FairTax is a single rate tax proposal which has been proposed as a bill in the United States Congress regularly since 2005 that includes complete dismantling of the Internal Revenue Service. The proposal would eliminate all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes, replacing them with a single consumption tax on retail sales.
The proposed Fair Tax Act (/) would apply a tax, once, at the point of purchase on all new goods and services for personal consumption. The proposal also specified a monthly welfare payment for low-income earners to offset the regressive tax impact. This was styled by advocates as an "advance rebate", or "prebate", of tax on purchases up to the poverty level. First introduced into the United States Congress in 1999, a number of congressional committees have heard testimony on the bill; however, it did not move from committee. A campaign in 2005 for the FairTax proposal involved Leo E. Linbeck and the Fairtax.org. Talk radio personality Neal Boortz and Georgia Congressman John Linder published The FairTax Book in 2005 and additional visibility was gained in the 2008 presidential campaign.
As defined in the proposed legislation, the initial sales tax rate is 30% (i.e. a purchase of $100 would incur a sales tax of $30, resulting in a total price to the consumer of $130). Advocates promote this as a 23% tax inclusive rate based on the total amount paid including the tax, which is the method currently used to calculate income tax liability. In subsequent years the rate could adjust annually based on federal receipts in the previous fiscal year. With the rebate taken into consideration, the FairTax would be progressive on consumption, but would still be regressive on income (since consumption as a percentage of income falls at higher income levels). Opponents argue this would accordingly decrease the tax burden on high-income earners and increase it on the lower class earners. Supporters contend that the plan would effectively tax wealth, increase purchasing power and decrease tax burdens by broadening the tax base.
Advocates expect a consumption tax to increase savings and investment, ease tax compliance and increase economic growth, increase incentives for international business to locate in the US and increase US competitiveness in international trade. The plan would provide transparency for funding the federal government. Supporters believe it would increase civil liberties, benefit the environment, and effectively tax illegal activity and undocumented immigrants. Critics contend that a consumption tax of this size would be extremely difficult to collect, would lead to pervasive tax evasion, and raise less revenue than the current tax system, leading to an increased budget deficit. The proposed Fairtax might cause removal of tax deduction incentives, transition effects on after-tax savings, incentives on credit use and the loss of tax advantages to state and local bonds. It also includes a sunset clause if the 16th Amendment to the US Constitution is not repealed within seven years of its enactment.
Legislative overview and history
The legislation would remove the Internal Revenue Service (after three years), and establish Excise Tax and Sales Tax bureaus in the Department of the Treasury. The states are granted the primary authority for the collection of sales tax revenues and the remittance of such revenues to the Treasury. The plan was 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. The FairTax legislation has been introduced in the House by Georgia Republicans John Linder (1999–2010) and Rob Woodall (2011–2014), while being introduced in the Senate by Georgia Republican Saxby Chambliss (2003–2014).