> According to the [[National Bureau of Economic Research]] and [[Americans For Fair Taxation]], GDP would increase almost 10.5 percent in the year after the FairTax goes into effect.<ref name="lindersite" /> In addition, the incentive to work would increase by as much as 20%, the economy’s [[capital stock]] would increase by 42%, [[labor supply]] by 4%, output by 12%, and [[real wage]] rate by 8%.<ref name="cleanout">{{cite web| url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4390| last=Trowell| first=Christopher| title=Clean out America’s Economic Arteries| publisher=Committee on Ways and Means| accessdate=2006-07-24}}</ref> A study in 2007 by the Beacon Hill Institute stated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3 percent, employment by 9.9 percent, [[real wage]]s by 10.2 percent, and consumption by 1.8 percent.<ref name="BHIeconomic">{{cite web | url=http://www.beaconhill.org/FairTax2007/EconomicEffectsFTBHICGEModel4-30-07.pdf | title=The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model | publisher=Beacon Hill Institute | last=Tuerck |first=David G.| coauthors=Haughton, Jonathan; Bhattarai, Keshab; Sanchez-Penalver, Alfonso; Viet Ngo, Phuong |date=2007-02 | accessdate=2007-09-18}}</ref> Further, studies of the FairTax at Boston University and Rice University suggest the FairTax will bring long-term interest rates down by as much as one third.<ref name="cleanout"/><ref name="interestrate">{{cite web|url=http://www.kc.frb.org/publicat/econrev/pdf/4q95golb.pdf | title=How Would Tax Reform Affect Financial Markets? | last=Golob|first=John E.|date=1995|accessdate=2007-01-22}}</ref> As falling tax compliance costs lower production costs, [[export]]s would increase by 26% initially and remain more than 13 percent above present levels.<ref name="lindersite" /> According to Professor Dale Jorgenson of [[Harvard University]]’s Economics Department, revenues to Social Security and [[Medicare (United States)|Medicare]] would double as the size of the economy doubles within 15 years after passage of the FairTax.<ref name="doubleecon">{{cite web| url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4390| title=Statement on FairTax to Ways and Means |last=Trowell| first=Christopher | publisher=Committee on Ways & Means| accessdate=2007-06-20}}</ref> Opponents offer a study commissioned by the [[National Retail Federation]] in 2000 that found a national sales tax bill filed by [[Billy Tauzin]], the ''Individual Tax Freedom Act'' ({{USBill|107|HR|2717}}), would bring a three-year decline in the economy, a four-year decline in employment and an eight-year decline in consumer spending.<ref name="NRFarticle">{{cite news| url=http://retailindustry.about.com/b/a/152273.htm| last=Vargas| first=Melody| title=Retailers Question Greenspan on Consumption Tax| work=National Retail Federation| publisher=About| date=[[2005-03-03]]| accessdate=2006-07-24}}</ref> ''[[Wall Street Journal]]'' columnist [[James Taranto]] states the FairTax is unsuited to take advantage of [[supply-side]] effects and would create a powerful disincentive to spend money.<ref name="Taranto"/> Global corporations consider local tax structures when making planning and capital investment decisions. Lower corporate tax rates and favorable transfer pricing regulations can induce higher corporate investment in a given locality. The [[United States]] currently has the highest combined statutory corporate income tax rate among [[OECD]] countries.<ref name="corptax">{{cite web| url=http://www.taxfoundation.org/news/show/1175.html| last=Hodge|first=Scott| coauthors=Atkins, Chris| title=The U.S. Corporate Income Tax System: Once a World Leader, Now A Millstone Around the Neck of American Business| publisher=The Tax Foundation| date=[[2005-11-15]]| accessdate=2006-08-03}}</ref> [[William Reynolds Archer, Jr.|Bill Archer]], former head of the [[House Ways and Means Committee]], asked [[Princeton University]] Econometrics to survey 500 [[Europe]]an and [[Asia]]n companies regarding the impact on their business decisions if the United States enacted the FairTax. 400 of those companies stated they would build their next plant in the United States, and 100 companies said they would move their corporate headquarters to the United States.<ref name="ABKS"/><ref name="billarcher">{{cite web| url=http://www.actionamerica.org/taxecon/tickfast.shtml| last=Gaver| first=John| title=The Economy Bomb Ticking Down Faster| publisher=Action America| date=[[2006-01-10]]| accessdate=2007-06-20}}</ref> In addition, the U.S. is currently the only one of the 30 OECD countries with no border adjustment element in its tax system.<ref name="LeoTestimony">{{cite web| url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=5196| last=Linbeck| first=Leo| title=Testimony Before the Subcommittee on Select Revenue Measures| publisher=House Committee on Ways and Means| date=[[2006-06-22]]| accessdate=2006-08-11}}</ref> Proponents state that because the FairTax is automatically border adjustable, the 17 percent competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home.<ref name="fairtaxfaq" /> ===Transition=== :''For more details on this topic, see [[Predicted effects of the FairTax#Transition effects|Predicted effects of the FairTax: Transition effects]]'' [[Image:TaxbaseStability.png|thumb|right|400px|Stability of the Tax Base: A comparison of [[Personal Consumption Expenditure]]s and [[Adjusted Gross Income]].]] If the FairTax bill were passed, permanent elimination of income taxation would not be guaranteed; the FairTax bill would repeal much of the existing [[Internal Revenue Code|tax code]], but the [[Sixteenth Amendment to the United States Constitution|Sixteenth Amendment]] would remain in place. The elimination of the possibility that income taxation would return (through a separate Congressional bill), requires a repeal of the Sixteenth Amendment to the [[United States Constitution]] along with expressly prohibiting a federal income tax.