The FairTax (HR-25) was recently re-introduced into the U.S. House, with a record number of co-sponsors. Then on Wednesday, it was re-introduced into the Senate (S-122). Between the two, the FairTax already has 66 sponsors and co-sponsors, which puts it well on its way to setting even more records.
It’s gaining so much momentum that some pundits are predicting that the leadership of both parties, who don’t want to give up the perks they get from the income tax, will no longer be able to keep the FairTax bottled up in committee.
So since it may soon become a major issue, we need to look at what the FairTax means for taxpayers. One of the questions that most people ask about it is, “What will I pay?”
The rate that you pay has to do with your spending habits and family size, which goes back to the FairTax “prebate.” The prebate is a check that every citizen family or legal resident family would receive from the government, equal to the FairTax amount that a family of their size would pay on poverty level spending.
The effect is to un-tax the cost of living and make the FairTax progressive.
The prebate is based on HHS Poverty Levels. In 2012, HHS concluded that the poverty level was $11,170 an adult and $3,960 for each child. So to determine the poverty level for your family, simply multiply $11,170 by the number of adults in your household and then multiply $3,960 by the number of children in the home. Then add those two results together to determine the annual poverty level for a family of your size.
After determining the poverty level for your family size, calculating your prebate is simple. Just multiply the annual poverty level that you just calculated, by 0.23 and divide by 12 months. This is the amount of prebate that every family of your size would receive.
Finally, figuring out your effective FairTax rate is a three-step process.
1) Multiply the amount of money that you spend on new retail purchases every month by 0.23. This is the tax you pay, before prebate.
2) Subtract from that number, your calculated monthly prebate. This is your net FairTax.
3) Now divide your net FairTax by your monthly retail purchases and multiply by 100 to convert to percent.
Now you have the tools to determine your effective FairTax rate. Do the math.
In short, if you don’t currently earn more than $69,000 per year, then as the above chart shows, your effective FairTax rate should be well under 10%. This is based on the fact that half of Americans pay no income tax and according to the latest IRS data, the income floor to be in the top 25% is $69,000.
Of course, that’s before considering the inevitable drop in all retail prices, which will occur under the FairTax and which will further reduce both your spending and taxes.
For more straight forward information like this, on how the FairTax works, read “The Rich Don’t Pay Tax! …Or Do They?” by John Gaver