The Fair Tax Act (/) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.
Supporters argue that a consumption tax, such as the FairTax, would have a positive impact on available capital (through deferred taxation on investment), increased U.S. international competitiveness (border tax adjustment in global trade), incentives for international business to locate in the U.S., increased economic growth, and ease of tax compliance. The plan may increase cost transparency for funding the federal government and supporters believe it would have positive effects on civil liberties, the environment, and advantages with taxing illegal activity and illegal immigrants. Because the FairTax plan would remove taxes on income, tax deductions would have no meaning or value, which concerns some lawmakers about losing this method of social incentive. There are also concerns regarding the repeal of the Sixteenth Amendment, transition effects on after-tax savings, impact to the income tax industry, incentives on credit use, and the loss of tax advantages to state and local bonds.
Economic effects
Tax burden visibility FairTax supporters assert that the proposal would make the cost of federal government highly visible as consumers would see most of this cost in a single tax paid every time they purchase a good or service. Under the current tax system, the federal government collects revenue through a wide variety of taxes on individuals and businesses. Thus the cost of government is spread out among many different avenues and may not be fully visible to individual citizens. For example, corporate taxes and compliance costs are passed partially from producers to final consumers when producers include those costs in the retail price of goods and services. The use of income tax withholding has also reduced the visibility of taxes. The U.S. Department of Treasury describes (in the history of the income tax) that withholding "greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." Proponents claim that the FairTax would greatly reduce, if not eliminate, the "K Street tax lobbyist's" ability to influence legislators to manipulate the U.S. tax code for the benefit of their clients. The FairTax legislation does not prevent future changes by Congress, however, due to the transparency of the FairTax, the American people would be aware of changes to the tax base from exemptions because a change in tax rate would likely be reflected. Congressman John Linder, the bill sponsor, is considering adding language to H.R. 25 during the 111th Congress that would require a supermajority vote of Congress to exempt any industry from the tax.
Effect on tax compliance costs The cost of preparing and filing all business and personal income tax returns is estimated to be $250–$300 billion each year. Approximately the same amount of money was estimated for calculating the tax implications of business decisions. That means approximately $500 to $600 billion was spent in the process of collecting roughly four times as much in taxes. According to a 2005 report from the U.S. Government Accountability Office, the efficiency cost of the current tax system—the output that is lost over and above the tax itself—is between $240 billion and $600 billion every year. Supporters argue that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy. With the FairTax system, the cost of compliance would be built into the tax by allowing the business and the State to keep 1/4 of 1% of taxes collected. A 2007 study by the Beacon Hill Institute found that the FairTax would save $346.51 billion in administrative costs and would be a much more efficient taxation system from the point of view of the administration, collection, and filing costs.
One additional "cost" more difficult to quantify is the cumulative cost of business decisions made, not in the interest of delivering more/better product and services, but rather in tax avoidance behaviors. An example might be the purchase of a small company with tremendous financial losses just to avoid corporate income tax on the larger, more profitable business. With 60,000+ pages now in the tax code, the impact of these decisions both on individual companies and on the economy at large is doubtless significant.
Promotion of economic growth In an open letter to the President, the Congress, and the American people, eighty economists, including Nobel Laureate Vernon L. Smith, stated that the FairTax would boost the United States economy. A study in 2007 by the Beacon Hill Institute of Suffolk University stated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%. Laurence Kotlikoff of Boston University finds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%. Further, studies of the FairTax at Boston University and Rice University suggests the FairTax will bring long-term interest rates down by as much as one third. As falling tax compliance costs lower production costs, exports would increase by 26% initially and remain more than 13% above present levels. According to Professor Dale Jorgenson of Harvard University’s Economics Department, revenues to Social Security and Medicare would double as the size of the economy doubles within 15 years after passage of the FairTax. Wall Street Journal columnist James Taranto states the FairTax is unsuited to take advantage of supply-side effects and would create a powerful disincentive to spend money.
