The Fair Tax

The Fair TaxThe Fair Tax

Americans for Fair Taxation

2

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

3

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)

Massachusetts Institute of Technology (Joseph Kahn)

4

Tax System Objectives

Simplicity

Fairness

Eliminate Loop Holes

Protect the Poor

Encourage Investment

Stimulate Business/Job Growth

5

Recommended System

A Consumption Tax

Replaces all Federal Taxes– Except special purpose excise taxes

Applies to all Consumption Expenditures– Personal– Business– Government

6

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

7

The Fair Tax Base

Fair Tax is imposed on ALL consumption:– Personal– Business* – Government

*Fair Tax is NOT imposed on:– Purchases for incorporation in a product

for subsequent sale through a retailer

8

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– Expenditures for education are treated as

an investment

9

Fair Tax BaseSource: 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

Less: Education Expenditures –$ 97.5

Plus: Expenditures by U.S. Non-residents $ 73.1

Fair Tax Base: $5,978.2

10

Rate Determination

Total Taxes Collected + Rebate

Total Consumption Expenditures

The necessary tax rate: 23%*

Results in lower taxes for 95% of All Americans!

*Shortly will have new analysis showing an even lower revenue neutral rate expected between 19-20%

=

_______________________________

11

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

12

Fair Tax Rebate—Year 2004

2004 Rebate

Household Household Annual Monthly

Size Allowance Rebate Rebate

One $9,310 $2,141 $178

Two $12,490 $2,873 $239

Three $15,670 $3,604 $300

Four $18,850 $4,336 $361

Five $22,030 $5,067 $422

Six $25,210 $5,798 $483

Seven $28,390 $6,530 $544

Eight $31,570 $7,261 $605

13

FAIR TAX EFFECTIVE TAX RATE

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$22,500 $45,000 $90,000 $180,000 $2,250,000

-11.5% 0.0% 11.5% 17.2% 20.1% 22.8%

14

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

Lower interest rates

15

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

16

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 18–28%

17

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

18

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 $280 billion cost of the income tax industry

19

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

It stimulates economic growth and job formation

20

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

21

Flat Tax vs. Fair Tax

Fair Tax Flat Tax

Is still an income tax No Yes

Eliminates $280 bil. 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 Yes No

Taxes inherited and gifted wealth more fairly Yes No

22

Probable Fair Tax Effect on State Tax Policy

Repeal of 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– Collect 1/4% from Feds

23

The Fair Tax Is:

Deceptively Simple

Extraordinarily Efficient

Fair to all Tax Payers

24

What do we want from you?

Your questions: Don’t understand? Don’t agree?

Agreement to join Americans for Fair Taxation

Agreement to contact President Bush and your congressional delegation

Your e-mail or phone # so we can “ask” for your support when timely

A contribution of $5–100/year to support AFFT budget

25

Americans for Fair Taxation

www.fairtax.org

1-800-FAIRTAX

www.azfairtax.org

info@azfairtax.org