Life After the Income Tax: What America Could Look Like Under the FAIRtax
Imagine receiving your paycheck and discovering that the federal government had taken nothing out of it. No federal income tax withholding. No Social Security payroll tax deduction. No Medicare payroll tax deduction. Imagine that April 15 is just another day. No more assembling W-2s, 1099s and receipts. No more calculating deductions and no more filling out long, complicated tax returns.
That is the fundamental change proposed by the FAIRtax.
The FairTax Act, H.R. 25, will:
- Repeal federal individual and corporate income taxes, payroll taxes, and estate and gift taxes.
- Replace them with a national retail consumption tax.
- Impose a 23 percent tax-inclusive rate on purchases of new goods and services.
- Exempt used goods.
- Exempt purchases for business and investment purposes.
- Provide every qualified household with a monthly “prebate” equal to the FAIRtax that would be paid on spending up to the federal poverty level.
- Eliminate filing personal and corporate income tax, gift tax and estate tax returns.
- Make April 15th just another lovely spring day.
Instead of taxing Americans when they work, save or invest, the federal government would collect its revenue when people choose to purchase new retail goods and services.
That changes incentives in the right way. No longer are you punished when you earn more. Now you pay federal taxes when you consume new retail goods or use retail services.
A person who earns a dollar can save or invest that dollar without Uncle Sam grabbing a piece of it for himself. If you have an effective tax rate of 20% and you earn a thousand dollars, you’ll have the full thousand dollars, not just 800 dollars to save or invest as you please.
Assume you invest the thousand dollars you earned in an investment that returns a modest 5% per year. Under the FAIRtax, your thousand dollars grows tax free at 5% per year.
Under the current system, you can only invest what’s left over after federal income tax is taken out, in this case, just $800. But it doesn’t stop there. Income taxes also consume 20% of your investment’s earnings leaving you less to reinvest each year.
The result is illustrated in the following chart.
| YEAR | FAIRTAX (TAX FREE) | CURRENT INCOME/PAYROLL TAX |
| 0 | $1,000.00 | $800 |
| 1 | $1,050.00 | $832 |
| 2 | $1,102.50 | $865.28 |
| 3 | $1,157.63 | $899.00 |
| 4 | $1,215.51 | $935.89 |
| 5 | $1,276.28 | $973.32 |
| 6 | $1,340.10 | $1,012.26 |
| 7 | $1,407.10 | $1,052.75 |
| 8 | $1,477.46 | $1,094.86 |
| 9 | $1,551.33 | $1,138.65 |
| 10 | $1,628.89 | $1,184.20 |
Billions Spent Preparing Taxes Could Be Put to Productive Use
The economic cost of the present system extends far beyond the taxes collected.
The Tax Foundation estimates that Americans now spend approximately 6.9 billion hours annually complying with federal tax-reporting requirements. It places the economic value of that time at approximately $387.5 billion and estimates another $157.1 billion in direct out-of-pocket compliance expenses—more than $544 billion annually in combined compliance costs.
The IRS itself estimates substantial burdens on businesses. For example, an average partnership return requires roughly 60 hours and $5,300 in out-of-pocket costs, while an average corporate Form 1120 requires about 90 hours and $8,600.
The FAIRtax would not eliminate every compliance cost—retail businesses would still collect and remit the national sales tax—but individuals and corporations will no longer prepare federal income tax returns and businesses and workers would no longer pay their share of the 15.3% payroll taxes.
Resources now devoted to tax preparation, tax accounting, depreciation schedules and income-tax planning could instead be used for investment, production, wages or consumption.
What Would Happen to Economic Growth?
No one can know precisely how an economy as large as America's would respond to such a fundamental change. Economic models, however, provide useful estimates.
A peer-reviewed study by economists Keshab Bhattarai, Jonathan Haughton and David Tuerck modeled the FAIRtax using a dynamic general-equilibrium model. It projected real economic output 3.9 percent above the baseline after one year, 6.8 percent higher after five years and 10.1 percent higher after 25 years. The model found that increased saving and investment would gradually expand the nation's capital stock and productive capacity.
This result is not unique to FAIRtax-sponsored research. A Congressional Budget Office simulation examining replacement of the federal income tax with a proportional consumption tax estimated an approximately 11 percent increase in long-run output, although the CBO model involved a different consumption-tax structure and also identified significant transition and distributional issues.
These are economic projections, not guarantees. Their importance lies in explaining the mechanism: when the tax system stops penalizing saving and investment, more capital can become available for factories, equipment, technology and business expansion. Greater capital investment can increase worker productivity and, ultimately, wages.
Would Americans Spend More or Less?
Initially, consumption could decline as households respond to the new incentive to save. The FAIRtax economic model predicts precisely that: consumption falls during the early transition while saving and investment increase.
Over time, however, the model projects real consumption approximately 4 percent above the baseline, as the larger capital stock produces greater output and income.
Consumers would also have greater control over when they incur federal tax. Buying a used automobile, for example, would not trigger FAIRtax because used property is excluded from the taxable base. Saving money would generate no FAIRtax liability until those savings were eventually spent on taxable consumption.
The monthly prebate would further change household finances by reimbursing qualified families for the FAIRtax attributable to spending up to the poverty level.
A Different Relationship Between Americans and Their Government
Perhaps the most profound change would not be economic but psychological.
Today, federal taxes are withheld before most workers ever see their earnings. Under the FAIRtax, workers would see their gross wages, and the federal tax would become visible when taxable purchases were made.
Americans would move from a system that asks, “How much did you earn?” to one that asks, “How much did you consume?”
April 15 would become just another day. Saving would no longer create a federal tax penalty. Businesses could make investment decisions without calculating their effect on federal income taxes. Families could see how much the federal government is costing them directly on their retail receipts.
The FAIRtax would therefore represent much more than just substituting one tax system for another. It would fundamentally change when Americans pay federal taxes, how businesses make economic decisions, and the relationship between earning, saving, investing and consuming.
Sources
- FairTax Act, H.R. 25 (119th Congress), GovInfo
- Tax Foundation, IRS Tax Complexity Costs the U.S. Economy More Than $544 Billion Annually
- IRS Instructions for Form 1120
- Bhattarai, Haughton & Tuerck, “The economic effects of the FairTax,” International Economics and Economic Policy
- Congressional Budget Office, Effects of Adopting a Consumption Tax
CONCLUSION
The FAIRtax will strengthen the growth side of the debt equation, but Congress must control the spending side as well.
If faster growth is combined with a balanced budget, existing debt will shrink rapidly relative to the economy and eventually be paid down through future surpluses. If trillion-dollar deficits continue, economic growth merely slows the deterioration.
The FAIRtax therefore should not be viewed as a magic debt eraser. Its fiscal advantage is that eliminating taxes on income, saving and investment could encourage capital formation, productivity and a larger economy.
Combined with a balanced federal budget, that faster-growing economy could transform today’s debt from an expanding national liability into a steadily declining share of America’s economic output.
The FAIRtax repeals federal individual and corporate income taxes and federal payroll taxes and replaces them with a transparent national retail consumption tax. The legislation expressly provides for repeal of both the income tax and payroll taxes.
Isn’t it time that we have a federal tax system that rewards things that benefit society?
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.