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The Chairman's Report February 12, 2021

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INTO THE WEEDS—HOW THE FAIRTAX RATE IS CALCULATED

Most of us who like the FAIRtax spend most of our time explaining questions that concern the application of the FAIRtax to various parts of the economy and how it affects each person’s life.  When asked about the origin of the 23% rate, we say that this is the rate that is needed to replace the revenues being collected now by the personal and corporate income tax, the estate and gift tax and Social Security and Medicare payroll taxes.

However, the question often arises:  “What happens after the first year?  How is the rate calculated then?”  Dr. Karen Walby, an economic advisor to Americans For Fair Taxation since 2004, has provided us with an answer to that question.

As you know, the tax rate for the calendar year when the FAIRtax is enacted is set at 23 percent of the gross payments (price plus tax) for the use or consumption in the United States of taxable property (goods) or services.

The FAIRtax is revenue neutral; therefore FAIRtax revenues are allocated among the various trust funds to ensure that the same proportionate amount of revenue flows into each trust fund as would have under current law(at the time the FAIRtax was enacted).  These funds are: The General Revenue Fund, the old-age and survivors insurance trust fund (Social Security), the disability insurance trust fund, the hospital insurance trust fund (Medicare), and the federal supplementary Medicaid insurance trust fund.

For all subsequent years, the rate of tax is equal to the combined federal tax rate percentage of the gross payments for the taxable property, goods or services.  The combined federal tax rate percentage is the sum of:  (1) the general revenue rate, (2) the old age, survivors and disability insurance (Social Security) rate, and (3) the hospital insurance (Medicare) rate.

General Revenue Fund – Total collected FAIRtax revenues are allocated to the general revenue fund in the same proportion as the general revenue rate bears to the combined federal tax rate percentage.*  The general revenue rate is set at 14.91%.  

Social Security trust fund – This rate is set annually on an actuarially sound basis to provide the same amount of revenue as the current payroll tax would have raised, if it were still in effect. The Social Security Rate = revenues that would have been generated by the Social Security payroll tax divided by the FAIRtax base.

Medicare trust fund – This rate is set annually on an actuarially sound basis to provide the same amount of revenue as the current payroll tax would have raised, if it were still in effect.  The Medicare Rate = revenues that would have been raised by the Medicare payroll tax divided by the FAIRtax base.

For the first year, the allocation of total revenue from the FAIRtax is specified in HR25 as follows:
 
 
Fund Percent of FAIRtax revenues Tax Rate
General Revenue Fund 64.83 14.91
Social Security trust funds 27.74 36.31
Medicare trust funds 7.74 1.78
TOTAL FAIRtax revenues 100.0 23.0
 
BOTTOM LINE – The total FAIRtax rate will be set in the annual US Budget, which has to be passed by the House and the Senate and signed by the President.  The allocation of the total FAIRtax rate to the general revenue, Social Security, and Medicare funds will also have to be specified therein and likewise approved.  
 
If the FAIRtax is enacted before Social Security and Medicare reform, the above provisions will undoubtedly have to be revised to define how the revenues that go to each of these trust funds is determined.  Then the rates will be calculated and added to the general fund rate in order to get the total FAIRtax rate.  As mentioned above, the revenues and rates will have to be approved in the budgeting process and voted on by Congress and signed by the President.
 
 As with any other tax legislation, any part of the FAIRtax legislation can be revised by any future Congress. Tax legislation must originate in the House of Representatives.  


*See Sections101(b)(3) and (b)(4) and Section 904 of HR25..


CONCLUSION

Elia Kazan was a Greek-American film and theatre director whose career started in 1934 and continued until 1976.  He directed many classic films.  He said,  Whatever hysteria exists is inflamed by mystery, suspicion and secrecy. Hard and exact facts will cool it.

Karen has provided us the hard and exact facts that reveal there is no mystery about the FAIRtax rate.

If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org.  Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.

Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.

Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:

“If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Is it hopeless?  When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?”  But I dream things that never were; and I say “Why not?”

Isn’t it time for us to ask, “Why not?”
 

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Americans for Fair Taxation® is a 501(c)(4) non-profit, non-partisan grassroots organization solely dedicated to replacing the current income tax system with a fair, simple and transparent national consumption tax – the FAIRtax® Plan. We rely entirely on contributions from concerned citizens like you who want a tax system that will generate jobs and stimulate the economy. Welcome to the FAIRtax team!

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