Is the Fair Tax Really Fair?

Fair Tax

I recently stumbled upon the idea of a different tax system that some are advocating our country change to called The Fair Tax. I don’t know if my head has been in the sand about this or if many other people have never heard of it as well. It was an interesting concept to me so I decided to do a little research on it. As I started to learn about this system and what it would do, I became intrigued at the benefits it could offer.

I can in no way offer an in-depth analysis of this tax program in this short article (for that try or just google Fair Tax) but I can offer my view of how a system like this could benefit me and others in similar life and financial situations. I don’t know all the ins and outs of every part of this so there may be unknown drawbacks to what I would currently consider a benefit (I’m sure I’ll get some comments from opponents to the plan stating these) but this is just a brief overview of my initial reaction to this new way of possibly doing taxes.

For those unaware of the Fair Tax system, here is a brief description of it taken directly from the Fairtax website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The numbers for this proposed sales tax rate I’ve found vary between 23% and 30%. The “poverty level” referred to above I found stated on the website as $24,000 a year.

Again, I don’t know everything there is to know about this tax plan or how much it would really save or cost me and millions of other Americans, but I do have a list of reasons why this tax plan could be a good thing (based on the information I’ve found).

We would keep 100% of our paychecks: Who likes having a yearly, monthly or hourly salary number that they are given, yet only seeing a certain percentage of that in your check? It’s always frustrating seeing how much money the government takes out of your check each pay period. We accept it as a fact of life, but we wouldn’t have to under this plan. Granted we would still have to pay taxes in a different form, but it would still be nice to see your paycheck actually reflect the money you make.

No more IRS: Enacting this tax plan would basically abolish the IRS. That’s enough to make you want to throw a party! No more April 15th doomsday, no more deductions, no more 1040 forms and schedule As and all the junk that comes with filing your taxes. No more forms and no more confusion. Because honestly, how many people besides tax accountants really understand our current tax system?

A monthly rebate: Who doesn’t love receiving checks in the mail? Or an automatic deposit for those more in the current times. In order to eliminate taxing of essential items and necessities, people would apparently receive a rebate of taxes paid on items totaling up to $500 per month (as I understand it). Since the poverty level is $24,000 a year, it seems that basically the first $500 a month you spend are not taxed. Now I don’t know how they can use one figure for everyone in the country and assume that each family’s necessities will fall into that figure nor do I know if people with bigger families get more back as their basic needs costs would be higher. Depending on the fine details, this could go either way.

Lowers tax rates: By only taxing purchased good, the plan promises to lower tax rates for everyone. Sounds good to me if it actually works out that way.

Makes products cheaper by eliminating the hidden taxes the manufacturers have to pay and pass on to you: So most items should be cheaper because of this. Then again, we’ll have to pay the 23-30% tax on top of that so I guess it’s a toss up.

Encourages people to save and invest by not taxing interest income or saved money: I think this is my favorite part of the plan. People would be rewarded for saving and spending less. Money you put in your savings account and retirement funds wouldn’t get taxed at all. This would mean you actually get to keep the interest you make on saving and investing. And since taxes would be based on spending, the less you spend the less you pay in taxes. This would help give people a break and give them a better chance to create an emergency fund and fund their retirement accounts and save up for big things like a down payment on a house. I personally don’t feel like there is much of an incentive nowadays to save since we usually end up paying taxes on the interest we earn, but with this plan we would definitely have an incentive.

Every idea or system has good sides and bad sides and I’m sure there are negatives that go with each one of these positives. And while a tax system like this may benefit someone like me, it may not benefit everyone else. So as you prepare to file your taxes with the IRS this year, here’s just something to think about that could be in your future.

Image courtesy of e53

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29 Responses to Is the Fair Tax Really Fair?

  1. Mike says:

    Would this generate the necessary revunue? I suppose dropping the IRS would sa ve a billion + but what about all of the people/businesses that will no longer be needed? Doesn’t that have a seriously negative impact?

  2. anonymous says:

    The IRS is a dead-weight cost. Worrying about the people or businesses that are no longer needed is unnecessary– the money that currently goes to paying accountants and tax lawyers would be freed up so it could be put to better use elsewhere.

    That’s like worrying about the guys maintaining horse buggies when the car came along.

    My concern about what is basically a sales tax is that it is seriously regressive. That benefits me substantially. My wife and I will pay about $75,000 in federal income tax this year. If we instead paid a 30% federal sales tax that would drop to about $25,000. That means that people making a lot less will have to pick up the slack, or there will have to be serious cuts in federal spending.

