For those of you wondering how Fair Tax is going to cover the expenses and hence revenue neutral at 23%, here is the beginng of the explanation. From pp 17-18 of
www.fairtaxvolunteer.org/smart/waysandmeansrebuttal.pdf
Perhaps the most glaring example of the staff’s errors in describing the FairTax
plan is their misrepresentation of the FairTax rate. First, the staff asserts that the budgetneutral rate for the FairTax would have to be 50 percent. The idea that a national sales tax would have to have a rate anywhere near 50 percent is just a fabrication, pure and simple. The staff cannot defeat the idea of a national sales tax by arbitrarily assigning it a higher rate that it believes the American people will not support. Noted researchers would refute the staff’s biased analysis. Dale Jorgenson (Harvard) found that the FairTax plan was revenue neutral at 22.9 percent.
8
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Postscript
8 The Economic Impact of the National Retail Sales Tax, Dale W. Jorgenson
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Jim Poterba (MIT) found that the FairTax plan was revenue neutral at 23.1 percent.9 Laurence Kotlikoff (Boston University) found that the revenue-neutral tax rate was 24 percent.10
But so would simple common sense analysis. The FairTax repeals the individual
and corporate income tax, payroll taxes, and the estate and gift tax. The FairTax would
tax all consumption, without exception. In fiscal year 2003, these taxes accounted for
about $1.67 trillion.11 The economy in 2003 produced goods and services valued at 10.4
trillion.12 Consumption in the U.S. economy is a little under 7/8 of economic output or
$8.6 trillion. If we take the taxes replaced and divide by total consumption in the U.S.-
$1.67 trillion (the taxes replaced) divided by $8.6 trillion (all consumption) we find the
rate at 19.4 percent. This is the starting point for thinking about the sales tax rate. There
is simply no way that replacing taxes equal to 19.4 percent of consumption with a tax –
the FairTax – that taxes all consumption is going to have to be imposed at a rate of 50
percent.
Looked at another way, there is no way that the FairTax with a base much broader
than the income tax, would be at a rate greater than the income tax. In 2001 (the latest
year available), total adjusted gross income (i.e., income before personal and dependent
exemptions, itemized deductions, and the like) was $6.17 trillion.13 Total consumption in
that same year was $8.54 trillion or 38 percent larger. Thus, the basic building block of
the FairTax base – total consumption – is 38 percent larger than the current tax system’s
starting point – adjusted gross income. Taxable income under the current system was
only $4.22 trillion in 2001, only 49 percent of total consumption. Or, stated differently,
total consumption is more than twice the taxable income under the current system.
The reason the FairTax can lower marginal tax rates is that the tax base of the
FairTax is broader than the current tax system. The reason the FairTax base is broader is
that the FairTax has no loopholes and no exclusions, whereas the current tax system is
full of loopholes, exceptions, and exclusions.