FairTax Overview
Second, the taxpayer can use his or her complete earnings to pay for the interest. Using pre-tax
earnings to pay for the interest on a new vehicle is analogous to the home mortgage deduction where
home purchasers can deduct interest paid. Deducting interest paid on home purchases is the tax code’s
attempt to allow interest to be paid with pre-income tax dollars. Since interest payments are not taxed
first under the FairTax, the FairTax extends what is essentially the treatment of home mortgage interest
to car buying. But it takes it one step further, granting what would be the equivalent today of a sort of
supercharged interest deduction. That is because the mortgage interest deduction does not allow a
deduction of such interest against payroll taxes (which three-quarters of Americans pay more of than
income taxes). The FairTax allows interest for a new car to be paid before any tax, either payroll or
income taxes, further reducing the actual costs of buying a car.
Removes the subsidy on foreign vehicles
Today, we have a tax system that remarkably subsidizes foreign content vehicles, assisting Japan,
Germany, and others in competing against the American worker. How do we do so? By doing nothing
to counter the fact that foreign countries rebate their taxes on exported items before they enter our shores
and impose an ad valorem tax on U.S. goods.
The U.S. should not grant an advantage to foreign companies competing in the U.S. market or
impose a disadvantage on American producers and workers selling their goods and services in the U.S.
and foreign markets as we now do as a matter of policy. Foreign VATs, which are a major component
of the total revenue raised elsewhere, are rebated when foreign goods are exported to the U.S. market.
Conversely, the U.S. tax system imposes no corresponding tax burden on foreign goods sold in the U.S.
market. The U.S.’s failure to answer with an ad valorem tax or to remove the tax on exports creates a
large and artificial relative price advantage for foreign goods, in both the U.S. market and abroad. The
table below illustrates the penalty U.S. producers pay in taxes.
Advantage for foreign producers
Origin
U.S. production
Foreign production
Sold in U.S. market
Pays U.S. income and payroll
taxes
Pays no U.S. income or payroll
tax and no foreign VAT
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Sold in foreign markets
Pays U.S. income and payroll
taxes and foreign VAT
Pays foreign VAT