<ref name="fairtaxfaq" /> 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 was passed after the FairTax passage, a hybrid system could develop. There is nothing preventing a bill for a national sales tax or [[value added tax]] (VAT) on top of today's income tax system. The Americans For Fair Taxation plan is to first pass the FairTax and then to focus grassroots efforts on {{USBill|110|HJ|16}}, that calls for the repeal of the Sixteenth Amendment.<ref name="fairtaxfaq" /><ref name="HJR16">{{cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.j.res.00016:|title=H. J. RES. 16| work=110th U.S. Congress| publisher=The Library of Congress| date=[[2007-01-07]]| accessdate=2007-01-19}}</ref> John Linder plans to include a [[sunset provision]] in H.R. 25 during the [[111th Congress]] that would require the repeal of the Sixteenth Amendment within 5 years after the implementation of the FairTax or the FairTax goes away.<ref name="16thsunset">{{cite web| url=http://linderfairtax.house.gov/index.cfm?FuseAction=FAQs.View&FAQ_id=20| last=Linder| first=John| title=John Linder's FairTax FAQ| publisher=Congress| accessdate=2007-01-14}}</ref> Individuals under the current system who accumulated savings from ordinary income (by choosing not to spend their money when the income was earned) paid taxes on that income before it was placed in savings (such as a [[Roth IRA]] or [[Certificate of deposit|CD]]). When individuals spend above the poverty level with money saved under the current system, that spending would be subject to the FairTax. People living through the transition may find both their earnings and their spending taxed.<ref name="Taranto2">{{cite news | url=http://www.opinionjournal.com/best/?id=110010996#flailing | title=Flailing the Fruga | first=James | last=Taranto | publisher=[[Wall Street Journal]] |date=2007-12-17 | accessdate=2007-12-20}}</ref> Critics have stated that the FairTax would result in unfair double taxation for savers and suggest it does not address the transition effect on some taxpayers who have accumulated significant savings from after-tax dollars, especially retirees who have finished their careers and switched to spending down their life savings.<ref name="about">{{cite web| url=http://economics.about.com/cs/taxpolicy/a/fairtax.htm| last=Moffatt| first=Mike| title=FairTax - Income Taxes vs. Sales Taxes| work=| publisher=About| date=| accessdate=2006-07-25}}</ref><ref name="Taranto2"/> Supporters of the plan argue that the current system is no different, since compliance costs and "hidden taxes" embedded in the prices of goods and services cause savings to be "taxed" a second time already when spent.<ref name="Taranto2"/> The rebates would supplement accrued savings, covering taxes up to the poverty level.<ref name="ABKS"/> The income taxes on capital gains, social security and pension benefits would be eliminated under FairTax. The FairTax would also eliminate what some claim to be the double taxation on savings that is part of [[Estate tax in the United States|estate taxes]]. In addition, the FairTax legislation adjusts [[Social Security (United States)|Social Security]] benefits for changes in the price level, so a percentage increase in prices would result in an equal percentage increase to Social Security income.<ref name="billtext"/> Supporters suggest these changes would offset paying the FairTax under transition conditions.<ref name="fairtaxbook" /> During the transition, many or most of the employees of the IRS (105,978 in 2005)<ref name="irslabor">{{cite web| url=http://www.irs.gov/pub/irs-soi/05db33ps.xls | format = Excel | title=IRS Labor Force, Compared to National Totals for Civilian and Federal [[Image:Page excel.png|16px]]| publisher=Internal Revenue Service|date=2005| accessdate=2006-11-18}}</ref> would face loss of employment.<ref name="beaconhill"/> The Beacon Hill Institute estimate is that the federal government would be able to cut $8 billion from the IRS budget of $11.01 billion (in 2007), reducing the size of federal tax administration by 73%.<ref name="beaconhill"/> In addition, income tax preparers (many seasonal), tax lawyers, tax compliance staff in medium-to-large businesses, and software companies which sell tax preparation software (such as Drake Software, TaxCut, and TurboTax), could face significant drops, changes, or loss of employment.<ref name="fairtaxfaq"/> IRS testimony from 2004 stated that 45% of revenue agents and officers would become eligible for retirement in the following 5 years and there is concern about the loss of their work force as their hiring efforts struggle to keep pace with attrition.<ref name="irstestimony">{{cite web| url=http://www.ustreas.gov/tigta/congress/congress_07212004.htm| last=Gardiner| first=Pamela| title=Treasury Inspector General for Tax Administration Testimony| publisher=U.S. Senate Committee on Finanace| date=[[2004-07-21]]| accessdate=2006-11-18}}</ref> In addition, the IRS would not go completely out of commission until three years after the FairTax is enacted, providing employees time to find other employment.<ref name="billtext"/> Proponents claim the projected 10.5 percent growth in the economy during the first year of the FairTax would provide plenty of new jobs to these workers that are typically well-educated and well-equipped with transferable skills.<ref name="fairtaxfaq"/> In the period before the FairTax is implemented, there could be a strong incentive for individuals to buy goods without the sales tax using credit. After the FairTax is in effect, the credit could be paid off using untaxed payroll. If credit incentives do not change, opponents of the FairTax worry it could exacerbate an existing consumer debt problem.<ref name="debt">{{cite news| url=http://www.ombwatch.org/article/articleview/3530/1/454| last=| first=| title=Household Debt: A Growing Challenge for American Families and Federal Policy|publisher=OMB Watch| date=[[2006-07-25]]| accessdate=2006-08-07}}</ref> Proponents of the FairTax state that this effect could also allow individuals to pay off their existing (pre-FairTax) debt more quickly,<ref name="fairtaxbook" /> and studies suggest lower interest rates after FairTax passage.