All The Truth: Income tax and income tax reform.

HR2525 Fair Tax Bill - Frequently Asked Questions

1. WHAT IS THE FAIRTAX?

The FairTax is a non-partisan proposal that will abolish all federal income taxes, including capital gains taxes, all payroll taxes, estate and gift taxes, and corporate and self-employment taxes and replace them all with one simple, straightforward national sales tax. It will dramatically change the basis for taxation in the country – so that we tax citizens only on what they spend, not on what they earn.

2. WHAT WILL BE TAXED?

A 23 percent, single rate, single stage tax, the FairTax will be applied to the sale of all new consumer goods and services at the final point of purchase. Used items will not be taxed. Business to business purchases for the production of goods and services will not be taxed.

3. EXACTLY WHAT TAXES WILL BE ABOLISHED?

The FairTax is a replacement tax. It will replace the individual federal income tax including capital gains taxes, all payroll taxes, corporate income taxes, the self-employment tax, and estate and gift taxes.

4. HOW WILL THE REBATE WORK?

All valid Social Security cardholders will receive a rebate equivalent to the FairTax paid on essential goods and services. The rebate will be paid in advance, in equal installments each month. The size of the monthly rebate will be determined by the government’s poverty level for a particular household size, multiplied by the tax rate. (Household is defined here as one or more individuals.)

THE FAIRTAX REBATE (1999)

Family Household Annual Rebate Monthly Rebate

Size Allowance Amount Amount

One $8,240 $1,895 $158

Two $16,480 $3,790 $316

Three $19,300 $4,439 $370

Four $22,120 $5,088 $424

Five $24,940 $5,736 $478

Six $27,760 $6,385 $532

No American will pay taxes on the purchase of necessities.

5. WHY NOT JUST EXEMPT FOOD AND MEDICINE FROM THE TAX? WOULDN’T THAT BE FAIR AND SIMPLE?

Exempting items by category is neither fair nor simple. Respected economists have shown that the wealthy spend much more on food, clothing, housing, and medical care than do the poor. Exempting these goods will give the wealthy a disproportionate benefit. For example, lobster and caviar cost much more than hamburgers and hot dogs.

Today, the purchase of these products is not exempted from federal taxation. The purchase of food, clothing, and medical services is made from after-income tax and after-payroll tax dollars. And, like everything else we buy, they already include hidden federal taxes.

Exempting one category of goods or services would open the door to the army of lobbyists and special interest groups that plague our political system today. Those who have the money can send their lobbyists to Washington to obtain tax breaks that are in their own interest. This process causes unfair and inefficient distortions in our economy, and it must stop.

6. IS THE 23% FAIRTAX TOO HIGH?

Most people are paying that much or more today, it’s just hidden from view. Even the very lowest income tax bracket is 15 percent, and all wage-earners pay 7.65 percent in payroll taxes. That’s 23 percent right there.

On top of that, you have to add in all of the taxes embedded in the goods you buy (another 20 to 35 percent). And the employer portion of the payroll tax helps to hold your wages down. Because the 23 percent FairTax would not be imposed on necessities, a family of four spending $28,808 would pay an effective rate of only 9.9 percent, not 23 percent.

When you count all taxes, no tax proposal has a lower rate than the FairTax.

7. DOES THE FAIRTAX RATE NEED TO BE MUCH HIGHER TO BE REVENUE-NEUTRAL?

The appropriate tax rate has been carefully determined; 23 percent provides for:

(1) raising the same amount of federal funds as are raised by the current system, (2) paying the universal rebate, and (3) paying the collection fees to retailers and state governments.

Unlike some other proposals, this rate has been independently confirmed by several non-partisan institutions across the country.

8. HOW WILL THE SOCIAL SECURITY SYSTEM BE AFFECTED?

Like all federal spending programs, Social Security will operate exactly as it does today, except that its funds will come from the federal sales tax – the FairTax. Employers will continue to report wages for each employee to the Social Security Administration for the determination of benefits. There will be no changes in who receives benefits or how much they receive.

