FairTax Overview
The FairTax prebate explained
Under the FairTax, all Americans consume what they see as their necessities of life free of tax. While
permitting no exemptions, the FairTax (HR25 / S122) provides a monthly, universal prebate to ensure
that each family unit can consume tax-free up to the poverty level, with the overall effect of making the
FairTax progressive in application. This is not an entitlement, but a rebate (in advance) of taxes paid –
thus the term prebate. Everyone pays taxes at the cash register.
Although everyone pays the same tax rate at the cash register, the chart below shows that the effect of
the prebate is to increase the actual tax rate (annual taxes paid as a percentage of annual spending) as the
level of spending increases, a progressive tax rate structure. For example, a person spending at the
poverty level ($31,020 for a family of four) has a 0% effective tax rate because the annual prebate of
$7,135 refunds all of the taxes they paid in their annual spending of $31,020. Whereas someone
spending at twice the poverty level has an effective tax rate of 11.5%, and so on. Annual spending
would have to be in excess of $14 million per year to reach the statutory rate of 23%.
FairTax Rate as a Percent of Spending: 2013
Two Adult/Two Child Household
30.0%
17.2%
20.0%
7.7%
10.0%
20.1%
21.6%
22.3%
11.5%
0.0%
0.0%
$15,510
$31,020
$46,530
$62,040
$124,080 $248,160 $496,320 $992,640 $1,985,280
-10.0%
-20.0%
-30.0%
22.6%
Annual Spending
-23.0%
Note: The Tax rate is calculated by subtracting the annual prebate from the FairTaxes on
spending and dividing that result by annual spending.
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