A Nathan Associates study commissioned by the National Retail Federation in 2000 that found a national sales tax bill filed by Billy Tauzin (Individual Tax Freedom Act) would bring a 3 year decline in the economy, a 4 year decline in employment and an 8 year decline in consumer spending. Proponents point out that the FairTax has different features than the Tauzin bill and that the study done by the NRF makes many adverse assumptions and does not take into account the removal of embedded tax costs or the inventory credit that refunds 23% of the cost of held inventory. The study, which represents supporters' worst-case scenario for a consumption tax, predicts that the economy will grow only 3% more in ten years than it would have under the income tax and that the increase in consumption will be 1.15% less in the first year relative to what it would have been under the income tax. The study concludes that consumption will be higher in the fourth year and every year thereafter than it would have been under the income tax. Research in 2006 on the FairTax plan by Arduin, Laffer & Moore Econometrics shows that consumption would increase by 2.4% in the first year of the FairTax. The increase in consumption would be fueled by the 1.7% increase in disposable (after-tax) personal income. By the 10th year, consumption would increase by 11.7% over the current tax system; and disposable income would be up by 11.8%.
FairTax simulation model resultsCumulative growth over current systemYear 1Year 2Year 3Year 4Year 5Year 10 Gross domestic product 2.4% 5.2% 7.0% 8.2% 9.0% 11.3% Employment 3.5% 5.7% 7.0% 7.7% 8.2% 9.0% Domestic investment 33.0% 35.4% 36.9% 38.0% 38.8% 41.2% Income from employment (wages) 27.4% 31.8% 34.5% 36.4% 37.7% 41.2% Consumption 2.4% 4.1% 5.8% 7.1% 8.1% 11.7% Disposable personal income (adjusted for changes in the price level) 1.7% 4.5% 6.4% 7.7% 8.7% 11.8%Units scaled 2004 GDP = 1.00. Capital and labor set to equal constant shares of 0.3 and 0.7, respectively.Source: Arduin, Laffer & Moore Econometrics, "A Macroeconomic Analysis of the FairTax Proposal", February, 2006.
Effect on international business locality Global corporations consider local tax structures when making planning and capital investment decisions. Lower corporate tax rates and favorable transfer pricing regulations can induce higher corporate investment in a given locality. Such investment translates into higher economic growth. Ireland's real GDP growth was almost three times higher than the European Union average between 1991 and 2000. This is partly attributed to the fact that, during the decade, Ireland taxed corporate profits from manufacturing at 10%, the lowest in the EU. The United States currently has the highest combined statutory corporate income tax rate among OECD countries. The FairTax would remove the corporate income tax, which supporters argue would make the United States the largest corporate tax haven in the world.
Bill Archer, former head of the House Ways and Means Committee, asked Princeton University econometricists to survey 500 European and Asian companies regarding the impact on their business decisions if the United States enacted the FairTax. Of these companies, 400 responded that they would build their next plant in the United States while the remaining 100 companies said they would move their corporate headquarters to the United States.
Border adjustability
The United States is the only one of 30 OECD countries with no border adjustment element in its tax system. Proponents state that because the FairTax would automatically be border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home. Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not compete successfully with foreign producers because of U.S. tax policy. "The Ways and Means Committee is tasked with writing the taxation laws that raise revenues for the nation but the fact that foreign nations routinely tax U.S. products upon entry and that these nations forgo national taxes on exports to the United States is a Ways and Means blind spot that has all but killed the 'Made in America' label". Under the FairTax, American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America. In addition, U.S. companies with investments or plants abroad would bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment. This would result in imports and domestic production competing on a level playing field. Exported goods would not be subject to the FairTax, since they would not be consumed in the U.S.; but imported goods sold in the U.S. would be subject to the FairTax because these products would be consumed domestically.
Repatriation of offshore accounts
John Linder asserts that an estimated 11 trillion dollars is currently held in foreign accounts, largely for tax purposes, and is growing by $800 billion per year. Former Federal Reserve Chairman Alan Greenspan predicts that enactment of the FairTax would result in a large portion of those funds being transferred to U.S. banks, where they would become available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States instead of the countries where those funds are currently held.
Transition effects