<ref name="cleanout"/><ref name="interestrate" /> ===Other indirect effects=== :''For more details on this topic, see [[Predicted effects of the FairTax#Other indirect effects|Predicted effects of the FairTax: Other indirect effects]]'' The current federal tax law allows individuals to [[Home mortgage interest deduction|deduct the home mortgage interest]] costs, and donations to certain charities, from taxable income. Someone subject to a 25% income tax rate essentially receives $250 back from the government after paying a $1000 of mortage interest, or making a donation of that amount, because that person's taxable income is reduced by $1,000. <ref name="publication936">{{cite web| url=http://www.irs.gov/pub/irs-pdf/p936.pdf| format=PDF|title=Publication 936| publisher=Internal Revenue Service|date=2005|accessdate=2006-11-13}}</ref> The FairTax is tax free on mortgage interest up to the basic interest rate as determined by the [[United States Federal Reserve]] and donations are not taxed.<ref name="billtext" /> In a 2007 study, the Beacon Hill Institute concluded that total charitable giving would increase under the FairTax, although increases in giving would not be distributed proportionately amongst the various types of charitable organizations.<ref name="BHIcharity">{{cite web| url=http://www.beaconhill.org/FairTax2007/FTaxCharitable%20GivingBHI4-24-07.pdf | title=The FairTax and Charitable Giving| publisher=Beacon Hill Institute | last=Tuerck |first=David G.| coauthors=Haughton, Jonathan; Bachman, Paul; Sanchez-Penalver, Alfonso; Dinwoodie, Sara|date=2007-02 | accessdate=2007-09-18}}</ref> The FairTax may also affect State and local government debt as the federal income tax system provides tax advantages to state and local [[municipal bond]]s.<ref name="bonds">{{cite web| url=http://bonds.yahoo.com/sm_bd5.html| title=Types of Bonds| work=SmartMoney.com| publisher=Yahoo Finance| accessdate=2006-07-24}}</ref> Proponents believe environmental benefits would result from the FairTax through [[environmental economics]] and the re-use and re-sale of used goods.<ref name="gravelfairtax">{{cite web| url=http://www.gravel2008.us/?q=fair_tax | title=FairTax | accessdate=2007-12-11 | publisher=Mike Gravel }}</ref> The significant reduction of paperwork for [[Tax forms in the United States|IRS compliance and tax forms]] is estimated to save about 300,000 trees each year.<ref name="gravelfairtax"/> Advocates claim the FairTax would provide incentive for illegal immigrants to [[Immigration to the United States|legalize]] as they would otherwise not receive the FairTax rebate.<ref name="fairtaxbook" /> Illegal immigrants would pay the maximum effective tax rate.<ref name="billtext" /> Proponents also believe that the FairTax would have positive effects on [[Civil liberties of the United States|civil liberties]] that are sometimes charged against the income tax system, such as [[social inequality]], [[economic inequality]], [[financial privacy]], [[self-incrimination]], [[unreasonable search and seizure]], [[burden of proof]], and [[due process]].<ref name="Sipos"/><ref name="civillib">{{cite web|url=http://cato.org/pubs/tbb/tbb-0204-2.html |title=Top Ten Civil Liberties Abuses of the Income Tax|last=Edwards|first=Chris|publisher=Cato Institute|date=2002-04|accessdate=2007-07-13}}</ref> ==Changes in the retail economy== :''See also: [[Tax#Economics of taxation|Tax: Economics of taxation]], [[Effect of taxes and subsidies on price]]'' Since the FairTax would not tax used goods, the value would be determined by the [[supply and demand]] in relation to new goods.<ref name="pricetheory"/> The price differential/margins between used and new goods would stay consistent, as the cost and value of used goods are in direct relationship to the cost and value of the new goods. Because the U.S. tax system has a hidden [[Effect of taxes and subsidies on price|effect on prices]], it is expected that moving to the FairTax would decrease production costs from the removal of business taxes and compliance costs, which is predicted to offset a portion of the FairTax effect on prices.<ref name="fairtaxbook"/> ===Value of used goods=== Since the FairTax would not tax used goods, some critics have argued that this would create a differential between the price of new and used goods, which may take years to equalize.<ref name="Bartletttaxnotes"/> Such a differential would certainly influence the sale of new goods like vehicles and homes. Similarly, some supporters have claimed that this would create an incentive to buy used goods, creating environmental benefits of re-use and re-sale.<ref name="gravelfairtax">{{cite web| url=http://www.gravel2008.us/?q=fair_tax | title=FairTax | accessdate=2007-12-11 | publisher=Mike Gravel }}</ref> Conversely, it is argued that like the income tax system that contains embedded tax cost (see [[FairTax#Theories of retail pricing|Theories of retail pricing]]),<ref name="forbes">{{cite news| url=http://www.forbes.com/opinions/2007/03/20/american-dream-taxes-oped-cz_sf_dream0307_0322dream.html | last=Forbes | first=Steve | title=The American Dream Improving Our Lot | publisher=Forbes| date=[[2007-03-22]]| accessdate=2007-03-26}}</ref> used goods would contain the embedded FairTax cost.<ref name="Taranto2"/> While the FairTax would not be applied to the retail sales of used goods, the inherent value of a used good includes the taxes paid when the good was sold at retail. The value is determined by the supply and demand in relation to new goods.<ref name="pricetheory">{{cite book | first=Steven | last=Landsburg | year=1998 | title=Price Theory and Applications | edition=4th edition (Hardcover) | publisher=South-Western Educational Publishing|id=ISBN 0-538-88206-9 }}</ref> The price differential / margins between used and new goods should stay consistent, as the cost and value of used goods are in direct relationship to the cost and value of the new goods. ===Theories of retail pricing=== [[Image:tax supply and demand.png|thumbnail|200px|left|Standard [[supply and demand]] diagram illustrating taxes' effect on prices.]] Retail prices are increased due to [[Effect of taxes and subsidies on price|embedded taxes]] and compliance costs passed to the consumer by producers and suppliers.