|FREQUENTLY ASKED QUESTIONS
Choose a Topic below to get Facts about the FairTax (H. R. 25/S. 296):
» FairTax History
» Illinois for the FairTax
» FairTax Quick Facts
» Why Should I support The FairTax?
Frequently Asked Questions:
» What Exactly will be taxed?
» How will the FairTax affect all income brackets?
» What is a Prebate?
» How will the FairTax affect the cost of goods and services?
» How will the FairTax affect my investments?
» How will the FairTax affect Social Security, Seniors and Retirees?
» How will the FairTax BE COLLECTED and how will that affect the Retail Industry?
» How CAN WE HELP PASS THE FairTax?
» How will the FairTax Reduce Tax Evasion?
» How will the FairTax affect Government Funding?
» How will the FairTax affect Charitable giving?
» What are "Tax Inclusive" and "Tax Exclusive" rates?
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Congressional Co-Sponsors FairTax (H. R. 25/S. 296)
In 1994 three Houston businessmen were meeting together for lunch. As was common, they began talking about the ridiculous Federal Income Tax Code. At this particular lunch however, they decided to take action and do something about it. Each person pledged $1.5 million dollars (as seed money) hireing the best tax experts in the country to identify the faults with the current federal tax system, and determine what American Citizens would like to see in tax reform. Combining the desires of Americans Citizens and identifying the faults, these tax experts were then faced with the task of designing the "best" system of taxation. Along with the initial $4.5 million, active fundraising brought in another $17 million, which funded focus groups with citizens throughout the U. S. and studies with nationally prominent experts in tax policy.
Tax Experts funded for this study include; but not limited to:
Professors David Burton and Dan Mastromarco, University of Maryland
Professor Larry Kotlikoff, Boston University
Stephen Moore, The Cato Institute
Professor Dale Jorgenson. Harvard University
Bill Beach, The Heritage Foundation
Jim Poterba, The National Bureau of Economic Research
Professor George Zodrow, Rice University and the Baker Institute for Public Policy
Professor Joseph Kahn, Massachusetts Institute of Technology
The final result became a non-partisan bill sponsored by Congressman John Linder (R-GA) and Collin Peterson (D-MN) submitted to the House of Representatives as H. R. 2525, "The Fair Tax of 1999," resubmitted in the 109th Congress as H.R.25, "Fair Tax Act of 2005" and was recently submitted into the 110thCongress also as H.R.25, "FairTax Act of 2007" and on April 3, 2007 Senate Bill S. 1025(now S 296 in the 111th Congress) was introduced by Senator Saxbly Chambliss from Georgia. These studies make the FairTax the most researched tax plan ever.
Recognizing that for the Federal Government to take such a significant step to eliminate the Income Tax Code in favor of a Consumption Tax, would require evidence of overwhelming support by the American People. Americans For Fair Taxation was established as a result of these studies and has been developing satelite FairTax Volunteer organizations throughout the United States with the sole purpose of educating citizens and encourging their support of the FairTax. Since its inception in 1995, Americans For Fair Taxation has grown to become the largest tax reform organization in the United States with hundreds of thousands of supporters and members.
» Read a letter from Congressmen Linder and Peterson
» Visit the Americans for Fair Taxation Website
» Visit Congressman Linder's Website
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Illinois for the FairTax
Illinois for the FairTax is a group of concerned Illinois citizens with the express mission of educating other Illinois citizens about the merits of changing the federal tax system from direct taxation of income to indirect taxation through a national consumption tax as outlined in House Bill H. R. 25 &
Senate Bill S. 296.
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Discussions with focus groups throughout the country showed that what citizens wanted is a tax system that provided Simplicity and Visibility.
