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How will the FairTax affect military personnel?

Under the FairTax, the purchase of goods at military exchanges and commissaries by consumers is taxable because the FairTax is a federal sales tax. The FairTax repeals the entire federal income tax and payroll tax system so military personnel would no longer have to pay tax on benefits of any kind and they would get their whole paycheck (no income tax withholding or payroll tax deductions would be taken out). Combat pay, for example, is not subject to the income tax but the soldier does have to pay Social Security and Medicare payroll taxes on these earnings. He/she may also have to pay taxes on retirement benefits/pensions. Under the FairTax all income, from any source whatsoever, is not subject to federal income taxes or payroll taxes.

Today, the reason why military personnel don’t pay sales taxes on purchases from commissaries and exchanges is because the sales tax is levied by the state in which the base is geographically located, and states do not have the authority to levy taxes on military installations under federal jurisdiction.

Nevertheless, purchasing goods at military exchanges is not actually tax free. Economic studies show that up to 20 percent of the cost of goods and services is due to embedded income and payroll taxes. They are part of the cost of doing business, so the business has to build them into its pricing structure in order to cover costs and stay in business.

Although the Fair Tax Act does not exempt purchases at military exchanges and commissaries, the FairTax prebate ensures that no military personnel pay taxes on the necessities of life. Each military household receives a monthly prebate check based on family size which pays the federal sales taxes on spending up to the poverty level. For example, a family of four will receive a monthly prebate check of $525 at the beginning of the month ($6,297 per year) which pays the FairTax on annual spending of $27,380. Providing tax relief by means of the prebate makes tax enforcement much easier, and it keeps the tax rate as low as possible, whereas exempting various categories of items or persons would raise the tax rate about 4 percentage points for everybody.

Click here to go to the Frequently Asked Questions (FAQ) section of our Web site, and click on question number 3 to learn how the rebate works and how much spending is tax free for each household size.

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