<ref name="forbes"/> John Linder states the FairTax would eliminate almost all federal taxation costs from the [[supply chain]], which could lower production costs by up to 30%.<ref name="lindersite"/> Price changes after the FairTax would largely depend on the response of the [[Federal Reserve System|Federal Reserve]] monetary authorities. Non-accommodation of the [[money supply]] would suggest retail prices and take home pay stay the same&mdash;embedded taxes are replaced by the FairTax. Full accommodation would suggest prices and incomes rise by the exclusive rate (i.e. 30 percent) &mdash; embedded taxes become [[windfall gain]]s. Partial accommodation would suggest a varying degree in-between.<ref name="thetruth"/><ref name="tuerck">{{cite web | url=http://www.beaconhill.org/FairTax2008/TuerckTaxNotes080204.pdf | format=PDF | title=Memo to Bruce Bartlett: Just Do The Math | first=David G. | last=Tuerck | publisher=Beacon Hill Institute | date=2008-02-04 | accessdate=2008-02-23}}</ref> The formula used to calculate the FairTax rebate and [[Social Security (United States)|Social Security]] benefits would be adjusted for price changes; for example, a 30% full accommodation would increase the rebate and Social Security benefits by the same factor.<ref name="billtext"/><ref name="plaintext">{{cite web|format=PDF |url=http://www.fairtax.org/PDF/PlainEnglishSummary_TheFairTaxAct2007.pdf | title=The Fair Tax Act of 2007 – HR 25/S 1025 plain English summary | date=2007 | accessdate=2008-07-12 | publisher=Americans For Fair Taxation}}</ref> Based on a study conducted by Dr. [[Dale W. Jorgenson|Dale Jorgenson]], proponents state that [[production cost]] of domestic goods and services could decrease by approximately 22 percent on average after embedded taxes were removed, leaving the sale nearly the same after taxes (non-accommodation).<ref name="fairtaxfaq"/> The study concludes that producer prices would drop between 15 percent and 26 percent (depending on the type of good/service) after the switch to a consumption based tax.<ref name="fairtaxbook" /><ref name="jogensonstudy">{{cite web | first=Dale W. | last=Jorgenson | date=1998-05-18 | title=The Economic Impact of the National Retail Sales Tax | url=http://linderfairtax.house.gov/index.cfm?FuseAction=Files.View&FileStore_id=18 | format=PDF | publisher=U.S. House of Representatives| accessdate=2008-02-20}}</ref> Jorgenson's research included all income and payroll taxes regardless of whether they were paid by employees or employers in the 22 percent embedded tax estimation. (It is also important to note that the Jorgenson model did not capture any reduction in the cost of compliance associated with changing from a complex income tax system to a simpler consumption tax.) Jorgenson assumes that businesses would pass on all the cost savings from the repeal of payroll taxes and income tax withholding to consumers in the form of lower prices. Mathematically, this results in employee take-home pay ([[net income]]) remaining unchanged from pre-FairTax levels.<ref name="money" /><ref name="boortzconfusion">{{cite web| url=http://boortz.com/nuze/200509/09152005.html#fairtax| last=Boortz| first=Neal| title=The FairTax - Straightening out some confusion| publisher=Cox Radio| date=[[2005-09-15]]| accessdate=2006-08-04}}</ref> If businesses instead provided employees with their [[gross income|gross pay]] (including income tax withholding and the employee share of payroll taxes),<ref name="beaconhill"/> Arduin, Laffer & Moore Econometrics estimated production costs would decrease by a minimum of 11.55% (partial accommodation).<ref name="ALME"/> This reduction would be from the removal of the remaining embedded costs, including corporate taxes, compliance costs, and the employer share of payroll taxes. This decrease would offset a portion of the FairTax amount reflected in retail prices, which proponents suggest as the most likely scenario.<ref name="thetruth"/> The Beacon Hill Institute shows that it would not matter, apart from transition issues, whether prices fall or rise—the relative tax burden remains the same because if prices increased with the addition of the FairTax, wages would also rise accordingly; or if the Federal Reserve decided not to accommodate, then prices would fall and wages would remain at their net levels. Purchasing power for buying consumer goods and services in either situation would remain essentially the same, and the FairTax rate would be the same.<ref name="beaconhill"/> Bruce Bartlett argued that it is unlikely that nominal wages would be reduced, which he believes would result in a recession, but that the [[Federal Reserve]] would likely increase the money supply to accommodate price increases.<ref name="Bartletttaxnotes"/> The decrease in production cost would not fully apply to imported products, so according to proponents, it would provide tax advantages for domestic production and increase U.S. competitiveness in global trade (see [[Predicted effects of the FairTax#Border adjustability|Border adjustability]]). Such logic is endorsed by a recent letter to the commission on tax reform by eighty economists, including [[Nobel Laureate]] [[Vernon L. Smith]].<ref name="endorsement" /> To ease the transition, U.S. retailers will receive a tax credit equal to the FairTax on their inventory to allow for quick cost reduction. Retailers would also receive an administrative fee equal to the greater of $200 or 0.25 percent of the remitted tax as compensation for compliance costs,<ref name="billtext"/> which amounts to around $5 billion. ==Effects on tax code compliance== FairTax supporters state that [[black market]] is largely untaxed under the current tax system. Economists estimate the [[underground economy]] in the United States to be between one and three trillion dollars annually.