The FairTax achieves these objectives through:
One rate for everyone
No more tax filings
Any CHANGE TO THE TAX RATE will show immediately on every cash register receipt
Protects low income families through a tax rebate on the necessities of life
Everyone pays the same rate on every purchase
In Addition, the FairTax produces the following:
Lets every worker keep their entire pay check; e.g., no payroll or income taxes
Allows those at/below the poverty level to have zero or negative taxes
Lets retirees keep their full pension or Social Security Checks - untaxed
Lets everyone keep their capital gains and investment income - untaxed
Encourages savings and investment creating greater National Growth and Productivity
Encourages Repatriation of wealth from tax havens
Stimulates Exports which leads to greater U.S. employment
Stimulates economic growth and job formation
Eliminates gift and inheritance taxes
Taxes spending of gifted and inherited wealth more fairly
Has a significantly lower cost of enforcement; e.g., Compliance
Makes the federal tax rate visible and politically risky to increase
Ends ALL Personal and Corporate income tax filings
Eliminates the IRS as we know it
Frees approximately $250 Billion tax accounting/law industry and $8 billion funding of the IRS for more productive employment
Eliminates Tax Loopholes; e.g., no more filings, no exemptions, no loopholes
Why should I Support the FairTax?
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Frequently Asked Questions
(Documents below are in PDF format. You need to have the Adobe Acrobat Reader installed to view these documents. To download a FREE PDF reader, click here.)
What exactly will be taxed?
A single rate, single-stage tax will be applied to the sale of all new consumer goods and services at the final point of consumption. This will result in 23% of a purchase being represented by tax. (For a discussion of "tax inclusive" vs "tax exclusive" Rates, see below.) Used items will not be taxed. Business-to-business purchases for the production of goods and services will not be taxed. Most importantly, you will keep 100% of your paycheck; there will be no more income, capital gains, self-employment, gift or corporate taxes and all households will receive a monthly rebate check. Under the FairTax no American will pay taxes on necessities. The rebate will be equivalent to the tax paid on esential goods and services and rebate checks will be mailed before the tax is actually paid. Monthly rebate checks are paid in equal installments at the beginning of each month and the size of the monthly rebate is determined by the federal poverty level for a particular household size. (Household is defined here as one or more individuals.)
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What is a Prebate?
The FairTax prebate "untaxes" the poor and ensures that no one has to pay tax on basic neccessities of life which makes the FairTax, progressive.
» View this chart for the details on how the 2007 Prebate works
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How will the FairTax affect ALL income brackets?
The FairTax is distributed amonst all income brackets fairly and more balanced than the current income tax system.
The FairTax empowers low income families because:
No American will pay taxes on necessities.
Every household receives a monthly rebate equal to the FairTax paid on essential goods and services.
Wage earners keep 100% of their paycheck.
More "real" dollars available to spend, save, and/or invest.
More "real" dollars for low income families to allow easier upward mobility.
Used items will not be taxed.
Education is considered an Investment under the FairTax therefore educational costs will go down by as much as 50% and becomes
easier to obtain.
The FairTax is the only plan that can legitimately claim to "untax" the poor. Not only will they receive the prebate on necessities but hidden (embedded) taxes, which are especially hard on the poor, will be eliminated. Those spending at twice the poverty level will pay a rate much lower than the income and payroll tax burdens they bear today,. The FairTax will dramatically improve the economy, making jobs more plentiful and increase wages.
Middle-income earners will benefit greatly under the FairTax. Just as the low income families benefit (see bullet list above) so do middle income families. In addition small business compliance costs virtually disappear. Self-employment taxes; gone. Hidden (embedded) taxes disappear and taxes become VISIBLE and the TAX RATE for middle-income families will drop.
The Wealthy will also be available for a rebate based on household size, just as those in other income brackets (no discrimination). With the elimination of corporate taxes, business-to-business taxes, self-employment taxes, capital gains taxes (investment and savings), and estate taxes, the increase in revenue, not only for individual households but for small business, allows that increase to be spent on developing factories (jobs), financing research (jobs), education (investment), savings and investment (all of which will not be taxed). Those in the upper income brackets, the Wealthy, spend more money than other individuals.
» Find out more about the affect of the FairTax on the Average American Citizen
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How will the FairTax affect the costs of goods and services?