9. HOW WILL THE FAIRTAX AFFECT SOCIAL SECURITY REFORM?

The FairTax does not affect Social Security reform efforts. It does not change Social Security benefits or the structure of the Social Security system. It simply replaces the current revenue source (payroll taxes) with a new revenue source (FairTax revenues). Research shows that consumption is a more stable revenue source than income. If Social Security is reformed or privatized in a way that reduces the government’s need for revenue, then the FairTax can be reduced. For example, if a mandatory private savings program is implemented in which people must save 10 percent of their income and Social Security benefits are curtailed, then the FairTax rate can be reduced just as payroll taxes would be reduced.

10. IS CONSUMPTION A RELIABLE SOURCE OF REVENUE?

Yes, in fact, consumption is a more stable source of revenue than income. A recent study shows that for the years 1959 to 1995, the consumption base was less variable than the income tax base. Why? Because during difficult times due to unemployment or an inability to work, people may not have as much income, or may have no income at all. They borrow funds or use savings. They may not have earnings, but they still continue to consume.

11. HOW WILL THE TAX BE COLLECTED?

Retail businesses will collect the tax from the consumer – 45 states already have a sales tax system, and the FairTax will simply be an additional line on the current sales tax reporting form. In some cases, however, businesses that produce products or services not currently subject to state sales taxes will have to begin collecting sales tax for the first time. Businesses will collect the tax and send it to the state taxing authority. All businesses collecting the federal sales tax will receive a fee for collection, and the states will also receive a collection fee. The tax revenues from the states will then be sent to the U.S. Treasury.

12. WHY IS THE FAIRTAX BETTER THAN OUR CURRENT SYSTEM?

Our current tax system is one of the reasons that many people are finding it so difficult to get ahead these days. It is one of the reasons the next generation may not have a standard of living as high as this generation. Cars replaced the horse and buggy, the telephone replaced the telegraph, and the FairTax will replace the income tax. The income tax is holding us back and making it more difficult than it needs to be to improve our families’ standard of living. It makes it unnecessarily difficult for our businesses to compete in international markets. It wastes vast resources on complying with needless paperwork. We can do better, and we must.

13. IS THE FAIRTAX FAIR?

Yes, the FairTax is fair – much fairer than the income tax. Wealthy people spend more money than other individuals. They buy expensive cars, big houses and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses and expensive jewelry. The FairTax will tax them on these purchases. If, however, they use their money to build job creating factories, finance research and development to create new products, or fund charitable activities (all of which help improve the standard of living of others), then those activities will not be taxed.

14. HOW DOES THE FAIRTAX TREAT LOW-INCOME FAMILIES AND INDIVIDUALS?

Under the current tax system, the poor pay Federal taxes hidden in the prices of everything they buy. As much as 20 cents out of every dollar they spend today in the stores goes to pay hidden corporate income and payroll taxes that businesses pass on to the consumer in the form of higher prices. The FairTax abolishes all of these hidden taxes.

Under the FairTax, poor people will pay no federal taxes at all. Every household will receive a rebate that is equal to the federal sales tax paid on essential goods and services, and wage earners will no longer be subject to the most regressive and burdensome tax of all, the payroll tax. Those spending at twice the poverty level will pay a tax of only 11.5 percent - a rate much lower than the income and payroll tax burden they bear today. Moreover, slow economic growth and recessions have a disproportionately adverse effect on lower income families. Breadwinners in these families are more likely to lose their jobs, are less likely to have the resources to weather bad economic times and are more in need of the initial employment opportunities that a dynamic, growing economy provides. The FairTax would dramatically improve economic growth and wage rates. Retaining the present tax system will make economic progress needlessly slow, harming low-income people the most.

15. IS IT FAIR FOR RICH PEOPLE TO GET THE SAME FAIRTAX REBATE FROM THE FEDERAL GOVERNMENT AS THE POOREST PERSON IN AMERICA?

Let’s look at a billionaire under the FairTax – if he spends $10,000,000 he will pay a tax of $2,300,000 and get a rebate of $2,440 (assuming he is married and has no children). His effective tax rate will be 22.98 percent.

