The Fair Tax Americans for Fair Taxation

The Fair Tax Americans for Fair Taxation

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 2

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) 3 Massachusetts Institute of Technology (Joseph Kahn)

Tax System Objectives Simplicity Fairness Eliminate Loop Holes Protect the Poor Encourage Investment Stimulate Business/Job Growth 4

Recommended System A Consumption Tax Replaces all Federal Taxes – Except special purpose excise taxes Applies to all Consumption Expenditures – – – 5 Personal Business Government

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 6

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 7

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 – 8 Expenditures for education are treated as an investment

Fair Tax Base Source: 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 –$ 97. 5 $ 73. 1 Less: Education Expenditures Plus: Expenditures by U. S. Non-residents 9 Fair Tax Base: $5, 978. 2

Rate Determination Total Taxes Collected + Rebate ________________ = Total Consumption Expenditures The necessary tax rate: 23% Results in lower taxes for 95% of All Americans! 10

Rate Determination How can it result in lower taxes for 95% of All Americans? By taxing – – 11 The underground economy Visitors, tourists, and illegals

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 12 18– 28%

Effect of Fair. Tax on Prices Price of goods under current system 13 $100

Effect of Fair. Tax on Prices Price of goods under income tax - Embedded taxes 14 $100 - 18

Effect of Fair. Tax on Prices Price of goods under income tax - Embedded taxes Wholesale cost of goods under Fair. Tax 15 $100 - 18 82

Effect of Fair. Tax on Prices Price of goods under income tax - Embedded taxes Wholesale cost of goods under Fair. Tax + Fairtax 16 $100 - 18 82 + 25

Effect of Fair. Tax on Prices Price of goods under income tax - Embedded taxes Wholesale cost of goods under Fair. Tax + Fairtax 82 + 25 Sales price, tax inclusive, under the Fair. Tax 17 $100 - 18 $ 107

Effect of Fair. Tax on Paychecks Get to keep whole paycheck Income Tax Gross Pay Fair. Tax 50, 000 Income Tax (17% minus $5, 150 deduction) - 3, 550 - Payroll (7. 5%) - 3, 750 - Take Home Pay 42, 700 50, 000 - 2, 400 42, 700 52, 400 Prebate (Single) Effective Income/Purchasing Power 18 22. 7%

Purchasing Power Under Fair. Tax Income Tax Net Income Fair. Tax 42, 700 52, 400 Price of “Stuff” 100 107 Amount of Stuff You Can Buy 427 490 Added Purchasing Power Under Fair. Tax 19 14. 8%

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) 20

FAIR TAX EFFECTIVE TAX RATE 21 -11. 5% 0. 0% 11. 5% 17. 2% 20. 1% 22. 8%

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 – – – 22 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 pay more than 23% of his gross purchases for Federal Taxes

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 23 Lower interest rates

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 24

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 25

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 26

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 27 It stimulates economic growth and job formation

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 28

Flat Tax vs. Fair 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 29 Flat Tax Yes No Taxes inherited and gifted wealth more fairly Yes No

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 – 30 Collect 1/4% from Feds

The Fair Tax Is: Deceptively Simple Extraordinarily Efficient Fair to all Tax Payers 31

What do we want from you? Join Five for Fair. Tax – – 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 Fair. Tax 32

Americans for Fair Taxation Texas Fair. Tax: www. txfairtax. org Fair. Tax Nation: fairtaxnation. ning. com AFFT: www. fairtax. org 33