FairTax Overview
The economy grows, more people have jobs, incomes increase more rapidly.
· Those taxpayers receiving a payroll check benefit from higher disposable income from the first
day under the FairTax, due to the repeal of the payroll tax in its entirety. Studies estimate the
increase in wages to be at least ten percent.
· All known economic projections predict a much healthier economy. 20 People are willing and able
to purchase more goods and services in a healthy economy. Typical estimates are that the
economy is 7 to 14 percent larger within 10 years and consumption grows substantially. Some
studies show the potential gains to be much higher.21 Real wages increase. Retailers make more
money in a prosperous, growing economy.
·
Research predicts consumption increases by 2.4 percent more in the first year than it would if the
current system were to remain in place. By the 10th year, consumption increases by 11.7 percent
over what it would be if the current tax system remained in place, and disposable income is 11.8
percent higher.22
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This increase in consumption is fueled by a 1.7 percent increase in disposable (after-tax)
personal income once the FairTax is enacted which grows to an 11.8 percent increase by the
tenth year.
· Consumer interest rates fall dramatically, between 25 to 30 percent thereby increasing consumer’s
ability to finance consumption.23 Since consumer interest is not deductible under present law; the
effect of lower interest rates strongly and positively impacts credit card or consumer loanfinanced purchases.
· The FairTax plan provides a prepaid monthly rebate of taxes (prebate) to every registered
household to cover the consumption tax charged on their spending up to the federal poverty level
($31,020 for a family of four). Likewise, Social Security benefits are adjusted to preserve their
purchasing power.
· Corporate income and employer payroll taxes are embedded in the price of everything we buy.
Once these taxes are repealed, marketplace competition and the lower cost of doing business
should drive down pre sales-tax prices..
19
Hall, Arthur P., “Compliance Costs of Alternative Tax Systems II,” The Tax Foundation, Special Brief, House Ways &
Means Committee Testimony, March 20, 1996. He estimated that under a national retail sales tax compliance costs would
decline by 95 percent.
20
For a brief summary of findings, see Research Summary, the Impact of the FairTax on the Economy.
http://www.fairtax.org/PDF/SummaryOfTheFairTaxOnTheEconomy.pdf
21
Arduin, Laffer, and Moore Econometrics LLC, A Macroeconomic Analysis of the FairTax Proposal, July, 2006 at
http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax . To the extent that higher productivity growth is linked to
higher capital accumulation (a likely scenario), the growth effects will be even greater. For instance, if the larger
accumulation of capital induces a one-quarter percent increase in productivity growth, total economic output in year ten
would be 19.4 percent greater than the baseline scenario as opposed to 11.3 percent.
In addition, the GAO has cited estimates that efficiency costs associated with our current tax system are 2 percent to 5
percent of GDP. To the extent the FairTax reduces these efficiency costs, a likely supposition, economic growth can be
further enhanced by up to 16.3 percent above the baseline scenario. Combining these two impacts, the FairTax increases
economic growth by up to 24.4 percent greater than the baseline scenario by year ten.
22
Arduin, Laffer & Moore Econometrics, ibid.
23
Golob, John E., “How Would Tax Reform Affect Financial Markets?” Economic Review, Federal Reserve Bank of Kansas
City, Fourth Quarter, 1995. He estimates a 25 to 35 percent drop (p. 27). See also Hall, Robert E. and Alvin Rabushka, The
Flat Tax, Second Edition, Stanford, California: Hoover Institution Press, 1995.
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