Let’s look at a middle-income married couple, under the FairTax, with no children – if they spend $30,000 they will pay $4,404 net of their rebate for an effective tax rate of 14.7 percent. The effective tax rate increases as spending increases, but will never exceed 23 percent! However, this same couple, if they earn $30,000 in wages today under the income tax, would pay $2,295 in payroll taxes and$2,674 in income taxes for a total of $4,969 in taxes (16.6 percent). In addition, their employer would pay another $2,295 in payroll taxes. Most economists think that the employer payroll tax is actually borne by employees in the form of lower wages. Looked at in this way, this couple is paying $7,264 (24.2 percent) in taxes today, which doesn’t even include the hidden taxes they pay every time they make a purchase. Therefore, a middle-income married couple with no children will have an effective tax rate of 14.7 percent under the FairTax, and today, under the income tax system, that same couple has an effective tax rate of 24.2 percent!

Finally, let’s look at a low-income couple under the FairTax – they will pay no federal tax at all. Today, under the income tax system, they not only pay 15 percent in payroll taxes but they pay another 20 percent in hidden income and payroll taxes buried in the cost of every product they buy.

16. WHAT ABOUT SENIOR CITIZENS AND RETIRED PEOPLE?

As a group, seniors will do very well under the FairTax. Low-income seniors will be, in fact, much better off under the FairTax than under the current income tax system. Seniors, like everyone else, will receive a monthly rebate, in advance of purchases, for taxes paid on the cost of necessities. The income tax imposed on Social Security benefits will be repealed. The income tax imposed on investment income and pension benefits or IRA withdrawals will be repealed. Pension funds, IRAs, and 401(k) plans had assets of $6.5 trillion in 1994. An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal but will not be required to do so after passage of the FairTax.

Seniors have dramatically higher home ownership rates than other age groups (81 percent for seniors compared to 65 percent on average). Owners of existing homes will likely experience large capital gains due to the repeal of the income tax and the implementation of the FairTax. Homes are often a family’s largest asset. Gains are likely to be in the range of 20 percent.

The FairTax will make the economy much more dynamic and prosperous. Consequently, federal tax revenues will grow. This makes it less likely that federal budget pressures will require Medicare or Social Security benefit cuts.

17. WILL SENIORS BE TAXED TWICE ON SAVINGS?

No, seniors are taxed twice under the income tax today. Under the FairTax they won’t be. As surprising as it may sound, prices at the cash register will not go up under the FairTax.

The price of goods and services we buy today is inflated by the cost of income and payroll taxes paid by workers and businesses. These costs are passed on to consumers in the form of higher prices.

When income and payroll taxes are repealed, prices will come down 20 to 25 percent, according to Dr. Dale Jorgenson, Chairman of the Harvard University Economics Department. Therefore senior citizens, like all Americans, will not lose purchasing power. In fact, seniors will be able to buy more.

Government benefits will be maintained, seniors will receive a monthly rebate in the mail so they won’t pay taxes on the purchase of necessities, as they do now, tax-deferred investments will be completely tax-free; and if their savings are invested in any long-term income-generating asset such as stocks, real estate, or a long-term bond that can’t be called, their assets will increase substantially in value.

18. WILL PRICES FOR GOODS AND SERVICES GO UP BY THE AMOUNT OF THE TAX?

No. All goods and services already contain hidden costs of the current tax system embedded in their prices. When these embedded taxes are removed, prices will come down. Dr. Dale Jorgenson, Chairman of the Economics Department at Harvard University, has projected an average producer price reduction of 20 percent in the first year after the adoption of the FairTax. In addition, the FairTax will lower compliance costs by an estimated 95 percent and the removal of these costs will force prices down even lower.

19. SHOULD THE GOVERNMENT TAX MEDICINE AND HEALTH CARE?

Because federal income and payroll taxes are embedded in the price of everything you buy, you are already paying federal taxes on the drugs and other health care services that you buy today, they are just hidden. With the FairTax, prices (including the FairTax) will not go up. Harvard economist Dale Jorgenson estimates that prices for services will decline by as much as 25 percent because of the repeal of the income tax.