  3. poundwise says:

    I’m very much in favor of a dramatically simplified tax system. I don’t know if the Fair Tax, in its currently proposed form, fits the bill all around or not. I’m glad its an issue though and, if nothing else, the Fair Tax proposal pushes the limited IRS/tax code overhaul discussion.

  4. A Marino says:

    Some may wonder why a system like this works and if they can even collect enought money to sustain it. The truth is that it will flush out all illegal money and even those who work under the table and not paying taxes. Everytime you buy, you are taxed therefore no one will excape it. The best part is that it will no longer punish savers by taxing the small amount that some savers receive in interest.

    It will encourage savings. Some people just feel like it’s not worth saving since it’s going to be taxed anyway.

    I personally think that it will bring more money into the economy. What I wonder about is the money that we already have that has been taxed. We shouldn’t be double taxed on that.

  5. Aaron says:

    Great article! Glad you found out about the FairTax as I’ve been a huge fan for about 4 years now after seeing our tax code destroy our manufacturing base in my home state of Michigan.

    To answer Mike, yes it’s been carefully calculated to be revenue neutral, the latest figures are from Boston University. Everyone pays now. (Under “About the FairTax” go to “Research Papers” then the “Taxes and Tax Reform” section to see the “What rate works” paper.

    Cutting overhead costs of American businesses so they can hire more people to expand instead of figure out taxes would be very good. The current system is a huge negative impact with over $300 Billion in compliance costs each year and only 84% compliance.

  6. Ernesto says:

    My concern with this tax proposal is the actual codifying of the tax itself:
    Are we taxing everything or exempting food, healthcare, housing? If any categories are exempted, we

  7. Mulyanto says:

    The Fair Tax CAN be feasible, and CAN be considered “fair”. If we define “fair” as everyone paying the same percentage, a flat rate tax is fair(er), whether it is on income or purchases. However, if we define “fair” to be that wealthier people pay a higher percentage, it is likely that the fair tax becomes less “fair.” There are figures out there that tell us what consumer spending is in this country. If our income tax receipts are say 500 billion dollars, and our consumer spending is 2 trillion dollars, a 25% “fair” tax percentage would generate the same revenue (if spending stays the same).

  8. Joey says:

    Hmmm, so if I make 4 million in a year…and all I buy is groceries…


    Sign me up!!!!

    ….for making 4 mil a year 😛

  9. Richard says:

    Well, the only true benefit I can see is that the underground economy would be taxed. If I were to hire a day laborer for $100 under the table and he/she spends that money here, if not sent to his/her homeland, then he/she would pay the same tax on say a burger at McD’s.

  10. John says:

    I have been reading about the FairTax for several years now and it would be the best thing that happened to the tax system since the 80’s.
    One error in the article is where it is ststed that the prebate is a single rate which is incorrect the rebate is actually based on family size each adult gets so much and each child gets so much a month based on the poverty level based on that sized family.
    The IRS actually wastes about $10 billion a year
    comment#2 you got it right except the slack will not be picked up by the less fortunate it will be picked up by the $1trillion+ underground economy and 40million tourists that visit the U.S on vacation or business every year.
    everything except education B to B transactions and used items would be taxed. you would have to charge the 30% tax on you rentals which would be payed to your state sales tax collection agency because the states will be collecting then sending it to the federal government; however due to the fact that you no longer pay income taxes you will be able to attain the same proffit margin or better without increasing the rent. Not sure if repairs are taxed or not but i would think if a farmer’s tractor is not taxed then a renter’s hot water heater won’t be taxed but i’m not sure.
    There are many layers of taxes unrealized by most people here is an example you want to build a car you need steel, in the price of that steel is the payrole taxes from the mining company which they add to the cost of their ore, the refinery, anyone that touches that steel before you turn it into a car will add their taxes to the cost then you add on the taxes you pay into the price before selling it to the final end user, these imbedded taxes are up to 30% of the cost of goods and services.
    you think that $100 paid to a laborer is impressive immagine all the tax revenue that would be generated by being able to tax the mob, drug dealers, and on the brighter side of things babysitters and other neighborhood childern yes! Teenagers will be taxed and maybe realize that government is expensive and learn to become self relient and create a generation that will stop asking the government for handouts and maybe get government spending under control(maybe just wishful thinking but it could haappen)

  11. Debbie Dubois says:

    I’m very happy that you did finally stumble across the FairTax. There are those of us who have been promoting it for a number of years now as the first step in taking back our power from a government that hides its taxes in the cost of goods sold, so double taxes us, if you will. Keep learning more…you’ll hear critics, but there is book coming: FairTax Answering The Critics in February. Read it and find cause to celebrate! It’s not a perfect answer, but it sure beats what we have now!!!

