FairTax Overview
For the entire group of small business taxpayers, the same study found that compliance costs (at a time
value of $45.40 per hour) are at most 1.6 percent of receipts, but are between 2.6 and 2.9 percent of asset
value. At a 10 percent pretax yield on assets, this would be equivalent to a 26 to 29 percent additional
tax rate on capital income. Thus, although compliance burdens on average do not add much to the price
small businesses must charge their customers, they represent a significant additional “tax” on investment
income. Moreover, there is significant variation within firms, with the very smallest firms bearing
disproportionately higher burdens as a share of gross receipts.
A small business today must use tax accounting rules (which are different than generally
accepted accounting principles) to keep track of: Income, inventories, various types of expenses (some
deductible, some partially deductible, some not currently deductible and some never deductible),
depreciation (which must be recorded in at least two ways for regular and alternative minimum tax
purposes), tax basis for assets sold, various pension and deferred compensation rules (including
participation, top-heavy and non-discrimination rules), various employee benefits rules, and so on. The
small business must also keep track of payroll taxes, including Social Security, Medicare and
unemployment taxes as well as file a plethora of information returns on its payments.
Under the FairTax, small business compliance costs drop dramatically because the only question
relevant for sales tax reporting purposes is “How much did you sell to consumers?” Period. Businesses
that sell to other businesses would have virtually no compliance costs since intermediate business-tobusiness sales are not taxed under the FairTax plan. In addition, under the plan, retail businesses receive
an administration fee that allows them to keep a portion of the sales tax they collect to compensate them
for collection costs. The Tax Foundation estimates that overall compliance costs fall by more than 90
percent.45
Small businesses are found in service, retailing, and other labor-intensive industries. Both
complying with and paying the payroll tax and the income tax impose a major burden on these small
businesses. Moreover, the service sector and the retailing sector typically have much higher effective
income tax rates than other businesses.
Kill the estate tax.
Each year, many small businesses and farms must be sold out of the family to pay estate and gift taxes
when the founding generation dies. After a lifetime of hard work and risk-taking, the state and gift tax
deprive the small business owner or family farmer of the right to pass his or her life’s work on from
father and mother to son or daughter. The estate tax punishes those that save and work hard to