I n May of 2007, FactCheck.org did an article about the FairTax that has been used in many message boards and other arguments as a reason why the FairTax is not as it appears in House bill 25 or Senate bill 122. The article starts out with a simple quote from Americans for Fair Taxation which is ” A 23-percent (of the tax-inclusive sales price) sales tax is imposed on all retail sales for personal consumption of new goods and services.” FactCheck then starts a paragraph with ” First consider the way in which sales tax is normally figured .” Starting at this point and running until the end of the article, they never get back to looking at the real FairTax proposal as written into the most researched piece of legislation in US history.
FactCheck goes into an explanation about how an item selling for $100, where 23% of the price is tax, means that the original price without tax was $77. Then they show that $23 is about 30% of $77. So they make a fuss about the tax-exclusive rate being 30%. The reason the FairTax lists the tax-inclusive rate is because they are comparing it to the federal income and payroll taxes we have today. So let’s take a 15% tax out of $50K earnings. The $7500 tax has a tax-exclusive rate of 17.6%. (If 15 does not equal 17.6, then 23 should not have to equal 30.) Apples and oranges, but the same quantity.
Another point attempted by the article is that the FairTax would be on everything; even things that are not now taxed. They start with the price of a new home. But today, the cost of a new home includes the payroll tax of the lumber jacks, the lumber yard, the window maker, the door maker, the cabinet maker, the hardware store, all the warehouses, and the different truckers used to move the raw materials and many others. The calculations of the FairTax are such that tax revenue will be the same as it is today. So what the FairTax collects once at the final sale of a new item is to be the same as what will be removed; therefore, the cost of goods will remain the same.
What makes the FairTax attractive to those concerned about the poor is the prebate. The prebate is an advance for every legal citizen that counter acts the tax on all spending up to the amount calculated as the poverty level. Those who now pay the social security tax but not any federal income tax, will see a better percentage gain switching to the FairTax than those paying any income tax today.
One factor ignored by the FactCheck article is that only new items will be taxed. Goods produced and in inventory at the time the FairTax goes into effect would be exempt from the sales tax. Used items (pre-owned, items on consignment) would also not be taxed. The ability of the poor and lower middle class to avoid taxes by purchasing used items allows them to keep more of the prebate.
Other important factors not brought up in the article are the ways the FairTax would limit government’s ability to change the tax code on a weekly basis, end the cost of compliance to the IRS, collect tax revenue from visitors to the country (both legal and illegal), collect tax revenues from criminals, tax imports the same way domestic items are taxed, and lower the cost of collecting taxes by stream lining the collection process.