  12. Tom Kropewnicki says:


    I’m glad you have found the FairTax. There is no question about how important it’s passage is for our country on the world’s economic stage and the benefit it would be to it’s citizens.

    For those who have not studied history, class warfare brought about the income tax to begin with. There was no need for it than and it has to be changed now. Socialism has crept into our society since it’s inception. Few people realize that Karl Marx was the biggest proponent of a regressive tax on income.

    As a long time “active” supporter of the FairTax I fully understand people not being aware of the FairTax “as written”. The media will not report fairly on it except in a mocking way. “It will never pass.” A favorite refrain of people. Also so many people are so threatened by the IRS they are scared to take a stance.

    WE THE PEOPLE can make the FairTax a reality. But first, the shackles of ignorance and apathy must be throwen off and our voices must speak with the same resolve as those
    of our founding fathers.

    Thank You for this blog

  13. Tom Kropewnicki says:

    Something else that hasn’t been mentioned. When we hear congress discuss the looming S.S. problem their only thoughts are raise taxes on the rich, raise taxes on workers, or cut benefits for the retired. NONE of these are good options

    The FairTax is also the cure for this problem. Broadening the tax base to include everyone who sets foot on U.S. soil is the answer. All talk about S.S. always centers only on the number of current taxpayers.

    Also, if the FairTax wouldn’t work, why are the media and congress so concerned about consumer spending? They know the dirty little secret about embedded taxes.

  14. Debbie M says:

    I fear something like this will be put into effect as more and more people retire and thus quit having an income to tax but keep having spending that could be taxed.

    And that’s how I could get scammed out of the extra money I am paying to have a significant amount of my retirement money in Roths. I’m paying income tax now, and then would also pay sales tax later, just like people who are getting tax deductions now and should be paying income tax later to make up for that.


    If there’s no IRS, then who’s in charge of collecting the sales tax? Bureaucracy is still involved, and there is still room for fraud (you could pretend to be several people in order to collect extra prebates).

  15. Tom Kropewnicki says:

    Debbie M,

    The FairTax website addresses your concerns and retirement funds.

    Good Luck

  16. RobertNYC says:

    The fair tax has gotten a lot of attention as one of the focus points of Huckabee’s run in the primaries.

    Mike: many point out that the proposed tax model does a great job a generating revenue and is in fact successful in a handful of small economies around the world. recently ran a feature on the matter expressing the different views people have

    Feel free to comment and join on the discussion.

    The Issue |

  17. dculling says:

    I really like the idea of the FairTax. I’m considering voting for Mike Huckabee mainly because of it and because he’ll continue to fight terrorism.

    If the FairTax passes America will become the tax free haven of the world. There is an estimated 10 trillion dollars stashed away in offshore accounts. There will be no reason to keep any money any where but here if it passes. Imagine what that will do for interest rates and availability of loans to start or expand businesses, home loans, credit cards or whatever.

    I hate the whole class warfare thing. While the wealthy might not pay as much tax as a percentage of their income as other income groups will, unless they stash their cash under the mattress they will invest here in ways that will help the economy to grow.

    There are many people spreading disinformation about the FairTax. I suppose there are many invested in some way in the current system or maybe just afraid of change.

    Keep reading at I think it’s all good and the best way to grow the economy which we have to do if we are to have any chance of meeting our obligations to the ever growing entitlement programs. Hopefully a fast growing economy will reduce government dependency as well.

  18. Minimum Wage says:

    Own a home? No tax on your home! Can’t buy a home? Sorry, sucker, pay up! Ka-ching! Ka-ching! Ka-ching!

  19. carole says:

    After reading “The Fair Tax Book”, I can tell you that I seriously have my doubts about trusting the federal government to lower taxes. This will give businesses and corporations a free ride by taxing consumption. There will continue to be an underground economy on “services”. I think this is a ploy to get everyone to pay a higher social security and medicare tax. Also, what about utilities and other services that are not competitive, they will go sky high. Yes, the current tax system is broken, but I don’t think I would trust these politicians to lower anything, especially taxes.What about all the seniors that have paid the highest tax rate? The answer is – tough! Seniors will not be able to pay the high costs imposed by this tax.

