FairTax Overview
(2) A MACROECONOMIC ANALYSIS OF THE FAIRTAX PROPOSAL98
The second study uses a dynamic, supply-side economic model to estimate the impact of the FairTax plan on
GDP, savings, employment, capital formation, domestic investment, and interest rates, and disposable personal
income. The study includes a comparison of the 10-year economic forecast assuming no change in the current
federal tax system compared to the 10-year economic forecast assuming the FairTax is enacted.
·
The economy as measured by GDP is 2.4% higher in the first year and 11.3% higher by the 10th year than it
would otherwise be.
·
Consumption increases by 2.4% more in the first year than it would be if the current system were to remain in
place.
·
The increase in consumption is fueled by the 1.7% increase in disposable (after-tax) personal income that
accompanies the rise in incomes from capital and labor once the FairTax is enacted.
·
By the 10th year, consumption increases by 11.7% over what it would be if the current tax system remained in
place; and disposable income is up by 11.8%.
Following the implementation of the FairTax plan, the higher take-home wage provides an immediate incentive
for people to work more. During the first year, this leads to total employment growth of 3.5 percent in excess of
the baseline scenario, which continues to grow through year 10 such that total employment is 9.0 percent above
what it would have been under the baseline scenario. The impact on total labor income is even more pronounced,
increasing due to both an increase in after-tax wages and the increase in the number of people working. Total
labor income rises 27.4 percent in the first year. By year 10, labor income is over 41 percent higher than what it
would have been under the baseline scenario.
Summary of Results by Year
Cumulative growth over current system
Year 2 Year 3
Year 4
Year 5
Year 10
Gross Domestic Product
2.4%
5.2%
8.2%
9.0%
11.3%
Employment
Domestic investment
Income from employment (wages)
3.5%
33.0%
27.4%
5.7% 7.0%
35.4% 36.9%
31.8% 34.5%
7.7%
38.0%
36.4%
8.2%
38.8%
37.7%
9.0%
41.2%
41.2%
Consumption
Disposable personal income
(adj. for changes in the price level)
98
Year 1
2.4%
4.1%
5.8%
7.1%
8.1%
11.7%
1.7%
4.5%
6.4%
7.7%
8.7%
11.8%
7.0%
See Arduin, Laffer & Moore Econometrics, A Macroeconomic Analysis of the FairTax Proposal, June,
2006, p.
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