The FairTax will dramatically reduce the costs of goods and services. Currently there are embedded costs in the price of products on the market. When these embedded taxes are removed, market share (competition) will force prices down. Dr. Dale Jorgenson, Chairman of the Economics Department at Harvard University, has projected a producer price reduction in just the first year after the adoption of the FairTax (H. R. 25/S. 1025). Dr Jorgenson also estimated service prices would decline due to the repeal of the income tax (16th amendment). Additionally the FairTax will lower compliance costs by more than 90% and the removal of these costs will force prices down even lower.
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How will the FairTax affect My Investments?
The Stock Market, mutual funds and retirement funds will prosper under the FairTax for both small and large investors, because corporations will face lower operating costs and individuals will have more money to save and invest. The FairTax will significantly enhance retirement savings for all Americans. Tax-free bonds will still be tax-free and all stocks, bonds and other investments will be tax-free as well!
The FairTax will greatly benefit real estate in a numbwer of ways, starting with the non-taxability of mortgage interest, which doubles the value of the mortgage interest deduction over today's allowable deductions. Taxpayers will for the first time be able to pay interest with pre-payroll and income tax dollars. Today, at best, taxpayers must pay mortgage interest with after-payroll tax dollars. Under the FairTax, mortgage interest rates will also fall. For example, on a $150,000, thirty-year home mortgage at an interest rate of 8 percent, the monthly mortgage payment would be $1,112.64. On that same mortgage at a 6 percent interest rate, the monthly paymnet would be $907.64. The two-point decrease in interest rates in this instance would result in a $73,800 cost savings!
Under the FairTax plan, home ownership will be a possibility for many who don't have that option under the current income tax system. Lower interest rates, the repeal of the income tax (16th amendment), the repeal of all payroll taxes, and the FairTax rebate will mean that people will have more money to spend, as well as the opportunity to become homeowners.
Interest rates will drop quickly by approximately 25% after passage of the FairTax bill (H. R. 25/S. 296). Interest rates include compensation to the lender for the tax that they must pay on interest. That is why taxable bonds bear a higher interest rate than tax-exempt bonds. When the tax on interest is removed, interest rates will drop toward today's tax-exempt rate. Under the current system, savings and investments are taxed. Under the FairTax, savings and investments will not be taxed at all. As Americans save more money, and businesses invest more in the world's only "zero tax" advantaged country, the pool of funds in lending institutions will grow, thereby causing the cost of borrowing funds to drop.
Find out more about how the FairTax will affect:
Stock and Bond Markets
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How will the FairTax affect Social Security, Seniors and Retirees?
The FairTax will ensure funding of Social Security and Medicareand will make the economy much more dynamic and prosperous. Consequently, federal tax revenues will grow. This makes is less likely that federal budget pressures will require Medicare or Social Security benefit cuts. Under the FairTax Social Security will operate exactly as it does today. except that its funds will come from the FairTax. Research shows that consumption is a more stable revenue source than income tax.
As a group, Seniors will do very well under the FairTax. Low-income Seniors will be much better off with the FairTax than under the current income tax system. Seniors, like everyone else, will receive a monthly rebate, in advance of purchases, for taxes paid on the cost of necessities. There will be no more income tax on Social Security. There will be no more income tax on investment income and pension benefits or IRA withdrawals. Seniors who own existing homes stand to experience large capital gains due to the repeal of the income tax (16th amendment) and implementation of the FairTax plan.
Prices at the cash register will go down under the FairTax (including the cost of prescription drugs!). The price of every good or service we buy today is inflated by the cost of income and payroll taxes paid by workers and businesses and passed on to consumers in the form of higher prices. When income and payroll taxes are repealed (16th amendment), prices will come down according to Dr. Dale Jorgenson, Chairman of the Harbvard University Economics Department. Therefore Senior citizens, like alll Americans, will be able to buy more, invest more, save more or simply be in charge of thier own finances.
Government benefits, Social Security and Medicare funding will be ensured, tax deferred investments will now be tax-free and savings, invested in stock, real estate, and some bonds will increase substantially in value. Most importantly, the FairTax will create wealth for all Americans providing tax-free dollars for tax-free savings, and for retirement thereby providing additional money for future prescription drugs and nursing care.
