Fair Tax Short Facts - Audio
Benefits of the Fair Tax
1. Treats every person equally. 2. Allows American businesses to thrive. 3. Generates the same tax revenue as the current four-million-word-plus tax code.
Example of the Prebate on Tax Rate
A two adult/two child family spending at the poverty level has an 0% effective tax rate because the annual prebate of $7,328 refunds all of the taxes they pay on their annual spending of $31,860. 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 fourteen million dollars per year to reach the statutory rate of 23%.
Qualifications to receive the prebate.
All qualified families are entitled to receive the monthly prebate. A "qualified family" consists of all family members sharing a common residence. Family members include an individual and his or her spouse, children and grandchildren, parents and grandparents.
The Prebate makes the Tax Rate progressive.
Although everyone pays the same tax rate at the cash register, 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.
Since business purchases are not taxable, how does the FAIRtax keep individuals from pretending to have a business so they can buy things tax-free? Part 3
As registered sellers, they are subject to the possibility of being audited by the state. During such an audit, they will have to produce the invoices for all the "business purchases" that they did not pay sales tax on and will have to be able to show that they were bona fide business expenses. If they cannot prove this, then they will have to pay the taxes that should have been paid when the items were purchased, plus interest and penalties.
Pay Tax on Only What You Spend
Be in control of your financial destiny. You alone can control your tax burden. If you're thrifty, you'll pay lower taxes than somebody who is not. Most importantly, you'll be taxed fairly.
Social Security and Medicare Funding
Benefits will not change. The FairTax actually puts these programs on a more solid funding foundation. Instead of being funded by taxes on workers' wages, which is a small pool, they'll be funded by taxes on overall consumption by all residents.
What about repealing the 16th Amendment?
Bill HJR 16 repeals the 16th Amendment to the Constitution but it must go through a different adoption process than HR 25. HJR 16 has to be passed by a two-thirds vote of members of both the House and the Senate and be approved (or ratified) by three-fourths of state legislatures (38).
Children away from home and children of divorced parents are eligible.
Children/students living away from home are considered family members if they are registered as a student for at least 5 months out of the year and receive at least 50 percent of their support from the family unit. Children of divorced parents are considered to be family members of the custodial parent. Incarcerated individuals are not eligible to be a member of a qualified family.
The Tax Gap affects all taxpayers. The Tax Gap is the difference between the amount of tax due and the amount actually collected. Here is the 2011 Annual Report to Congress, from Nina Olson, the National Taxpayer Advocate.
Dividing the most recent tax gap estimate of $290 billion by the number of households in the United States suggests that the average household is being assessed an annual "surtax" of about $2,680 to enable the federal government to raise the same level of revenue it would collect if all taxpayers were to report their income and pay their taxes in full. That is not a burden we should expect our nation's taxpayers to bear lightly.
Payroll benefit to the employee.
Fair tax allows you to keep your whole paycheck and only pay taxes on what you spend.
How is the Prebate distributed?
In accordance with instructions from each qualified family, SSA will provide the prebate in the form of a paper check via U.S. Mail, an electronic funds transfer to a bank account, or a "smartcard" that can be used much like a bank debit card. (This method is already in use to provide other benefits from the federal government.)
How is one counted in the prebate?
In order for a person to be counted as a member of the family for purposes of determining the size of the qualified family, a person must have a valid social security number and be a lawful resident of the United States.
Since business purchases are not taxable, how does the FAIRtax keep individuals from pretending to have a business so they can buy things tax-free? Part 1
In order for any person to purchase items tax free for business purposes, the business has to be a registered seller and possess a registered seller certificate issued by the state sales tax authority. Registered sellers are expected to file monthly or quarterly sales tax returns with the state.
What is the law regarding fraud with regards to the prebate?
It is unlawful to willingly and knowingly file a false prebate claim. HR25 provides for both civil and criminal penalties. The civil penalty is equal to the greater of $500 or 50 percent of the claimed annual prebate amount not actually due plus repayment of any falsely due prebate amounts. A criminal penalty of imprisonment for up to one year may also be imposed.
Is the embedded tax really a sales tax?
