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FAQs

 

How does the FairTax affect wages and prices?

Is the FairTax fair?

How is the tax collected?

How does the prebate work?

How is the Social Security system affected?

What is taxed?

How does the FairTax protect low-income and lower-middle-income families and individuals?

How is the FairTax better than our current system?

Is consumption a reliable source of revenue?

How does the FairTax affect senior citizens, the retired, and people on fixed incomes?

What taxes are abolished?

Can the FairTax really be passed into law?

How does the FairTax affect wages and prices?

Americans who produce goods and earn wages must pay significant tax and compliance costs under the current federal income tax system. These taxes and costs both reduce after-tax wages and profits and are then passed on to the consumers of those goods and services in the form of price increases. When the FairTax removes income, capital gains, payroll, estate, and gift taxes, the pre-FairTax prices of those good and services will fall. The removal of these hidden taxes may also allow wages to rise. Exactly how much prices will fall and wages will rise depends on market forces. For example, in a profession with many jobs and not enough workers to fill them, wages will likely increase more than in a field where there are too many employees and too few positions available. Return to top

Is the FairTax fair?

Yes. The FairTax is fair and, in fact, much more fair than the income tax. Wealthy people spend more money than other individuals. They purchase expensive cars, big houses, expensive jewelry, designer clothing and yachts; they buy the filet mignon instead of a hamburger, fine wine rather than beer. The FairTax taxes them on these purchases. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities, then those activities are not taxed. You are only taxed on the new products and services you purchase so the less you buy the less you are taxed. Return to top

How is the tax collected?

Retail businesses collect the tax from the consumer, just as state sales tax systems currently do. The FairTax is simply an additional line on the current sales tax reporting form. Retailers simply collect the tax and send it to the state taxing authority. All businesses serving as collection agents receive a fee for collection, and the states also receive a collection fee. The tax revenues from the states are then sent to the U.S. Treasury. Return to top

How does the prebate work?

All valid Social Security cardholders who are U.S. residents receive a monthly prebate equivalent to the FairTax paid on essential good and services, also known as the poverty level expenditures. The prebate is paid in advance in equal installments each month. The size of the prebate is determined by the Department of Health and Human Services' poverty level guideline multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc. Return to top

How is the Social Security system affected?

Like all federal spending programs, Social Security operates exactly as it does today, except that its funds come from a broad, progressive sales tax, rather than a narrow, regressive payroll tax. Employers continue to report wages for each employee to the Social Security Administration for the determination of benefits. The transition to a reformed Social Security system is eased while ensuring there is sufficient funding to continue promised benefits.

Meanwhile Social Security/Medicare funds are no longer triple-taxed as under the current system: 1) when payroll taxes are initially withheld; 2) when those withheld payroll taxes are counted as part of the taxable base for income tax purposes; and 3) when the promised benefits are finally received. Return to top

What is taxed?

The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase on new goods and services for personal consumption. Used items are not taxed; business-to-business purchases for production of goods and services is not taxed. A rebate makes the effective rate progressive. Return to top

How does the FairTax protect low-income and lower-middle-income families and individuals?

Under the FairTax plan, those at or below the poverty line pay no net FairTax. Every household receive a rebate that is equal to the FairTax paid on essential goods and services, and wage earners are no longer subject to the most regressive and burdensome tax of all - the payroll tax. Those spending at twice the poverty level pay a tax of only 11.5%, a rate much lower than the income and payroll tax burden they bear today. Return to top

How is the FairTax better than our current system?

Our present tax system is one of the reasons that people are finding it so difficult to get ahead these days. It is one of the reasons the next generation may not have a standard of living as high as this generation. Cars replaced the horse and buggy, telephones replaced the telegraph, and the FairTax replaces the income tax. The income tax is holding us back and making it more difficult than is necessary to improve our families' standard of living. It makes it needlessly difficult for our businesses to compete in international markets; it wastes vast resources on complying with needless paperwork. We can do better and we must. Return to top

Is consumption a reliable source of revenue?

Yes. In fact, consumption is a more stable source of revenue than income. When comparing the yearly changes in tax bases for income tax (adjusted gross income - AGI) and the FairTax (personal consumption expenditures - PCE) for years 1974 to 2004, PCE has always grown from year to year whereas AGI dropped from 2000 - 2001 and again from 2001 - 2002. The higher growth rates of AGI in boom years results in overspending and then, when the economy slows down, either budget cuts are needed, or, more often, taxes are raised or the budget deficit increases. Return to top

How does the FairTax affect senior citizens, the retired, and people on fixed incomes?

As a group, senior citizens do very well under the FairTax plan. Low-income seniors are actually much better off under the FairTax than the current system.

Some people mistakenly believe that people who live exclusively on Social Security do not pay taxes; however, they may not know the hidden corporate income taxes and employer payroll taxes being applied whenever a purchase is made. Under the FairTax, everyone pays $0.23 out of every dollar they choose to spend on new goods and services. On top of the money they will be saving when hidden taxes are eliminated, fixed income citizens will also receive the monthly prebate like everyone else for taxes paid on the cost of necessities. Return to top

What taxes are abolished?

The FairTax is a replacement, not reform. It replaces federal income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes. Return to top

Can the FairTax really be passed into law?

Do women have the right to vote in this country? Did we pass Prohibition? Did we repeal it? Does Civil Rights guarantee freedoms far beyond the lunch counter and mass transit? All of these were grassroots efforts that resulted in radical changes in our nation and the world. Is the current income tax system any less a yoke around the necks of otherwise free people? We think not.

Passing the original 16th Amendment and the income tax wasn't easy, and repealing the income tax and the 16th Amendment won't be easy either. That is why the FairTax has strived to build a grassroots movement and gain grassroots alliances to support the effort. When the FairTax generates unprecedented economic growth in the first few months of being effective, citizens nationwide will make it clear to Washington that they want to make the change permanent. But this will only happen when the American people rally behind the effort, throw off the yoke, and demand rectification of 90 years of wrongs done by the income tax. Return to top

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FairTax Glossary

Embedded Taxes
Embedded taxes are taxes that are hidden from taxpayers. They are passed on to consumers through higher prices, to workers through lower wages, and to shareholders through lower dividends than would otherwise be the case in the absence of those taxes.

 

National FairTax Effort