20. SHOULD THE GOVERNMENT TAX SERVICES?

Service providers pay the income tax today, and should not be exempt from the FairTax. Services now account for well over one-half of the Gross Domestic Product (GDP). It would be unfair and economically foolish to tax only goods. Neither consumption of services nor consumption of goods should be tax preferred. Competition, not politics, should determine what goods and services cost.

21. HOW WILL THE FAIRTAX IMPACT INCOME TAX PREPARERS, ACCOUNTANTS, AND MANY GOVERNMENT EMPLOYEES?

There will, of course, still be some people who are involved in tax return preparation and tax administration under the FairTax, but many fewer than those involved with the income tax today. Most income tax preparers, tax lawyers, and Internal Revenue Service employees will have to find other, more productive work. We have nothing to show for the $225 billion that we spend each year measuring, tracking, sheltering, documenting, and filing our annual income. Surely these valuable labor and capital resources can be employed more productively.

22. WHAT ABOUT THE HOME MORTGAGE DEDUCTION?

Income tax deductions only have value against an income tax liability. Under the FairTax there will be no tax liability to offset, because individual taxpayers will no longer file tax returns or pay taxes on their income. There will no longer be any need for tax deductions of any kind.

Under the FairTax, mortgage interest rates will fall by 25 to 30 percent (about 2 points), a huge savings for consumers. For example, on a $150,000, thirty-year home mortgage at an interest rate of 8 percent, the monthly mortgage payment would be $1,112.64. On that same mortgage at a 6 percent interest rate, the monthly payment would be $907.64. The two-point decrease in interest rates in this instance would result in a $73,800 cost savings to the consumer.

Under the FairTax, home ownership will be a possibility for many who will never have that option under the income tax system. Lower interest rates, the repeal of the income tax, the repeal of all payroll taxes, and the rebate will mean that people will have more money to spend, and have an increased opportunity to become homeowners.

23. WHAT WILL HAPPEN TO CHARITABLE GIVING?

It will probably increase under the FairTax. The FairTax will allow people to make charitable contributions out of pre-tax dollars. Under the current system, the charitable deduction only offsets a portion of your tax liability. In fact, most taxpayers today cannot deduct their contributions, only the relatively few (28 percent) who itemize may deduct their contributions. For those generally less affluent taxpayers who do not itemize, the cost of charitable giving will actually decrease under the FairTax because they will be able to make contributions from pre-tax dollars.

24. WILL CORPORATIONS GET A WINDFALL WITH THE ABOLITION OF THE CORPORATE TAX?

Corporations are legal fictions and do not bear the burden of taxation. Only people pay taxes. Corporations pass on their tax burden in the form of higher prices to consumers, lower returns to investors, and lower wages to workers. Under the FairTax, if income earned in a corporation by owners or employees is spent on consumption goods, the FairTax is paid. But, if the money is retained in the business and reinvested to create jobs, build factories, or develop new technologies, no tax is due. This is the fairest, most productive tax system possible. Free market competition will do the rest.

25. WILL THE FAIRTAX BE A BURDEN TO THE RETAIL INDUSTRY?

Retail businesses are tax collectors today. They withhold income and payroll taxes from their employees. Moreover, the vast majority of retail businesses operating in states with a sales tax (45 states currently use a sales tax) are already sales tax collectors.

Under the FairTax, retailers would be paid a fee equal to one-quarter of one percent of the federal sales tax they collect and remit. In addition, of course, retailers would no longer need to bear the costs of complying with the income tax, including the uniform capitalization requirements, the various depreciation schemes and the various employee benefit and pension rules.

Finally, the aggregate, beneficial effects of dramatically lower income tax compliance costs, no income taxes, no payroll taxes on workers and a reasonable fee for collecting the FairTax will assure that retailers will do quite well.

26. HOW WILL STATE TAX SYSTEMS BE AFFECTED, AND CAN STATES ADEQUATELY COLLECT A FEDERAL SALES TAX?

No state would be required to repeal its income tax or piggyback its sales tax on the federal tax. All states will have the opportunity to conform their sales tax to the federal sales tax. Most states will probably choose to conform. It will make the administrative costs of businesses in that state much lower. The state will be paid a fee by the federal government to collect the tax. For states that already collect a sales tax, this fee will prove generous. A state can choose not to collect the federal sales tax, and either outsource the collection to another state, or opt to have the federal government collect it directly. If a state chooses to conform to the federal tax base, they will be able to raise the same amount of state sales tax with a lower rate since the FairTax tax base is broader than their current tax base. Finally, conforming states that are part of the FairTax system will, for the first time, be able to collect sales tax on out-of-state mail order sales into their state.