  20. dculling says:

    After reading

  21. Pingback: Don't Mess With Taxes

  22. MarkDC says:

    Fairtax sounds GREAT. And if it worked anything like they hoped, it would be a no brainer.

    Unfortunately, its pretty much a farce. For one thing, it taxes the federal government — to pay the federal government.

    Neal Boortz wrote (page 148 in FairTax Book) “The federal government itself will become a MAJOR TAXPAYER.”

    Fairtax depends on about 500 billion dollars from the federal government “paying” its own taxes.

    Fairtax paying itself is like me paying myself 10,000 to cut my own grass. Oh yeah, I can write the check, and I can even deposit the check. Even if I do this every day, I don’t get 300,000 a month. I just get short grass.

    Since the federal government has to PAY the Taxes to itself, it doesnt really GET any money. The effect would be exactly the same, if the government DIDNT pay the tax. Therefore, the 500 billion fairtax pretends to collect — can’t possibly be collected.

    That one fallacy alone means the fairtax rate would have to be much higher, to make up for that 500 billion- probably raise to about 40%.

    Are there any other things that Fairtax depends on taxing, but can not?

    Yes. Health care for example. Fairtax assumes it can collect 540 billion from this market segment.

    But can it really make people pay 560 billion in taxes on their health care?

    While some people may be able to pay a 40% sales tax on their cancer surgery, heart bypass surgery, and hip replacement — many could not possibly pay it. How could the parents of a child with leukemia pay a 40-60,000 sales tax on their efforts to keep their child alive?

    Insurance surely isn’t going to suddenly pay 40% more for health care. Insurance only pays for certain procedures — and tax isn’t one of them. Plus, insurance invariably caps out. So the Fairtax would give a whole new meaning to the term “co-pay”

    SOme people have 100,000 medical costs — but only make 25,000. Their insurance pays the difference, or the government. Who will pay all these taxes?

    I think its clear, there would be a huge uproar over the tax on health care, and this market would rightly get an exception.

    That would make the tax rate more like 50%, to make up for that 500 billion that wouldn’t be collected.

    Few people realize that all utitlies will be taxed — your electric bill, your gas, and even the gasoline that goes into your car.

    Plus — rent is taxed – do you think renters would be able to pay an extra 50% sales tax?

    I don’t see how a high sales tax could work – not for cancer patients, not for people who have rent.

  23. ConcernedCitizen says:

    What Does the Fair Tax Really Do for You?

    The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:

    Assumption #1 – All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

    Assumption #2

  24. kalisha johnson says:

    What is the fair tax and what is about can u make flow cahrt about fair tax

  25. jodi says:

    the IRS would not be abolished, maybe the name would change but some one has to oversee how tax are collected and redistributed through rebates etc…anything that sounds to good to be true, usually IS to good to be true.

  26. AaronS says:

    Jodi, are you familiar with the FairTax legislation? (HR 25) The IRS is defunded and disbaned in the bill because the states collect the FairTax like their sales taxes now. They enforce it too and send it to a federal national sales tax bureau. Completely different.

    And the too good to be true reference might be true when its a stranger offering a good time but have you looked at anything on the FairTax? Its real. Over $22M of research, a Congressional bill and thousands of grassroots volunteers. You can’t dismiss it that easily. Our current tax code is too bad to be true.

  27. Elizabeth says:

    According to my research, this would not make enough revenue. And, by removing the IRS, you are loosing a lot of jobs. A lot of people work for the IRS and all of them would be out of work from this “fair tax” Also, it is unfairly taxing the poor. This is a non fair tax.

  28. anonymous says:

    seriously?! all this rhetoric and nobody bothers to check the actual federal poverty guidelines?!

    $25,000 is the national median income (somewhat) for single person NOT poverty guideline.

    how about fact checking before discussing?

  29. lisa says:

    Sounds like a VAT, which socialist countries have..Mind you, I don’t mind a flat tax rate for everyone. The problem I have is that if it’s run by the gov’t and they decide they need more money, they can raise this tax as much as they like. Just like our european socialist countries. And we know that the europeans don’t eat or live like us. I work with europeans and they never want to move back to europe….So, the idea is good but we know what happens when the gov’t is in charge of your money….you lose

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