FairTax Overview
Table 1: 2011 Income and Payroll Taxes
Includes only Employee portion of federal payroll taxes
Family
Gross
Income
$29,420
$58,840
$88,260
$117,680
Income
Tax
-$3,048
$4,016
$8,429
$15,181
Social
Medicare
Security
$1,824
$3,648
$5,472
$6,622
$427
$853
$1,280
$1,706
Total
Tax
-$797
$8,517
$15,181
$23,509
Effective
Tax Ratea
-2.7%
14.5%
17.2%
20.0%
FairTax
Sales
Tax
$0.00
$6,767
$13,533
$20,300
Effective
Tax Rateb
0.0%
11.5%
15.3%
17.3%
a
Effective R ate = total taxes / family income. The total taxes are computed for a family of
four claiming the standard deduction for joint returns ($11,600) and four personal
exemptions ($3,700 each). Taxpayers who itemize (1/3 of taxpayers) would have lower
effective rates; higher income taxpayers are more likely to itemize.
b
Assumes that the family spends all income earned, saving nothing and receives monthly
FairTax prebate checks totaling $6,767 annually (equal to 23% of poverty level spending
($29,420 for a family of four).
Table 1 shows that a sample family of four with a poverty level income of $29,42089 has an
effective federal tax rate of -2.7 percent of their gross income, when the Earned Income Credit of $3,350
is taken into account. A sample family earning $58,840 pays 14.5 percent of their gross income in
federal taxes. Under the FairTax, the family of four earning $29,420 (spending all of their income) pays
zero federal taxes (after the prebate90), and the same family of four earning and spending $58,840 pays
an effective tax rate of only 11.5 percent on their taxable purchases.
However, this is not the whole picture. While payroll taxes are levied equally between employers and
employees, it is the broad consensus among economists, including those at the Congressional Budget
Office and the Joint Committee on Taxation, that it is really the employee that bears the burden of the
employer portions of Social Security and Medicare payroll taxes, and federal unemployment taxes
through lower wages than would otherwise be paid.91 On this basis, the true burden of the current
federal income tax system on taxpayers becomes even more dramatic. (See Table 2.)
89
This income level is derived from the poverty level guideline for a family of four, two adults, two children. See Federal
Register, Vol. 76, No. 13, January 20, 2011.
90
The prebate is a rebate paid at the beginning of each month, in twelve equal installments. The amount of the prebate is
determined by the Department of Health & Human Services’ poverty level guideline multiplied by the FairTax rate. The
poverty guidelines are a well established measurement of the poverty level based on expenditures for necessities such as
food, clothing, shelter, transportation, medical care, etc.
91
See The Corporate Income Tax and Workers’ Wages: New Evidence from the 50 States, Tax
Foundation Special Report No. 169, August 2009; Congressional Budget Office, “Historical Effective
Federal Tax Rates, 1979-2006,” April 2009 and Joint Committee on Taxation, “Overview of Present
Law and Economic Analysis Relating to Marginal Tax Rates and the President’s Individual Income Tax
Rate Proposals,” March 6, 2001.
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