27. HOW WILL THE PLAN AFFECT ECONOMIC GROWTH?

Once the penalty for working harder and producing more has been removed, and Americans are free to keep every dollar they earn, a new era of economic growth and job creation will be unleashed. Americans will be able to save more, and businesses will be able to invest more. Capital formation, the real source of job creation and innovation, will be facilitated. GDP will increase by an estimated 10.5 percent. The FairTax will raise the economy’s capital stock by 42 percent, its labor supply by 4 percent, its output by 12 percent, and its real wage rate by 8 percent.

Moreover, U.S. companies and individuals will be able to repatriate, on a tax-free basis, income generated overseas. As a result, huge amounts of new capital will flow into the United States. Additionally, other countries will likely seek to invest here to avoid taxes on income in their own countries, further spurring the growth of our own economy.

28. WILL THE FAIRTAX CAUSE A RECESSION?

No, the FairTax will not cause a recession. Consumers will not stop buying goods and services. Prices will not go up by the amount of sales tax. In fact, the tax-inclusive prices of products will very likely remain close to what they are today.

Income and payroll taxes are embedded in the price of everything we buy today, and when the income tax is repealed, prices will drop by an average of at least 20 percent. Prices will be reduced even further due to lower compliance costs.

In addition, people’s disposable income will go up the amount of the repealed income and payroll taxes. Since the FairTax is revenue neutral, the same amount of resources will be extracted from the economy as is extracted under current law. These funds will, however, be extracted in a less economically damaging way.

Every known economic projection shows the economy doing better – not worse – under a consumption tax like the FairTax. Because the economy will grow and become more productive, investment, wages and consumption will be higher than they would have been under the income tax.

29. WHAT WILL HAPPEN TO INTEREST RATES?

First, interest rates will drop quickly by approximately one-quarter after passage of the FairTax. Interest rates include compensation to the lender for the tax that they must pay on interest you pay them. That is why taxable bonds bear a higher interest rate than tax-exempt bonds. When the tax on interest is removed, interest rates will drop toward today’s tax-exempt rate.

Second, under the current system, savings and investments are taxed. Under the FairTax, savings and investments will not be taxed at all. As Americans save more money, the pool of funds in lending institutions will grow, thereby causing the cost of borrowing funds to drop.

30. WHAT WILL HAPPEN TO THE STOCK MARKET, MUTUAL FUNDS, AND RETIREMENT FUNDS?

Investors will prosper greatly under this plan, since corporations will face lower operating costs and individuals will have more money to save and invest. The reform will significantly enhance the retirement savings of many Americans.

31. WHAT WILL HAPPEN TO TAX-FREE BONDS?

Nothing will happen to tax-free bonds. They will still be tax-free. On the other hand, all stocks, bonds, and other investments will be tax-free as well.

32. HOW WILL THIS AFFECT U.S. COMPETITIVENESS IN FOREIGN TRADE?

Since all U.S. exporters will immediately see an average 20 percent reduction in their production costs, they will experience an immediate boost in their competitiveness overseas. American companies doing business internationally will be able to sell their goods at lower prices. In addition, U.S. companies with investments or plants abroad will be able to sell their goods at lower prices and bring home profits from overseas without the penalty of paying income taxes, resulting in more U.S. capital investment. And at last, imports and domestic production will be put on a level playing field. Exported goods will not be subject to the FairTax, since they will not be consumed in the U.S.; but imported goods sold in the U.S. will be subject to the FairTax because these products will be consumed domestically.

33. WHAT ABOUT BORDER ISSUES?

It is unlikely that “shopping across the border” in Canada or Mexico will result in any cost savings to the consumer. Remember, the tax-inclusive prices of goods and services after passage of the FairTax will remain very close to the same levels that can be found in the marketplace today. With regard to interstate competition, since all states will have the same federal sales tax rate, the federal sales tax will not be an incentive to cross state lines to avoid the tax either.