<ref name="Newnan"/><ref name="shadow">{{cite web| url=http://wsjclassroom.com/archive/05apr/econ_underground.htm| last=McTague| first=Jim| title=The Underground Economy| work=Barron's| publisher=The Wall Street Journal Classroom Edition|date=April 2005| accessdate=2006-07-25}}</ref><ref name="madness">{{cite book|last=Schlosser|first=Eric|title=Reefer Madness: Sex, Drugs, and Cheap Labor in the American Black Market|publisher=Mariner Books|edition=Reprint|date=[[2004-04-01]]|isbn=978-0618446704}}</ref> By imposing a sales tax, supporters state that black market activity would be significantly taxed when proceeds from such activity are spent on legal consumption.<ref name="Taranto3">{{cite news | url=http://www.opinionjournal.com/best/?id=110010972#pandering | title=Political Pandering | publisher=[[Wall Street Journal]] | last=Taranto | first=James |date=2007-12-10 | accessdate=2007-12-20}}</ref> For example, the sale of illegal [[narcotic]]s would remain untaxed (instead of being guilty of income tax evasion, [[drug dealer]]s would be guilty of failing to submit sales tax), but they would face taxation when they used drug proceeds to buy consumer goods such as food, clothing, and cars. By taxing this previously untaxed money, FairTax supporters state that non-filers would be paying part of their share of what would otherwise be uncollected income and payroll taxes.<ref name="fairtaxbook" /><ref name="AEI">{{cite web | url=http://www.aei.org/events/eventID.1466,filter.all/event_detail.asp | title=Taxing Sales under the FairTax: What Rate Works? | publisher=American Enterprise Institute |date=2007-02-28 | accessdate=2007-12-20}}</ref> Other economists and analysts have argued that the underground economy would continue to bear the same tax burden as before,<ref name="quandry">{{cite web| url=http://economics.about.com/od/thefairtaxproposal/a/fairtax_quand.htm| last=Moffatt| first=Mike| title=FairTax Quandry| publisher=About, Inc|date=2006| accessdate=2006-09-06}}</ref> stating that you receive the same effect with the current tax system&mdash;while illicit income is not taxed directly, spending results in business income and wages that are taxed.<ref name="consumptiontax" /><ref name="Taranto3"/><ref name="AEI"/> ===Tax compliance and evasion=== [[Image:CROSSNG.JPG|thumb|right|250px|"No, No! Not That Way"—[[Political cartoon]] from 1933 commenting on a general [[sales tax]] over an [[income tax]].]] The current income tax system fails to collect on a significant percentage of taxes. The IRS estimates twenty additional cents of taxes are owed on unreported income for every tax dollar collected. In 2001, the IRS estimated this shortfall to be over $312 billion.<ref name="economist">{{cite web| url=http://www.economist.com/displaystory.cfm?story_id=3860731| title=Simplifying tax systems: The case for flat taxes| work=Barron's| publisher=The Economist| date=[[2005-04-14]]| accessdate=2006-07-25}}</ref> These figures do not include taxes lost on illicit sources of income, such as illegal drug dealing. Proponents assert that the transparency and simplicity of the FairTax would subject much of this unreported income to taxation. The number of tax collection points would be significantly reduced under the FairTax, as only retailers would file a tax return compared to every income earner. The FairTax would reduce the number of tax filers by about 86 percent (from 100 million to 14 million) and reduce the filing complexity to a simplified state sales tax form.<ref name="taxfilers">{{cite web| url=http://www.fairtax.org/PDF/WhatTheFederalTaxSystemIsCostingYou.pdf| format=PDF|title=What the federal tax system is costing you – besides your taxes!|publisher=Americans For Fair Taxation| date=[[2007-02-19]]| accessdate=2007-03-27}}</ref><ref name="lindersite"/><ref name="KotlikoffBartlett"/> Research supports the claim that simplified tax systems lead to greater compliance. The [[International Monetary Fund]] (IMF) found that [[Russia]]'s transition to a [[flat tax]] increased income reporting from 52 percent to 68 percent in one year. Similar results have occurred in [[Slovenia]].<ref name="economist" /> The [[Government Accountability Office]] (GAO), among others, have specifically identified the negative relationship between compliance costs and the number of focal points for collection.<ref name="BHIstates">{{cite web| url=http://www.beaconhill.org/FairTax2007/FiscalFederalismNatFairtTaxStatesBHI-071025.pdf | title=Fiscal Federalism: The National FairTax and the States | publisher=[[Beacon Hill Institute]] | last=Tuerck | first=David | coauthors=Bachman, Paul; Jacob, Sylvia | format=PDF | date=2007-09 | accessdate=2007-01-19}}</ref> The federal government would be able to concentrate its entire tax enforcement efforts on a single tax: the FairTax. Retailers would receive an administrative fee equal to the greater of $200 or 0.25 percent of the remitted tax as compensation for compliance costs.<ref name="billtext"/> In addition, the overwhelming majority of purchases occur in major retail outlets, which are very unlikely to evade the FairTax and risk losing their business licenses.<ref name="beaconhill"/> Economic Census figures for 2002 show that 48.5 percent of merchandise sales are made by just 688 businesses ([[Big-box store|"Big-Box" retailers]]). 85.7 percent of all sales are made by 92,334 businesses, which is 3.6 percent of American companies. In the service sector, approximately 80 percent of sales are made by 1.2 percent of U.S. businesses.<ref name="thetruth"/> FairTax opponents believe that compliance decreases when taxes are not [[Tax withholding in the United States|automatically withheld]] from citizens, and that massive [[tax evasion]] could result by collecting at just one point in the economic system.<ref name="Bartletttaxnotes"/> Compliance rates can also fall when taxed entities, rather than a third party, self-report their tax liability. For example, ordinary personal income taxes can be automatically withheld and are reported to the government by a third party. Taxes without withholding and with self-reporting, such as the FairTax, can see higher evasion rates. In other countries, similar [[value added tax|VAT]] taxes have an average evasion rate of 20%.<ref name="taxpanelrebuttal"/> Tax publications by the [[Organisation for Economic Co-operation and Development]] (OECD), IMF, and [[Brookings Institution]] have suggested that the upper limit for a sales tax is about 10% before incentives for evasion become too great to control.