» Find out more about how the FairTax will impact Senior Citizens
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How will the FairTax be collected and how will that affect the retail industry?
Retail businesses will collect the tax from the consumer; 45 of the 50 United States already have a sales tax system in place and the FairTax will simply be an additional line on the current sales tax reporting form (businesses only required to file). In rare cases, businesses that produce products or services that are not currently taxed under state sales tax codes will have to begin collecting the FairTax for the first time. Businesses simply collect the tax and send it to the state taxing authority. All businesses serving as collection agents will receive a fee for collection services and state agencies will also be paid a collection fee. Tax revenues collected by states will then be sent the the U.S. Treasury. State participation in the FairTax collection system is voluntary and states can choose to outsource their collections to another state. The retail industry will significantly save money from reduced compliance costs under the FairTax. Retail businesses, along with other businesses are already tax collectors. They are required to withold income and payroll taxes from their employees. Moreover, the vast majority of retail businesses currently operating in states with a sales tax (45 of 50 states currently use a sales tax) are already sales tax collectors. Under the FairTax, retailers would have the responsibility to collect and submit the tax. Those five states who do not have a sales tax will find the FairTax easier and much less expensive than the current confusing and cumbersome tax code. In addition, retailers would be paid a fee equal to one-quarter of one percent of the federal sales taxes they collect and remit.
Retailers would no longer need to bear the cost of complying with the income tax, including uniform capitalization requirements, various depreciation schemes and employee benefit and pension rules. Beneficial effects of eliminating income tax compliance costs, no income taxes, and a reasonable fee for collecting the FairTax, will ensure that retailers will do quite well.
» Find out more about the affect of the FairTax on Retailers
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How will we pass the FairTax?
Did you know that passing the FairTax requires the votes of only 32 members of Congress? Over the pas six years Americans for Fair Taxation has grown to be one of the largest and most powerful grassroots tax reform organizations. Getting the FairTax to the floor of the House and Senate is the critical point in the evolution of the FairTax. Once the FairTax reaches the "floor" it cannot be ignored. All members will have to vote “yea” or “nay” and be held accountable to their constituents for their vote. Bringing the FairTax to a vote in both houses requires only 32 votes! If 11 members of the Senate Finance Committee and 21 members of the House Ways and Means Committee support the FairTax, they can bring the FairTax bill out of their respective committees to the floor of the House and Senate. At that point, it would be Leadership's decision whether to bring it up for a vote of the full membership.The Senate Finance Committee has 20 members and the House Ways and Means Committee has 40 members. We must work together to inform and educate those 59 legislators about the many significant advantages of the FairTax. Once we accomplish that reasonable and modest goal, the FairTax will be well on its way to "reality" and the IRS AN ORGANIZATION OF THE PAST.Only consistent "grassroots" enthusiasm and pressure will ensure that these key legislators, followed by the rest of congress, will address the FairTax. Congressmen rarely hear from large numbers of constituents on any one issue but if there is one distinctive time when Congressmen do listen, it is when their constituents speak in large numbers! Be enthusiastic and consistent when contacting your representatives about the FairTax. Your letters, emails and phone calls will make a difference. Tell your elected leaders that the FairTax is not only a plan whose time has come but most likely the financial salvation of the United States.
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How will the FairTax reduce TAX EVASION?
The old saying that "nothing is certain except death and taxes" should be modified to include "tax evaision" under the current tax code! The IRS estimates that at least 40% of Americans, who file, no longer comply with the current tax code. Most non-compliance is unintentional, due to the enormous complexity of the present system and the code that regulates it. Whatever non-compliance costs the IRS, it raises taxes for those who do comply by over 33%! Of course the IRS figures do not include taxes lost on illegal income sources.