34. WHAT ABOUT TAX EVASION UNDER THE FAIRTAX?

The old aphorism that nothing is certain except death and taxes should be modified to include tax evasion. Tax evasion has increased by 67 percent during the past 11 years. As a percentage of Gross Domestic Product (GDP), tax evasion has reached 2.0 percent compared to 1.6 percent in 1991. Tax evasion continues to be in the range of 22 to 23 percent of income taxes collected.

Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system. These IRS figures do not include taxes lost on illegal sources of income. This, despite a major enforcement effort and assessment of over 34 million civil penalties in 1997 on American taxpayers in an effort to force compliance with the tax system. Disrespect for the tax system and the law has reached dangerous levels and makes a system based on taxpayer self-assessment less and less viable.

The FairTax is likely to reduce rather than increase the problem of tax evasion. The increased fairness, transparency and legitimacy of the system will induce more compliance. The roughly 90 percent reduction in filers will enable tax administrators to more narrowly and effectively address non-compliance and will increase the likelihood that tax evasion will be uncovered. The relative simplicity of the FairTax will promote compliance. Businesses will need to answer only one question to determine the tax due: how much was sold to consumers? Finally, because tax rates will decrease, tax evasion will be less profitable; and because of the dramatic reduction in tax filers, tax evaders will be more easily caught under the FairTax system.

35. NO OTHER COUNTRY IN THE WORLD HAS EVER TRIEDTHIS PLAN, SO WHY SHOULD WE?

The sales tax is a familiar tax, being a major source of revenue in 45 states and the District of Columbia. It is true, however, that no country until now has ever repealed its income tax and replaced it with a federal sales tax. No other country has a system of government like ours and no other country has led the world in so many fields as ours. There is no particular reason we should follow other countries’ lead on tax matters. We should strive to have the best tax system, period.

36. WHAT ABOUT THE FLAT TAX - WOULD IT BE BETTER AND EASIER TO PASS?

The flat tax and the FairTax share some important similarities. They are both flat rate taxes that are neutral with respect to savings and investment. The flat tax, however, retains the income tax administration apparatus, and can easily revert to a graduated income tax.

Very few people really understand the flat tax. It is, in fact, a VAT (Value Added Tax), and a large part of the burden of the flat tax – the business tax – will remain hidden from people. The FairTax is simple, easy to understand and visible. It cannot be converted into an income tax.

Under a flat tax, individuals would still file an income tax return each year similar to today’s 1040 EZ. Under the FairTax, individuals would never file a tax return again, ever! Under the flat tax, the payroll tax would be retained and income tax withholding would still be with us. Under the FairTax, the payroll tax, which is a larger tax burden for most Americans than the income tax, would be repealed. Under the FairTax, what you earn is what you keep – no more withholding taxes, no more income tax.

Notwithstanding flat tax proponents’ honorable intentions, income tax reform has been less than a success in the past. Congress has tried to reform the income tax again and again. The problem is the income tax and it is time to stop tinkering with it. It is time to junk the entire income tax system and start over with a tax system that is more appropriate for a free society and better able to meet the needs of the information age.

37. CAN CONGRESS JUST SIMPLY RAISE THE RATE OF THE FAIRTAX?

Yes, of course Congress can raise the FairTax rate just as it could raise the flat tax rate or can and does raise the income tax rate. However, the FairTax is highly visible. And because there is only one tax rate, it will be very hard for Congress to adopt the typical divide-and-conquer, hide-and-disguise strategy employed today to gradually ratchet up the tax burden by manipulating the tax code. Ultimately, the tax rate will be dictated by the size of the government. If government gets larger, higher tax rates will be required. If government shrinks relative to the economy, then the tax rate will fall.

38. COULD WE END UP WITH BOTH THE FAIRTAX AND AN INCOME TAX?

No, the FairTax is designed only as a replacement for the entire income tax system. Moreover, concurrent with replacing the income tax, the FairTax includes a constitutional amendment prohibiting an income tax.

