FairTax Overview
Table 2: 2011 Income and Payroll Taxes
(Includes Employee and Employer portions of federal payroll taxes)
FairTax
Family
Federal
Effective
Income
Social Medicar Total
Sales Effective
Gross
Unemploymen
Tax
Tax
Security
e
Taxes
Tax
Tax Ratec
Incomea
t Tax
Rateb
$32,105 -$3,048
$434
$3,648
$854 $1,888
5.9%
$617
1.9%
$63,775 $4,016
$434
$7,296 $1,706 $13,452
21.1% $7,901
12.4%
$95,446 $8,429
$434
$10,944 $2,560 $22,367
23.4% $15,186
15.9%
$126,442 $15,181
$434
$13,243 $3,413 $32,271
25.5% $22,315
17.6%
a
Employer payroll taxes (federal unemployment, Social Security and Medicare) have been
added to family gross income to measure the true burden of the federal tax system on families.
b
The rate assumes that the employee pays both the employee and the employer portions of
Social Security and Medicare payroll taxes and federal unemployment taxes through lower
wages. The rate = 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.
c
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).
Given that the employer share of payroll taxes in actuality reflects a reduction of the employee’s
potential wages, we can determine the “actual” tax burden as shown in Table 2. First, we increase the
gross family income amounts from Table 1 by the amount of employer payroll taxes (Federal
Unemployment Tax, Social Security and Medicare taxes). Employer payroll taxes of $434 (FUT),
$1,824 (SS), and $427 (Med) are added to the employee’s income of $29,420 to obtain a “potential”
income of $32,105. The total taxes paid are then compared to the total potential income to determine the
actual tax burden which in this case is an effective tax rate of 5.9 percent of their gross income even
after deduction of the Earned Income Credit.
The FairTax amount is calculated by multiplying the rate of 23 percent times family income,
assuming that all income is spent. This amount is divided by income to yield and effective tax rate. For
comparable income levels, the FairTax effective tax rate is substantially less than under the current
system. In the case of the family with potential income of $32,105, the effective rate is only 1.9 percent.
The tax rate for the $63,775 income level jumps to 12.4 percent but that is still much less than the 21.1
percent rate for the income tax system. The results show that the FairTax is progressive; i.e., the
effective tax rate rises as income rises.
Our current tax system is also unfair because it is highly responsive to political influence on
behalf of special interest groups. Average taxpayers without the means or organization to influence tax
policy are at a clear disadvantage. The inextricable relationship between the tax code and lobbyists is
evidenced by the fact that more than half of Washington lobbyists are registered on tax matters. Under
the FairTax, there are no exceptions and there are no exclusions – there are no loopholes to be exploited
by special interests. Under the FairTax, all taxpayers have an equal voice.
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