Effective Tax Rates Under the Current System vs. the FAIRtax
“Effective tax rate” under the income/payroll tax system is simply the percentage of your total income that you pay in federal taxes. Since the FAIRtax taxes spending, not income, the “effective tax rate” under the FAIRtax is the amount of FAIRtax you pay out of your own pocket expressed as a percentage of your total spending.
In both cases, your effective tax rate is significantly lower than the rate for your tax bracket or the 23% FAIRtax rate applied to each taxable purchase.
Calculating the Effective Tax Rate under the current income/payroll tax system
- Start with your gross income
- Subtract the standard deduction
- Use the 2026 marginal brackets, which start at 10% to a maximum of 37%, to get the income tax before other credits and deductions
- Subtract nonrefundable credits, most notably the $2,200-per-child Child Tax Credit, to get the tax owed.
- Add employee-side payroll tax — 7.65% of total wages (6.2% Social Security plus 1.45% Medicare) — which applies only to earned income, not to Social Security benefits or retirement withdrawals.
- Divide the total tax paid by gross income.
Calculating the Effective Tax Rate under the FAIRtax
- There is no income tax and no payroll tax, so a $70,000 paycheck arrives intact.
- The 23% rate is “tax-inclusive” —the way the current income tax calculates its rates.
- The tax is shown as a share of the total, not added on top.
- So $70,000 of spending contains $16,100 of embedded tax.
- Every household then receives a monthly “Family Consumption Allowance” (the prebate), tailored to your household size and set at 23% of the federal poverty guideline for that household size.
- Net tax paid is the gross tax minus the prebate.
- Divide the net tax by total spending and you get the effective tax rate.
Here are two examples:
Working couple, two children (ages 10 and 8)
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The Child Tax Credit fully offsets this family’s income tax, so their entire current-system burden is the 7.65% payroll tax withheld from their paycheck.
(Note this uses only the worker’s half of payroll tax; most economists believe workers also bear the employer’s matching 7.65% through lower wages, which would put the current-system rate closer to 15.3% — a reminder that the “correct” effective rate depends on assumptions as much as arithmetic.)
Working couple, two children (ages 10 and 8)
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It must be noted that the above calculation is a worst case scenario. Very few families spend 100% of their income on new goods and services. Most will save some, and many will purchase some used goods which are not subject to the FAIRtax as the following example illustrates.
If they purchase a previously owned home, their $15,000 annual payments are not subject to the FAIRtax. If they purchase used cars, their $10,000 annual car payments are not subject to the FAIRtax. If $25,000 of their spending is on used goods, here is the new calculation:
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CONCLUSION
Upon hearing that the FAIRtax rate is 23%, many people instinctively jump to the mistaken conclusion that the FAIRtax is going to make their lives 23% more expensive. Unless you’re spending multiplied millions of dollars every year, your effective FAIRtax rate is going to be much lower.
As, you can see in the above examples, the FAIRtax is assessed on the purchases of new goods. If a family elects to purchase used goods, those are not taxed and that is how the second illustration showed the effective tax rate under the FAIRtax is less than under the present income/payroll tax system.
Alternatively, if the family elects to purchase only new goods, the effective tax rate is higher.
The key word is “elects”. Unlike the income/payroll tax system, the FAIRtax lets people control their effective tax rate with their spending decisions.
People are upset with our present income/payroll tax system because it benefits only a small percentage of the population—the very wealthy and Members of Congress who fund their re-election campaigns by selling favorable tax treatment to the highest bidder.
For the rest of us, it’s an expensive, intrusive, incomprehensible mess that none of us fully understands.
THE FAIRTAX IS THE ANSWER.
The FAIRtax Act (H.R. 25) is more than just a proposal for a retail sales tax; it is a fundamental restructuring of the federal fiscal structure. Unlike other excise taxes which normally are applied to specific products and in different percentage amounts, the FAIRtax applies a 23% rate to all new retail products and retail services.
The FAIRtax is a national retail sales tax on new retail goods and retail services which provides a family credit so that all purchases up to the poverty level for each family are not taxed. There is no withholding from your paycheck, and YOU NEVER HAVE TO FILE A TAX RETURN TELLING THE GOVERNMENT HOW MUCH YOU EARNED AND HOW MUCH YOU SPENT, AND YOU’LL NEVER BE HARASSED BY THE IRS EVER AGAIN.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@FAIRtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.
THE SOLUTION—PASS THE FAIRTAX!
Why would D.C. pass the FAIRtax and give up this almost unlimited source of donations? The only way that they will is if the rest of us demand it!
Isn’t it time to end this ludicrous tax collection system and the IRS?
HELP BRING ABOUT REAL TAX REFORM AND STOP FUTURE IRS ABUSES
By contributing (investing) $10.40 per month, you help provide a financial base to AFFT. If you can make larger contributions (investments), these will be used not for salaries, as we are all volunteers, but for the needed updates to our economic studies which will be vital for all future years.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.