It's fair to call these embedded taxes a "sales tax" because we pay it every time we buy any goods or services — we just don't see it. The FairTax eliminates these embedded taxes, resulting in a single-rate national sales tax visible to all.
How is the Social Security system affected?
Like all federal spending programs, Social Security operates exactly as it does today, except that its funds come from a broad, progressive sales tax, rather than a narrow, regressive payroll tax. Employers continue to report wages for each employee, though, to the Social Security Administration for the determination of benefits. The transition to a reformed Social Security system is eased while ensuring there is sufficient funding to continue promised benefits.
The IRS is No Longer Needed
No more complicated tax forms, individual audits, or intrusive federal bureaucracy. Retailers will collect the FairTax just as they do now with state sales taxes. All money will be collected and remitted to the U.S. Treasury, and both the retailers and states will be paid a fee for their collection service.
Calculation of Prebate based upon Poverty Level Spending
Poverty level spending represents what it costs families of varying household size and composition to buy their necessities.
How is Social Security funded currently?
Social Security/Medicare funds are no longer triple-taxed as under the current system: 1) when payroll taxes are initially withheld; 2) when those withheld payroll taxes are counted as part of the taxable base for income tax purposes; and 3) when the promised benefits are finally received.
Everyone Pays Their Fair Share
Tax evasion and the underground economy cost each taxpayer an additional $2,500 every year! But by taxing new products and services consumed, the FairTax puts everyone in the country at the same level at the cash register. Further, only legal residents are eligible for the prebate.
Does the 16th Amendment require an income tax?
The 16th Amendment does not "require" an income tax, it only "allows" one, and the FairTax will have broken that egg in a million pieces. It would be extremely difficult to put that egg "back together again." Once the FairTax is enacted it would be an extremely daunting task for Congress to make people start filing income tax returns again. There would be a public uproar. Once the American public has experienced the freedom from filing income tax returns it's hard to imagine them tolerating going back.
What is the FairTax Plan?
The FairTax Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. The IRS is disbanded and defunded.
Does the tax payer have rights?
The FairTax has much stronger taxpayer rights than does the current tax system, the FairTax legislation provides for a number of fines and penalties for noncompliance. It also authorizes a mechanism for reporting tax cheats and obtaining a reward.
What is taxed?
The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A prebate makes the effective rate progressive.
Eliminates the Payroll Tax - An instant pay increase!
The FairTax is the only tax plan currently being proposed that includes the removal of the payroll tax. American workers will get to keep every dime they earn; including what would have been paid in federal income taxes and payroll taxes.
Get a Tax Refund in Advance on Purchases of Basic Necessities
The FairTax provides a progressive program called a prebate. This gives every legal resident household an "advance refund" at the beginning of each month so that purchases made up to the poverty level are tax-free. The prebate prevents an unfair burden on low-income families.
What is the Fair Tax rate?
The FairTax rate after necessities is 23% compared to combining the 15% income tax bracket with the 7.65% of employee payroll taxes under the current system -- both of which will be eliminated!
What are we taxed on under the Fair Tax?
The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
What is the cost of mailing the Prebate?
The National Taxpayers Union estimated that the cost of mailing monthly prebate checks via the U.S. Post Office would be approximately $260 million. To the extent the SSA uses electronic funds transfer/direct deposit and "smart card" technology; this amount would be reduced substantially. According to the SSA, Office of the Chief Actuary, over 99% of Social Security benefit payments were paid with direct deposit as of June, 2013.
How is the prebate distributed?
The Social Security Administration (SSA) will send out the monthly prebate on or before the first day of every month. Prebate payments can only be made to persons 18 years or older. If a family wishes to designate more than one person to receive the prebate, then the prebate payment will be divided evenly among those persons designated. Example: two single people sharing the same residence would be able to each get a prebate check.
How does the cost of the Prebate contrast with the current system?
The cost of the prebate is less than one-half of the amount of tax expenditures (for example, standard deductions, personal exemptions, Earned Income Tax Credit, mortgage interest and charitable contribution deductions, and various other tax preferences) doled out under the current federal income tax system that are repealed when the FairTax is enacted. For 2012, the total of all of these tax breaks is estimated to be $1.3 trillion.
What is the Fiscal Impact of the Prebate?