39. IS THE FAIRTAX JUST ANOTHER CONSERVATIVE TAX SCHEME?

No. The FairTax has bi-partisan support from people across the political spectrum in all walks of life. Its supporters need only have one common belief: that it is a fairer, simpler, more efficient way to raise federal revenue. The FairTax will deliver these benefits to the American people and more . . . more government accountability for taxpayer dollars, a tax system that will make it easier – not harder – for the average person to get ahead, and perhaps most importantly, a tax system that will provide tax relief for those who are most in need.

40. WHAT ASSUMPTIONS HAVE BEEN MADE ABOUT GOVERNMENT SPENDING?

The FairTax is devised to be revenue neutral for the first year of operation. It will raise the same amount of revenue as it is raised by current law. After the first year, revenue is expected to rise because of the economic growth generated by this plan. At that time the American people, the Congress, and the President will have to decide whether to lower the tax rate or to spend the additional revenue.

41. HOW WILL THE FAIRTAX AFFECT GOVERNMENT SPENDING?

The public will need to remain vigilant to ensure that the economic gains caused by the FairTax benefit the people and the causes they deem worthy. However, citizens will more easily be able to determine if their elected representatives are acting in their best interest. Legislators will more easily be held accountable for their decisions. For the first time in decades, it will be simple to see whether a politician is advocating increasing taxes or restraining government spending as the economic pie gets bigger. This is not the case today.

42. WHY A CONSTITUTIONAL AMENDMENT?

It is not the intention of this plan, or the desire of the American people, to end up with both a federal income tax and a federal sales tax. The objective is to ensure that one is replaced by the other, not added on top of the other. A constitutional amendment to ban Congress from taxing income will achieve this goal.

43. ISN’T OUR WHOLE ECONOMY BUILT AROUND THE INCOME TAX?

First of all, our entire economy is not built around the income tax. Instead our economy is held back by the income tax. In fact, there was no income tax for the first 124 years of our history, - that’s more than half the time we have existed as a nation. Under the FairTax, within ten years, the average American will be at least 10 percent and probably 15 percent better off than he or she would be under the current system. That translates to an increase in income of $5,000 every year for the typical two-earner household.

44. HOW WILL THIS PLAN AFFECT COMPLIANCE COSTS?

It is estimated that Americans spend at least $225 billion a year to comply with the tax code, that’s $850 for every man, woman, and child in the country. Billions of dollars in compliance costs are wasted each year, and we have nothing of value to show for this expenditure – not one single productive service or product is added to the economy. It is estimated that the FairTax will dramatically cut compliance costs, perhaps by as much as 95 percent.

45. WHAT ABOUT THE VAT (VALUE ADDED TAX)? ISN’T IT A CONSUMPTION TAX AND HASN’T IT BEEN A FAILURE IN OTHER COUNTRIES?

First, the FairTax is not a VAT. A VAT works very differently. It taxes every stage of production. It is much more complex, and is typically hidden from the taxpayer’s view. Second, in industrialized countries that have a VAT, it co-exists with high-rate income taxes, payroll and many other taxes that, in some instances, cause marginal tax rates as high as 70 percent. Third, all other industrialized countries, except Australia and Japan, have a much larger tax burden than the U.S., which requires higher rates.

46. WILL THE TRANSITION FROM THE INCOME TAX TO THE FAIRTAX BE DISRUPTIVE AND DIFFICULT?

Everyone will have to think about taxes in a different way. Income – what we earn – will no longer have to be documented, measured and kept track of for tax purposes. The only relevant measure of our tax liability will be the amount spent on final, discretionary consumption. Tax-related issues will suddenly be a lot simpler and more straight-forward than they used to be. The aggravation and anxiety associated with “April 15th” will disappear forever with the FairTax. The sales tax is not new; most Americans come into contact with it daily, since 45 states currently use it to collect state revenues. In fact, it should be easier to switch from a federal income tax to a federal sales tax system than it is to switch from gallons to liters, or from feet to meters! Of course, those who depend on the structure and complexity of our current system (e.g. tax lobbyists, tax preparers and tax shelter promoters), will have to find more productive economic pursuits. However, everyone will have enough advance notice to adjust to the new system – the FairTax, a better choice for America.