<ref name="Bartletttaxnotes"/> According to the GAO, 80% of state tax officials opposed a national sales tax as an intrusion on their tax base.<ref name="Bartletttaxnotes"/> Opponents also raise concerns of legal [[tax avoidance]] by spending and consuming outside of the U.S. (imported goods would be subject to collection by the [[U.S. Customs Service]]).<ref name="fallacies">{{cite news | url=http://www.motherjones.com/news/update/2007/12/huckabee-fair-tax-fallacies.html | title=Mike Huckabee's Fair Tax Fallacies | last=Karvounis | first=Niko | publisher=''[[Mother Jones (magazine)|Mother Jones]]'' | date=2007-12-13 | accessdate=2008-01-21}}</ref> The FairTax is a national tax, but can be administered by the states rather than a federal agency.<ref name="billtext"/> This has a bearing on compliance, as the states' own agencies could monitor and audit businesses within that state. The 0.25 percent retained by the states amounts to $5 billion the states would have available for enforcement and administration. For example, [[California]] should receive over $500 million for enforcement and administration, which is more than the $327 million budget for the state's sales and excise taxes.<ref name="LAO">{{cite web| url=http://www.lao.ca.gov/analysis_2004/general_govt/gen_09_0860_anl04.htm| title=California Sales Tax Enforcement Costs – Analysis of the 2004–05 Budget Bill| publisher=Legislative Analyst's Office|date=February 2004| accessdate=2006-07-25}}</ref> Because the federal money paid to the states would be a percentage of the total revenue collected, John Linder claims the states would have an incentive to maximize collections.<ref name="fairtaxbook"/> Proponents believe that states that choose to conform to the federal tax base would have advantages in enforcement, [[information sharing]], and clear interstate revenue allocation rules.<ref name="billtext"/><ref name="states">{{cite web|url=http://fairtax.org/PDF/TheFairTaxWhatsInItForTheStates.pdf |format=PDF|title=The FairTax: What’s in it for the states? |publisher=Americans For Fair Taxation |accessdate=2007-01-29}}</ref><ref name="BHIstates"/> A study by the [[Beacon Hill Institute]] concluded that, on average, states could more than halve their sales tax rates and that state economies would benefit greatly from adopting a state-level FairTax.<ref name="BHIstates"/> Economists from the [[University of Tennessee]] concluded that while there would be many desirable [[macroeconomic]] effects, adoption of a national retail sales tax would also have serious effects on state and local government finances.<ref name="UTKstates"/> Economist Bruce Bartlett stated that if the states did not conform to the FairTax, they would have massive confusion and complication as to what is taxed by the state and what is taxed by the federal government.<ref name="Bartletttaxnotes"/> In addition, sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles&mdash;Bartlett suggests that the state may not have sufficient incentive to enforce the tax.<ref name="BartlettWSJ"/> University of Michigan economist Joel Slemrod argues that states would face significant issues in enforcing the tax. "Even at an average rate of around five percent, state sales taxes are difficult to administer."<ref name="nyreview">{{cite news| url=http://www.nytimes.com/2005/11/13/books/review/13slemrod.html?ei=5088&en=adb65ce66e79b77f&ex=1289538000&partner=rssnyt&emc=rss&pagewanted=print| last=Slemrod| first=Joel| title='The Fairtax Book' and 'Flat Tax Revolution': 1040EZ — Really, Really EZ| publisher=New York Times| date=[[2005-11-13]]| accessdate=2006-07-25}}</ref> The [[President's Advisory Panel for Federal Tax Reform]] stated that if the federal government were to cease taxing income, states might choose to shift their revenue-raising to income.<ref name="finalreport"/> Absent the [[Internal Revenue Service]], it would be more difficult to maintain viable income tax systems.<ref name="UTKstates">{{cite web | url=http://www.taxadmin.org/fta/FS_Symposium/Fox-Murray.pdf | title=A National Retail Sales Tax: Consequences for the States | format=PDF | last=Fox | first=William F. | coauthors=Murray, Matthew N. | publisher=Federation of Tax Administrators | date=2005-05-13 | accessdate=2008-01-19}}</ref> ===Underground economy=== Opponents of the FairTax argue that imposing a national retail sales tax would drive transactions underground and create a vast [[underground economy]].<ref name="money"/><ref name="NSTv.VAT">{{cite web| url=http://www.jpfo.org/fairtax.htm| last=Franks| first=Dale| coauthors=| title=The NST v. the VAT| publisher=QandO| date=[[2004-12-08]]| accessdate=2006-08-12}}</ref> Under a retail sales tax system, the purchase of intermediate goods and services that are [[factors of production]] are not taxed, since those goods would produce a final retail good that would be taxed. Individuals and businesses may be able to manipulate the tax system by claiming that purchases are for intermediate goods, when in fact they are final purchases that should be taxed. Proponents point out that a business is required to have a registered seller's certificate on file, and must keep complete records of all transactions for six years. Businesses must also record all taxable goods bought for seven years. They are required to report these sales every month (see [[FairTax#Personal vs. business purchases|Personal vs. business purchases]]).<ref name="billtext"/> The government could also stipulate that all retail sellers provide buyers with a written receipt, regardless of transaction type (cash, credit, etc.), which would create a paper trail for evasion with risk of having the buyer turn them in (the FairTax authorizes a reward for reporting tax cheats).<ref name="KotlikoffBartlett"/> While many economists and tax experts support a consumption tax, problems could arise with using a retail sales tax rather than a [[value added tax]] (VAT).