FairTax Overview
First, look at the current system. Today, a worker must earn $44,578 to be able to pay for the
average new vehicle sold in 2011 (according to NADA) because in order to do so, he first had to give
the federal government $11,763 in payroll taxes and income taxes. This leaves $2,336 to pay the
interest on the loan and $30,659 for the price of the car. Under the FairTax, our buyer only has to earn
$100 to spend $100 – no income taxes or payroll taxes are deducted from his or her wages. The total
cost of purchasing the car is $41,597 which includes the price of the car at $30,659 plus total interest of
$1,741 and the FairTax of $9,198. This is 7.06% percent less than today, even after the sales tax is
added on! The cost savings increase to 12.02% percent if the car buyer is self-employed and pays 15.3
percent payroll taxes (both the employer and employee share) instead of 7.65 percent.
A major cost component of an automobile for a consumer is interest. The FairTax results in
interest cost savings on the purchase of a new car in two ways. First, under the FairTax interest rates
will decline from their level under an income tax. Interest rates will fall 25 to 35 percent under a
consumption tax like the FairTax.36 Rates will drop immediately and quickly toward the current taxexempt rate. Investors will no longer need to receive a tax premium to achieve a particular after-tax rate
of return. The impact of eliminating this “tax wedge” or tax premium on interest can be seen every day
in The Wall Street Journal. Tax-exempt municipal bonds tend to yield about 30 percent less than
taxable corporate bonds of similar term and risk.
36
For a more detailed discussion of the impact a national sales tax would have on interest rates, see 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 Feldstein, Martin, “The Effect of a Consumption Tax on the
Rate of Interest,” National Bureau of Economic Research, Working Paper No. 5397, December, 1995.
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