Disrespect for the present tax system and the law has reached dangerous levels, and makes a system based on taxpayer "self-assessment" less viable. The FairTax is simple and straightforward greatly reducinhg the problem of tax evasion. Increasing fairness, simplicity, transparency and legitimacy of the system promotes compliance. Reducing tax filers by 90% enables tax administrators to effectively address non=compliance, increasing probability tax evasion will and can be discovered.
Businesses will only need to answser one question to determine the tax due: how much was sold to consumers? Those who were able to easily evade taxes under the current income tax system will be hard pressed to do so under a federal sales tax. (the FairTax)
Finally, because tax rates will decrease, tax evasion will become less profitable and less desirable because dramatic reductions in actual tax filers, tax evaders will be more easily caught under the FairTax system.
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How will the FairTax affect Federal Government Funding?
The FairTax plan is designed to be revenue-neutral for the first year of operation; e.g., raises the same amount of revenue as currently being raised. After the first year, revenue is expected to rise because of the growth generated by the FairTax. At that time American Citizens, Congress, and the President will have to decide whether to lower the tax rate or spend the addtional revenues.
Under the FairTax, citizens will better be able to determine if their elected representatives are acting in their best interest. Legislators will be held accountable for their decisions because the FairTax is highly visible. Because there is only one tax rate, Congress will not be able to adopt the typical, "divide-and-conquer", "hide-and-disguise", strategy employed today to promote special interests. For the first time in decades, it will be simple to see whether any politician advocates an increase in taxes for programs truly supported by the people in their respective districts. This is not the case with our current tax code. The Fairtax has bi-partisan support from people in all walks lf life. Its supporters share one common belief: the FairTax is fairer, simpler, and a more efficient way to raise federal revenues.
» Find out more about the impact of the FairTax on Government Revenues
» Find out more information about the impact of the FairTax on Government Stability
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How will the FairTax affect Charitable Giving?
The FairTax will allow people to make charitable contributions from pre-tax dollars. With more money available to spend, more people will give. Most taxpayers today cannot deduct their contributions and only a relative few who actually do itemize may deduct their contributions with after-tax payroll dollars. For those less affluent, taxpayers who do not itemize, the cost of charitable giving will actually go down under the FairTax because they will be able to make contributions from pre-tax dollars.
» Find more about the impact of the FairTax on charitable Giving!
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What are "Tax Inclusive" and "Tax Exclusive" Rates?
When discussing tax rates it's important to understand whether the "tax inclusive" or "tax exclusive" is being quoted in order to fairly compare "apples with apples". One describes the rate with the tax included in the total and the other with the tax excluded from the total.
The tax rate contained in the FairTax bill (H. R. 25/S. 296) is 23%, and is called a "Tax Inclusive" rate which is comparable to the income tax, always stated as tax inclusive; that is, the tax is "included" in wages.
For example, if a person earns $40,000 and $9,200 in income tax and payroll withholding is taken from his paycheck, the $9,200, which is "included" in the wages, represents 23% of his income ($40,000 X .23 = $9,200) leaving that person with $30,800 after taxes.
Now divide the $9,200 in taxes by the $30,800 in after tax wages to get the "exclusive" rate of 29.9%.
Now then compare this to the FairTax. If a person makes a $100 purchase and $23 dollars of the purchase is tax, the tax "tax inclusive" rate is 23%. However, the $23 represents 29.9% of the $77 value of the goods purchased ($100 - $23 =$77). The 29.9% rate is called a "Tax Exclusive" rate. "Tax Inclusive" and "Tax Exclusive" rates are equivalent: equal - the same.
Under the current federal tax system, anyone with up to $80,000 of income pays the 7.65% employee half of payroll taxes. The minimum marginal income tax rate is 15% of taxable income and increases to 39% at higher income levels. That means the lowest inclusive payroll-withholding rate is 22.65% (rounded to 23%) and most people have federal tax withholdings well in excess of 23%.
When comparing income tax rates with FairTax rates it's important to compare "tax inclusive" with "tax inclusive" rates and "tax exclusive" with "tax exclusive" rates: e.g., "apples to apples" - "oranges to oranges" to make a fair comparison.
Another graphic way to explain it!
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