<ref name="money"/><ref name="Bartletttaxnotes"/> A VAT imposes a tax at every intermediate step of production, so the goods reach the final consumer with much of the tax already in the price, along with some extra overhead. The retail seller has little incentive to conceal retail sales, since he has already paid much of the good's tax. Retailers are unlikely to subsidize the consumer's tax evasion by concealing sales. In contrast, a retailer has paid no tax on goods under a sales tax system. This provides an incentive for retailers to conceal sales and engage in "tax [[arbitrage]]" by sharing some of the illicit tax savings with the final consumer.<ref name="VAT">{{cite web| url=http://qando.net/details.aspx?Entry=2443| last=Franks| first=Dale| title=Fair Tax Supporters: Whistling Past the Graveyard| publisher=QandO| date=[[2005-08-25]]| accessdate=2006-07-25}}</ref> [[Laurence Kotlikoff]] of Boston University has stated that the government could compel firms to report, via [[Tax forms in the United States#1099_series|1099-type forms]], their sales to other firms, which would provide the same records that arise under a VAT.<ref name="KotlikoffBartlett"/> In the United States, a general sales tax is imposed in 45 states plus the District of Columbia (accounting for over 97 percent of both population and economic output). Most states also collect a variety of local sales taxes including county, city, and transit taxes.<ref name="SalesTaxFAQ">{{cite web| url=http://www.salestaxinstitute.com/sales-tax-faq.jsp| title=Sales Tax FAQ| publisher=Sales Tax Institute|accessdate=2006-08-11}}</ref> The United States has a large infrastructure for taxing sales that many countries do not have. Proponents respond to the underground economy argument by pointing out that, whereas tax evasion under the current income tax system requires only one person (the payer) to lie on their tax forms, tax evasion under the FairTax requires collusion of both the payer (the retail purchaser) and the payee (the retail seller). Furthermore, the number of individuals required to file taxes drops from approximately 100 million to 14 million, a drop in excess of 80 percent.<ref name="KotlikoffBartlett"/> This drop in the number of collection points will allow the tax administration to view tax fraud with greater scrutiny.<ref name="taxfilers" /> Proponents of the FairTax see a substantial amount of additional tax revenue from those engaging in the black market, as a sales tax would require all who consume to be taxed (see [[FairTax#Effects on tax code compliance|Effects on tax code compliance]]). ===Personal versus business purchases=== For an individual to purchase items tax-free for business purposes, the business would be required to be a registered seller with the state sales tax authority, and thereby be subject to audit. The state would issue the business a registered seller's certificate. This would enable the business to purchase tax free from wholesale vendors, but they must give a copy of their registration certificate to the vendor to leave an audit trail.<ref name="billtext"/> When an item is purchased for business use from a retail vendor, the business would have to pay the tax on the purchase and take a credit against the tax due on their sales tax return. Taxable property and services purchased by a qualified non-profit or religious organization "for business purposes" would not be taxable.<ref name="nonprofit">{{cite web| url=http://www.fairtax.org/pdfs/religious_giving.pdf| format=PDF| title=The impact of the FairTax on religious and other charitable giving| publisher=Americans For Fair Taxation| date=| accessdate=2006-08-13}}</ref> Businesses would be required to submit monthly or quarterly reports (depending on sales volume) of taxable sales and sales tax collected on their monthly sales tax return.<ref name="ABKS" /> During audits, the business would have to produce invoices for the "business purchases" that they did not pay sales tax on, and would have to be able to show that they were genuine business expenses.<ref name="billtext"/> Since 145 million individuals would no longer be filing tax returns, there would only be about 25 million businesses that could be audited.<ref name="taxfilers" /> Advocates claim that this would greatly increase the likelihood of business audits, making tax evasion behavior much more risky. Additionally, the FairTax legislation has several fines and penalties for non-compliance and authorizes a mechanism for reporting tax cheats and obtaining a reward.<ref name="billtext"/> To prevent businesses from purchasing everything for their employees, in a family business for example, goods and services bought by the business for the employees that are not strictly for business use would be taxable.<ref name="billtext"/> Health insurance or medical expenses would be an example where the business would have to pay the FairTax on these purchases. ==FairTax movement== [[Image:Orlandotaxrallypic1.jpg|thumb|right|300px|Grassroots supporters organize in [[Orlando, Florida]] for a FairTax Rally on [[July 28]], [[2006]].]] The origins of the FairTax began with a group of businessmen from Houston, Texas, who initially financed what has become the [[advocacy group|political advocacy group]] [[Americans For Fair Taxation]] (AFFT), which has grown into a large [[grassroots]] [[tax reform]] movement.<ref name="movement">{{cite web|url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4429 |title=Committee on Ways and Means Hearing -Statement of Leo Linbeck| publisher=Committee on Ways and Means|date=2005|accessdate=2007-01-25}}</ref><ref name="thetruth"/> This organization, founded in 1994, claims to have spent over $20 million in research,<ref name="redherring">{{cite news|url=http://online.wsj.com/article/SB118835673922011955.html| title=Be Fair to FairTax -- Throw the Red Herrings Back in the Water| publisher=Wall Street Journal|last=Linbeck| first=Leo| date=[[2007-08-29]]|accessdate=2007-09-02}}</ref> marketing, lobbying, and organizing efforts over a ten year period and is seeking to raise over $100 million more to promote the plan. AFFT includes a staff in [[Houston]] and a large group of volunteers who are working to get the FairTax enacted.