FairTax Overview
The FairTax plan (which replaces federal individual and corporate income taxes (including self
employment taxes and the alternative minimum tax), the payroll tax, and the estate and gift tax with a
single rate, simple national retail sales tax on the retail sale of all goods and services) dramatically
improves the economic environment for small businesses. It reduces compliance costs and tax burdens
and improves bottom line profits.
Under the FairTax, small business enjoys a zero tax rate. And compliance costs plummet
dramatically.
Corporations, subchapter S corporations, partnerships, limited liability companies, and sole
proprietorships pay no tax on their income. Both the employee and employer share of payroll taxes, the
self-employment tax rate, and the estate and gift tax are abolished.
Income tax compliance costs are a much more substantial economic drag on small business than
they are for larger businesses. According to the Tax Foundation, small businesses spend $724 to comply
with the income tax for every $100 they pay in tax. More than 90 percent of all U.S. corporations have
assets of $1 million or less and, therefore, bear tremendous relative compliance burdens. Small
corporations bear a compliance cost burden about 27 times greater than the largest U.S. corporations,
those with $10 billion or more in assets.43
Compliance costs vary dramatically even among small businesses when measuring business size
by the number of employees. Businesses with 5 employees or less pay compliance costs of $7,274 per
employee whereas business with 26 to 50 employees pay an average of $768.50 in compliance costs per
employee.44
Income Tax Compliance Costs by Size of Business
Cost per Employee
$8,000.00
$7,274.00
$7,000.00
$6,000.00
$5,000.00
$4,000.00
$3,000.00
$2,155.00
$1,348.50
$2,000.00
$1,081.00
$1,000.00
$768.50
$296.50
$0.00
1 to 5
6 to 10
11 to 15
15 to 25
26 to 50
More than
50
Number of Employees
43
“Federal Tax Compliance Costs Climb to $225,” Tax Features, Tax Foundation, March 1996, p. 3.
DeLuca, Donald, John Guyton, Wu-Lang Lee, John O’Hare, and Scott Stilmar. “Estimates of US Federal Income Tax
Compliance Burden for Small Businesses.” Presented at 2007 National Tax Association Meetings. Columbus, Ohio.
44
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