Tax Alerts
Fair Tax Act

By Joseph Nicholson, eHow Contributor

The so-called Fair Tax Act was introduced in 2009 as House Resolution 25 and Senate Resolution 296. Also known as the national sales tax, it essentially echoed the plan announced by then-presidential candidate (and former Arkansas governor) Mike Huckabee during his campaign in 2007. But whether or not you consider the proposal to be truly "fair" probably depends on your point of view. Though the plan simplifies the enormous U.S. tax code, it also shifts the burden away from the upper-income tax bracket to average consumers.


1.    The main idea behind the Fair Tax Act is to simplify the tax code, a valid and important issue for a lot of Americans. The problem with the Fair Tax Act, or FairTax, is that it doesn't just "simplify" the tax system; it replaces it with something completely different. The proposal was designed by Americans for Fair Taxation (AFFT), who claim simplification was their major goal. But part of the $23 million they spent in devising the plan was spent on marketing the plan, whose name was ultimately taken from tests before focus groups.


2.    The FairTax proposal eliminates the income tax and replaces it with a tax on consumption, similar to a sales tax. The stated rate is 23 percent, but in reality, this is misleading. If, for example, an object cost $10, the Fair Tax plan would tack on an additional $3 in tax. That $3 is 23 percent of the final $13 price, but is actually 30 percent of the original $10.


3.    The major effect of the FairTax plan is to shift the burden of taxation away from high income earners and towards average Americans. A consumption tax is what is called "regressive."' This means it has a greater effect on the less affluent, for whom consumption is a large percentage of their income. Proponents claim that the plan rewards saving, but this is another way of simply saying it doesn't tax the income of those who make enough to save. Meanwhile those who are essentially forced to spend most of their earnings just to meet the costs of living will pay a much higher proportion of their total income in taxes than a higher income earner. This is the exact opposite of the tax bracket system of the income tax, and probably has a large influence on whether or not individuals regard the proposed change as fair.


4.    Another major criticism leveled at the FairTax proposal is the claim that it would generate enough tax revenue to replace current income tax receipts. An executive tax panel under President Bush concluded the tax rate would have to be at least 34 percent, instead of the 30 percent proposed under the FairTax. Another economist figured the rate would have be at least 44 percent, and might have to increase with time if consumption declines as a result.


5.    The FairTax proposal calls for consumers to receive a rebate on taxes paid on consumption until the total spent reaches the poverty level. Actually, since the rebate would be given in advance at the start of each month, it's called a prebate. But this prebate is little more than an attempt to buy support for the plan. Those whose total income is at or near the poverty already pay little if anything in income taxes and would not see much of a change under the plan. The very wealthy, however, would likely see a huge decline in their tax liability, since the vast majority of their wealth will not be spent from month to month. This means the greatest impact will be felt by middle-income earners-- those making between $40,000 and $100,000 annually--who would instantly find themselves paying a much larger percent of their income in taxes than ever before.

Resources FairTax Un-'FairTax'

Read more: Problems with the Fair Tax |