<ref name="ABKS"/> [[Bruce Bartlett]] has charged that the FairTax was devised by the [[Church of Scientology]] in the early 1990s.<ref name="BartlettWSJ" /> Representative John Linder told the ''[[Atlanta Journal-Constitution]]'' that Bartlett confused the FairTax movement with the [[Scientology]]-affiliated [[Citizens for an Alternative Tax System]].<ref>{{cite news| url=http://www.ajc.com/metro/content/shared-blogs/ajc/politicalinsider/entries/2007/08/28/on_john_linder_and_scientology.html | title=On John Linder and Scientology| publisher=The Atlanta Journal-Constitution| date=[[2007-08-28]]| accessdate=2007-08-30 |last=Galloway |first=Jim}}</ref> Leo Linbeck, AFFT Chairman and CEO, stated "As a founder of Americans For Fair Taxation, I can state categorically, however, that Scientology played no role in the founding, research or crafting of the legislation giving expression to the FairTax."<ref name="redherring" /> Much support has been achieved by [[talk radio]] personality [[Neal Boortz]]. Boortz's book (co-authored by Georgia Congressman [[John Linder]]) entitled ''[[The FairTax Book]]'', explains the proposal and spent time atop the [[New York Times Best Seller list|''New York Times'' Best Seller list]]. Boortz stated that he donates his share of the proceeds to charity to promote the book.<ref name="boortzbook">{{cite web| url=http://boortz.com/nuze/200509/09202005.html| last=Boortz| first=Neal| title=Nealz Nuze|publisher=Cox Radio| date=[[2005-09-07]]| accessdate=2006-08-07}}</ref> In addition, Boortz and Linder have organized several FairTax rallies to publicize support for the plan. Other media personalities have also assisted in growing grassroots support including radio and former TV talk show host [[Larry Elder]], radio host and former Senatorial candidate [[Herman Cain]], [[Fox News Channel|Fox News]] and radio host [[Sean Hannity]], and [[ABC News]] co-anchor [[John Stossel]].<ref name="boortzrally">{{cite web| url=http://boortz.com/nuze/200605/05252006.html| last=Boortz| first=Neal| title=Nealz Nuze|publisher=Cox Radio| date=[[2006-05-25]]| accessdate=2007-02-26}}</ref> The FairTax has received additional visibility as one of the issues in the [[United States presidential election, 2008|2008 presidential election]] on the issue of taxes and the IRS. At a debate on [[June 30]], [[2007]], several [[2008 Republican presidential candidates|Republican candidates]] were asked about their position on the FairTax and many responded that they would sign the bill into law if elected.<ref name=ifrquestions>{{cite web | url=http://www.taxrelief.org/presidential_forum.htm | title=Candidate Questions Answered | accessdate=2007-08-02}}</ref><ref name="2008election">{{cite news| url=http://abcnews.go.com/Politics/Story?id=3428541&page=2 |title=Thompson Flip Flops on Taxes? |publisher=ABC News |last=Davis |first=Teddy |date=[[2007-07-31]]| accessdate=2007-08-02}}</ref> The most vocal promoters of the FairTax in the election are former Republican candidate [[Mike Huckabee]] and former Democratic candidate [[Mike Gravel]]. The Internet, [[blogosphere]], and [[electronic mailing lists]] like [[Yahoo! Groups]] have contributed to informing, organizing, and gaining support for the FairTax. Many web sites have been created by supporters to help organize the effort and promote the plan. ==See also== {{FairTax}} *[[Alternative Minimum Tax]] *[[Consumption tax]] *[[Flat tax]] *[[Income tax in the United States]] *[[Progressive tax]] *[[Regressive tax]] *[[Sales taxes in the United States]] *[[Tax incidence]] *[[Taxation in the United States]] <!-- Above 4 blank lines are necessary for template to fit properly. --> ==Notes== {{Reflist|2}} ==Further reading== <!-- Please do not add articles to this section - Reserve for relevant books --> *{{cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2006 | title=[[The FairTax Book|The FairTax Book: Saying Goodbye to the Income Tax and the IRS]] | edition=Paperback | publisher=Regan Books | isbn=0060875496 }} *{{cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2008 | title=[[FairTax: The Truth: Answering the Critics]] | edition=Paperback | publisher=HarperCollins | isbn=9780061540462}} *{{cite book | first=Laurence| last=Kotlikoff | coauthors=Burns, Scott | year=2004 | title=[[The Coming Generational Storm: What You Need to Know about America's Economic Future]] | publisher=MIT Press |isbn=0262112868}} *{{cite book | first=Edward, J. | last=McCaffery | year=2006 | title=Fair Not Flat: How to Make the Tax System Better and Simpler | edition=Paperback | publisher=University of Chicago Press | isbn=9780226555614 }} *{{cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret: Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | isbn=1403391890 }} *{{cite book | first=Nelson |last=Warwick | year=2007| title=Fair Tax: A Wolf in Sheep's Clothing |edition=Paperback | publisher=AuthorHouse | isbn=9781434314628}} *{{cite book | first=George R. | last=Zodrow | coauthors=Mieszkowski, Peter | year=2002 | title=United States Tax Reform in the 21st Century | url=http://books.google.com/books?id=SHZF-VNri5YC&printsec=frontcover#PPP1,M1 | edition=Hardcover | publisher=Cambridge University Press | isbn=9780521803830}} ==External links== {{wikiquote|Taxation}} <!-- ******* Please discuss in article talk page before adding new links - Several grassroot sites are listed under the Americans For Fair Taxation article ******* --> *[http://www.fairtax.org FairTax.org] – Americans For Fair Taxation *[http://linderfairtax.house.gov/ John Linder's FairTax Site] – Primary sponsor of the bill *[http://fairtaxgroups.com FairTaxGroups.com] – FairTax forum recommended by Neal Boortz '''Legislation''' :*[http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.25.IH: H.R.25: ''Fair Tax Act of 2007''] – Text of House bill H.R.25 :*[http://thomas.loc.gov/cgi-bin/query/z?c110:S.1025: S.1025: ''Fair Tax Act of 2007''] – Text of Senate bill S.1025 {{featured article}} [[Category:Political movements]] [[Category:Tax reform]] [[Category:Taxation in the United States]] [[Category:United States proposed federal legislation]] [[de:FairTax Act]] [[fr:FairTax]] [[pl:FairTax]]