FairTax Overview
5) The FairTax prebate lets seniors purchase what they deem as living essentials tax-free up to the
poverty level. Used goods are tax-free as well.
Under the FairTax, senior citizens, like others, receive a monthly cash rebate that exempts consumption
of necessities (up to the poverty level as determined by the Department of Health and Human Services)
from federal taxation.57 Thus, seniors living at or below the poverty level pay no sales tax at all under
the FairTax.
While everyone pays the same tax rate at the cash register, the prebate results in effective tax rates
(annual taxes paid divided by annual spending) that increase as the level of spending increases – a
progressive tax rate structure. For example, a person spending at the poverty level has a 0 percent
effective tax rate, whereas someone spending at twice the poverty level has an effective tax rate of 11.5
percent, and so on.
A couple living solely on Social Security and receiving the average annual benefits for a retiree and
spouse of approximately $22,36058 receives a cash rebate of $5,285 per year which is more than the
FairTax owed if they spent all their income. As shown in the chart below, they would have a negative
FairTax rate of -0.6 percent. They can spend their entire income tax-free while their after-tax
purchasing power increases compared to what they have today.
FairTax Rate as a Percent of Spending: 2013
Senior Couple Receivng Average Social Security Benefits
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
20.0%
17.1%
11.2%
7.2%
-0.6%
$11,180
-23.0%
$22,360
$33,540
$44,720
$89,440
$178,880
Annual Spending
Note: The Tax rate is calculated by subtracting the annual prebate from the
FairTaxes on spending and dividing that result by annual spending.
In addition, the FairTax taxes only new goods and services. So seniors can make choices in their
spending to reduce the taxes they pay. They can buy used cars, used appliances, used homes, even used
clothing.
57
or a more detailed discussion of the rebate and fairness issues generally, see FairTax white paper, “The FairTax: Good for
Taxpayers, Good for Businesses, Good for the Economy.”
58
The average monthly combined Social Security benefits check for retired workers and their spouses is $1,863.30 per month
as of December, 2011. Source: Social Security Administration, Master Beneficiary Record, 100 percent data, Table 5.A16.
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