The estimated number of households for 2011 is 114.8 million. Assuming 100 percent participation by all eligible households, the maximum cost of the prebate would be $543 billion.
Missed Prebate Registration renewal. After the initial registration, any qualified family that fails to renew its registration each year, within 30 days of the family determination date, will cease receiving the prebate 90 days following the failure to register.
The family can file to get up to six months of missed prebate checks later (with no interest on missed payments). A possible method of assigning registration renewal dates would be on the birth date of the person filing the application. Thirty (30) or more days before the annual registration date, the sales tax authority is required to mail a proposed registration to each qualified family that simply needs to be signed and mailed back in if the family's circumstances have not changed.
Calculation of the prebate.
The monthly prebate check is calculated by multiplying the annual consumption allowance as measured by the Department of Health and Human Services poverty guidelines times the FairTax rate and dividing by twelve.
Is the FAIRtax progressive? Do the rich pay more and the poor pay less as a percentage of their spending?
The poor actually pay less than zero-percent retail sales tax on their spending. Much like with the earned income tax credit of today, the prebate may give them more money than they actually spend on retail taxes. Especially if they are frugal and buy mostly used products. On the other hand, the wealthy approach a maximum of 23-percent retail sales tax on their spending.
Is there any provision in the FAIRtax bill to prevent both an income tax and a sales tax? Part 1
The short answer is that there is no provision in the FairTax bill (HR 25) that would prevent having a national sales tax and the income tax. However, the FairTax legislation does three things that effectively dismantle the income tax: (1) it abolishes the IRS, (2) it repeals all statutory language having to do with taxing income and payroll (i.e., the Internal Revenue Code), and (3) it eliminates the filing of annual income tax returns to the federal government for over 140 million Americans.
What about fraud related to duplicate social security accounts?
The states will also check for duplicate social security numbers being claimed by different households to prevent more than one household listing the same person as a household member. Any duplicate social security numbers will have to be resolved before the prebate payment is made.
What are some of the taxes that are eliminated?
This nonpartisan legislation (HR 25 / S 155) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax - administered primarily by existing state sales tax authorities.
How does the Prebate work?
Under the FairTax, all Americans consume what they see as their necessities of life free of tax. While permitting no exemptions, the FairTax (HR25 / S155) 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.
How does the Fair Tax work?
Under the FairTax, every person living in the United States pays a sales tax on purchases of new goods and services, excluding necessities due to the prebate.
Since business purchases are not taxable, how does the FAIRtax keep individuals from pretending to have a business so they can buy things tax-free? Part 4
Under the FairTax, there will be less than 20 million businesses that will be filing sales tax returns (current system has over 140 million tax filers) and thus subject to the possibility of being audited. Thus, the probability of tax cheats getting caught will be much greater than it is today, making tax evasion riskier than it is today.
How does one file to receive the prebate? Filing is very simple.
Unlike the Earned Income Tax Credit, the application/registration form that families who choose to receive the prebate must file is simple and straightforward. Those choosing not to register will not receive a prebate. The registration form requires only basic information.
Tax Gap updated information
Using the most recent IRS tax gap data, the IRS estimated the gross tax gap—the difference between taxes owed and taxes paid on time—to be $450 billion, an increase of 30% over 2001.2 The net tax gap (which subtracts enforced tax collections) has likewise risen to $385 billion, an increase of 33%.
Is there any provision in the FAIRtax bill to prevent both an income tax and a sales tax? Part 2
We already have both an income and a type of sales tax today. U.S. produced goods and services are burdened with an "embedded" tax due to the cascading of income and payroll taxes paid by U.S. employers at every step of production. These costs are passed on to the customer.
Since business purchases are not taxable, how does the FAIRtax keep individuals from pretending to have a business so they can buy things tax-free? Part 2
When a business purchases items for business use from a retail vendor, they have to pay the tax on the purchase and take a credit against the tax due on their monthly sales tax return. They must keep invoices/receipts to document what they purchased and the amount of the purchase.
Fraud Prevention with the Prebate
When the state sales tax authorities process the prebate applications they will validate all names and social security numbers against the SSA database. States already do this in relation to the administration of other state/federal cooperative programs such as unemployment compensation benefits and child support enforcement.
