The FairTax is a proposal in America for a consumption tax designed to replace the entire federal income tax system, including personal, payroll, social security, corporate, self-employment, capital gains, gift, and inheritance taxes. In order to ensure that no American will pay tax on necessities, the FairTax plan also provides a monthly rebate or prebate equal to the consumption tax spent on necessities up to the federal poverty level.

The FairTax legislation has been introduced in the House of Representatives as HR 25 and in the Senate as S 1493. As of March 2004, the FairTax bills have over 40 co-sponsors.

The basic premise for the Fair Tax is the idea of eliminating imbedded taxes in all consumer products. Payroll and corporate taxes are "embedded" in all consumer products and services. Basically, the providers of goods and services pass along the cost of doing business to the consumer in the form of higher prices. The theory is that if these taxes are eliminated, capitalist and free market pressures will force prices down to adjust for the lower cost of doing business, thereby offsetting the price increse due to the higher sales tax. In essence, the net change is near zero to the consumers bottom line. The goal of the "Fair Tax" is to make the tax system more "fair" and to vastly reduce the cumbersome process and associated beauracracy of collecting taxes, i.e. the IRS.

In its current form, the FairTax legislation, sponsored by major politicians including President George W. Bush, House Majority Leader Tom DeLay, and Speaker of the House Dennis Hastert, would impose a 23% across-the-board sales tax and completely eliminate the income tax. Every family would receive rebate checks on a monthly basis to cover the estimated amount of taxes paid on necessities, with the net result that families living or spending at or below the federal poverty line would pay no federal taxes of any sort. Proponents estimate that this tax would easily equal current tax levels.

External Links

Fair Tax America

Americans for Fair Taxation

FairTax - Income Taxes vs. Sales Taxes (About.com)