In Depth the Fair Tax Act of 2005

“To promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.” That is what the top of H.R. 25 [109th] says. This is the bill in Congress that is designed to create the true reforms to the tax code that this country so badly needs. U.S. businesses and workers have been subject to an increasingly complex and seemingly unfair tax code for decades, and the Fair Tax Act of 2005 (or Fair Tax), which is what H.R. 25 [109th] was created to address this problem.

But what is the Fair Tax? Put simply, it is a consumption tax on all new goods that consumers would pay upon purchase, the same way that state sales tax is paid. Ideally, it would bring in the same amount of revenue that the current income and payroll tax system brings in, and if implemented, would repeal sections of the Internal Revenue Code and abolish the IRS. People would then be able to take home their entire paycheck, save for deductions for insurance. For the middle class, this could mean an increase in take-home pay of 25%-35%. The tax itself would be a 23% tax on the gross payment for any good or service (FairTax, 2007). It would also include monthly “prebates” that would determine a family’s overall tax burden. For instance, assuming that annual spending is equal to annual income, a family of four that earns $27,380 a year would receive a “prebate” equal to the amount spent in taxes, making the family’s net tax burden zero. A family of four with an annual income of $54,700 would have a tax burden of just 11.5%, compared to the roughly 27% that they currently shoulder. And so on up the line; nobody would have a tax burden greater than 23% (“The FairTax Prebate Explained,” 2007).

H.R. 25 acknowledges that the income tax stifles economic growth and reduced the American standard of living. It also acknowledges that it is unfair and inequitable, and impedes productivity in the workplace, among many other problems. Sections 101, 102 and 103 of the bill state very simply that subtitles A, B and C of the Internal Revenue Code are repealed, and Section 104 discusses re-designating the remaining subtitles. The new subtitle A would describe and refer to the consumption tax. Ideally, H.R. 25 would make taxes very transparent and easy for consumers to track and understand, and would make government taxation far more fair than it currently is.

For people who have calculated what the government actually takes out of their monthly paycheck, even being responsible for 23% in taxes sounds like a godsend because it is lower than what is being deducted out of their paychecks right now. However, according to Claire Wolfe and Aaron Zelman (2004), the Fair Tax could wind up being a worse disaster than the current tax code is. The first problem is that this tax could wind up actually adding 30% to the cost of goods, instead of 23% (explained below). For anybody who has a 7% state sales tax, they know that it isn’t particularly much to pay until they buy something that costs more than $1000. A 30% increase to the cost of something that is priced at $1000 would ultimately mean a price tag of $1391, because it would include the national tax and the 7% state sales tax.

In addition, Wolfe and Zelman worry that the country would end up with both a consumption tax and an income tax. The reason for this is that H.R. 25 has no prohibition of reinstating the income tax in times of national emergency. The definition of an emergency could be stretched to include even the most minor of crises, and saddle workers and consumers with more tax burden than they can bear.

They also discuss the tax rate being calculated in a deceptive manner because it is calculated on the final payment that one would pay for a good or service. So a candy bar that costs $1.00 (without state taxes added on) would cost $1.30 with the Fair Tax in effect. The number 23 comes from the fact that $.30 is 23% of $1.30. But the added cost to the consumer is 30%, not 23%. Also, this added cost could increase inflation, which hurts consumers even more.

Laurence Vance (2005) also calls the Fair Tax a fallacy because of the unfairness of it to consumers, and because it assumes that there is a way for the government to tax consumers and workers fairly. Also, he points out an obvious problem with the bill that has not really been considered by advocates: the fact that the IRS was created with the 16th Amendment, and that abolishing the IRS means repealing that amendment. The only way to repeal one constitutional amendment is with another, which must be passed and then ratified by three fourths of the states. Since they want to pass the bill before repealing the 16th Amendment, consumers could wind up stuck with both the consumption tax and the income tax anyway, even if a provision were put in the bill to prevent Congress from reinstating the income tax.

The Fair Tax bill is still in committee. For as drastic a move as this is, Congress cannot treat it lightly. Ideally the House Ways and Means Committee would see where the loopholes are in the bill and close them, in addition to doing further research on how this tax could hurt everyone, before sending it back to the floor.


About the fair tax. (2007). Retrieved May 15, 2007, from FairTax Web site:

H.R. 25 [109th]: fair tax act of 2005. (2005). Retrieved May 15, 2007, from Web site:

The fairtax prebate explained. (2007). Retrieved May 15, 2007, from FairTax Web site:

Vance, L. (2005). The fair tax fraud . Retrieved May 15, 2007, from Ludwig von Mises Institute Web site:

Wolfe, C., & Zelma, A. (2004). The fairtax: a trojan horse for america?. Retrieved May 15, 2007, from Jews For The Preservation of Firearms Ownership, Inc. Web site: