The Fair TaxThe Fair Tax

Americans for Fair Taxation

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The Fair Tax Founders

Where Did it Start?Leo Linbeck* and two business associates(*Chairman and CEO, Linbeck Corp; Past Chairman, Federal Reserve of Dallas)

$4.5 mil. seed money from three associates

Funded studies at major universities and financial institutions

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Economic Research Participants

The Argus group (David Burton and Dan Mastromarco)

Boston University (Larry Kotlikoff)

Cato Institute (Steven Moore)

Harvard University (Dale Jorgenson)

Heritage Foundation (Bill Beach)

National Bureau of Economic Research (Jim Poterba)

Rice University, Baker Institute for Public Policy (George Zodrow)

Massachusetts Institute of Technology (Joseph Kahn)

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Tax System Objectives

Simplicity

Fairness

Eliminate Loop Holes

Protect the Poor

Encourage Investment

Stimulate Business/Job Growth

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Recommended System

A Consumption Tax

Replaces all Federal Taxes– Except special purpose excise taxes

Applies to all Consumption Expenditures– Personal– Business– Government

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The Fair Tax Replaces

All personal and business income taxes

All capital gains and investment income taxes

All social security and Medicare payroll taxes

All gift and inheritance taxes

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The Fair Tax Base

Fair Tax is imposed on ALL consumption:– Personal– Business* – Government

*Fair Tax is NOT imposed on:– Purchases used in a product for

subsequent sale through a retailer

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Special Provisions

Rebate to all Americans for tax on the necessities of life– At the poverty level, households have a zero

tax rate

Charities do not collect a tax on donations – They are not a consumer

Educational institutions do not tax tuition or other receipts and gifts– Expenditures for education are treated as

an investment

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Fair Tax BaseSource: National Income Product Accounts, Survey of Current Business, Aug., 1996 (From Emancipating America from the Income Tax by D. R. Mastromarco and D. R. Burton)

Description of Taxable Item Billions (1995)Personal Consumption Expenditures $4,924.9

Purchases of New Homes $ 156.4

Improvements to Single-family Homes $ 73.9

Imputed Rent on Housing –$ 534.3

Additional Financial Intermediation Services –$ 53.0

Foreign Travel by U.S. Residents –$ 26.4

Expenditures Abroad by U.S. Residents –$ 2.7

Food Produced and Consumed on Farms –$ 0.4

State and Local Government Consumption $ 682.6

State and Local Government Gross Purchases $ 150.1

Federal Government Consumption $ 453.8

Federal Government Gross Purchase $ 62.7

Less: Education Expenditures –$ 97.5

Plus: Expenditures by U.S. Non-residents $ 73.1

Fair Tax Base: $5,978.2

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Rate Determination

Total Taxes Collected + Rebate

Total Consumption Expenditures

The necessary tax rate: 23%

Results in lower taxes for 95% of All Americans!

=_______________________________

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Rate Determination

How can it result in lower taxes for 95% of All Americans?

By taxing– The underground economy– Visitors, tourists, and illegals

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Why Prices Will Decrease 18-28%

Product/Service Labor Cost Loaded with:

Social Security and Medicare Taxes (employer half of payroll taxes included in labor overhead)

7.8125%

Business/corporate Income Tax 5–10%

Cascading of Taxes in Tiered Production 5–10%

Total Tax Load in Product Prices 18–28%

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Effect of FairTax on Prices

Price of goods under current system $100

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Effect of FairTax on Prices

Price of goods under income tax $100

- Embedded taxes - 18

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Effect of FairTax on Prices

Price of goods under income tax $100

- Embedded taxes - 18

Wholesale cost of goods under FairTax 82

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Effect of FairTax on Prices

Price of goods under income tax $100

- Embedded taxes - 18

Wholesale cost of goods under FairTax 82

+ Fairtax + 25

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Effect of FairTax on Prices

Price of goods under income tax $100

- Embedded taxes - 18

Wholesale cost of goods under FairTax 82

+ Fairtax + 25

Sales price, tax inclusive,

under the FairTax

$ 107

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Effect of FairTax on Paychecks

Get to keep whole paycheck

Income Tax FairTax

Gross Pay 50,000 50,000

Income Tax (17% minus $5,150 deduction) - 3,550 - 0 -

Payroll (7.5%) - 3,750 - 0 -

Take Home Pay 42,700 50,000

Prebate (Single) - 0 - 2,400

Effective Income/Purchasing Power 42,700 52,400

22.7%

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Purchasing Power Under FairTax

Income Tax FairTax

Net Income 42,700 52,400

Price of “Stuff” 100 107

Amount of Stuff You Can Buy 427 490

Added Purchasing Power Under FairTax 14.8%

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Fair Tax Rebate—Year 2008

Household Size

Poverty Level

Annual Rebate

Monthly Rebate

Adult $10,400 $2,392 $199

Adult + child $14,000 $3,220 $268

Adult + 2 children $17,600 $4,048 $337

Couple $20,800 $4,784 $399

Couple + child $24,400 $5,612 $468

Couple + 2 children $28,000 $6,440 $537

Couple + 3 children $31,600 $7,268 $606

(Poverty level determined by the Dept. of Health and Human Services)

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FAIR TAX EFFECTIVE TAX RATE

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$22,500 $45,000 $90,000 $180,000 $2,250,000

-11.5% 0.0% 11.5% 17.2% 20.1% 22.8%

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Tax Inclusive vs. Tax Exclusive Rates

Income Tax Rate of 23% is Tax Inclusive– Income includes the tax that is paid

Fair Tax Rate of 23% is Tax Inclusive– Equivalent to an exclusive rate of 29.9% added

to a purchase– $100 purchase + 29.9% = $129.9 gross purchase– $29.9 tax divided by $129.9 = 23%

No American can pay more than 23% of his gross purchases for Federal Taxes

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The Fair Tax Stimulates Economic Growth

Through encouragement of:Reinvestment of tax free earnings

Reinvestment of tax free dividends

Reinvestment of untaxed capital gains

Increased personal savings and investment

Foreign capital investment

Lower interest rates

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Compliance/Tax Evasion

Easier tax enforcement– 90% reduction in tax filers– Only audits of customer shipments from

manufacturers needed– Cash register records of retails

Relative simplicity of Fair Tax will encourage compliance

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The Fair Tax Accomplishes:

It lets every worker keep their entire paycheck—NO income or payroll taxes

It lets retirees keep their pensions and social security checks—Untaxed

It lets everyone keep capital gains and investment income—Untaxed

It encourages savings and investments

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The Fair Tax Accomplishes:

It eliminates gift and inheritance taxes

It taxes spending of inherited/gifted wealth more fairly

It ends personal and corporate income tax filings

It eliminates the $225 billion cost of the income tax industry

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The Fair Tax Accomplishes:

It eliminates the need for the $8 billion IRS

It encourages repatriation of wealth from tax havens

It encourages foreign capital investment

It stimulates exports

It stimulates economic growth and job formation

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The Fair Tax Accomplishes:

It eliminates all tax loopholes

It has a significantly lower cost of enforcement

It eliminates a significant percent of congressional lobbyists

It makes the real federal tax rate visible to voters—every time the cash register rings

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Flat Tax vs. Fair Tax

Fair Tax Flat Tax

Is still an income tax No Yes

Eliminates $250 mil. Income tax industry Yes No

Simplifies business accounting and reporting Yes No

Stimulates exports Yes No

Encourages capital repatriation from tax havens Yes No

Encourages investment Yes No

Eliminates product tax build up in product cycle Yes No

Result in lower interest rates Yes No

Eliminates double taxation of business profits Yes No

Facilitates home ownership Yes No

Taxes inherited and gifted wealth more fairly Yes No

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Probable Fair Tax Effect on State Tax Policy

Repeal State Income Tax– Enforcement too expensive without IRS

Eliminate Exemptions to State Sales Tax– Necessary to become Fed tax collector– Too confusing to have different rates

Become Fed Tax Collector– Collect 1/4% from Feds

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The Fair Tax Is:

Deceptively Simple

Extraordinarily Efficient

Fair to all Tax Payers

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What do we want from you?

Join Five for FairTax – text “fairtax” to 95495, or – www.fiveforfairtax.org

Participate in – Tea Parties and special events– Community Meetings– State Organization

Let elected officials at State and Federal know you want the FairTax

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Americans for Fair Taxation

Texas FairTax: www.txfairtax.org

FairTax Nation: fairtaxnation.ning.com

AFFT: www.fairtax.org