A letter from FairTax Chief Operating Officer, David Polyansky, to FactCheck.org:

June 5, 2007

Dear Messrs. Jackson and Miller, and Mss. Novak and Robertson:

It is hard not to conclude that writer Joe Miller has something besides the plain truth in mind after having spent hours acquainting him with our issue last Friday and hours more in good faith efforts to communicate, point by point, just how unfair he has been in his description of the FairTax in his article entitled “Unspinning the FairTax,” posted on FactCheck.org on May 31, 2007.  Any reasonable person will conclude, after reading through the specifics, that Mr. Miller based negative conclusions, pejorative in nature, on erroneous assumptions that, in themselves, reveal either a bias or a faulty process of analysis.  I am writing to ask for specific recourse.

In particular, I am attaching our point-by-point rebuttal to the inaccurate assumptions and factual assertions found in this article and ask that by 2:00 p.m. EDT today FactCheck.org: (i) remove the article from your Web site until we are able to resolve the key errors we have brought to your attention (or at least agree that we cannot reach a resolution); and/or (ii) allow Americans For Fair Taxation/FairTax.org to post the attached rebuttal next to the FactCheck.org article for the same period of time the at-issue article is available to visitors to your Web site; and (iii) schedule another telephone conference today between us, Joe Miller, and one or more of FactCheck.org’s senior editors to discuss our concerns in greater detail. I would ask that you provide me your response to these requests in writing.

There is little doubt Mr. Miller has spent much time researching the FairTax, but either because he was determined to produce a "gotcha!" piece or because he has a bias of unknown origin, FactCheck.org has now published an unfair and factually inaccurate analysis of the FairTax. This not only puts our honest issue, education, and advocacy efforts (and peer tested scholarship) in the most slanted and negatively subjective possible light but also ultimately reveals something besides a dedication to truth on the part of this writer and, by reflection, FactCheck.org.

Can this piece, which goes beyond fact finding to highly judgmental and subjective conclusions, really be the measure of fairness that FactCheck.org seeks?

As a follow-up to our telephone conversation with Mr. Miller on Friday, I want to reiterate our disappointment with what can only be described as an unfair and unsupported analysis of the FairTax Plan.

In addition to the attached rebuttal document, I would like to list a few key points that have caused me great concern as to whether your writer conducted a fair and impartial review of the FairTax Plan:

1)   As I stated in my May 29, 2007 e-mail to Messrs. Jackson and Miller, Americans For Fair Taxation would make available to your organization the entirety of the $20 million in research that well-respected economists across the country have conducted in review of the FairTax proposal. Mr. Miller dismissed this research out of hand in our last phone conversation with him because it was, in his words, "commissioned," which assumes that the nation’s foremost public finance economists can be swayed by a contract, ignores the fact that most research is commissioned and that all of our research has been subject to critical peer review over many years.

2)   When we asked for research that supports Mr. Miller’s contrary conclusions on several fact subjects, Mr. Miller refused to cite countering research, instead citing unnamed sources and the President’s Advisory Panel on Federal Tax Reform (which has admitted to having never conducted an in-depth analysis of the FairTax Plan and which has refused to share with the public any underlying assumptions and calculations in scoring their own flawed version of a national retail sales tax). 

And please consider this another request on behalf of Americans For Fair Taxation and our hundreds of thousands of supporters nationwide to provide us with the "research" Mr. Miller relied upon to reach the conclusions stated in this article. Clearly, the citations he points to are not sufficient to come to the assumptions and incorrect conclusions he makes in the article.

3a)   The most blatant factual error in Mr. Miller’s article is that the one graph and accompanying text in the article that purports to show that the FairTax would raise taxes on all Americans with incomes between $15,000 and $200,000 was produced by the Treasury Department as part of an analysis of a proposal other than the FairTax and is so labeled.  That the graph does not relate to the FairTax is made even more clear in the text of the Treasury study.  The graph looked at a proposal with a different tax base and that did not repeal the regressive payroll tax.  The FairTax repeals the regressive payroll tax.

3b)   One of the most glaring pieces of evidence of bias in the article was Mr. Miller's assertion that we have misled the public by defining the FairTax rate as 23 percent using the "inclusive" method of calculation. Mr. Miller states that as a result, “many FairTax supporters do not understand that the 23 percent number is tax inclusive.” Notwithstanding our very own explicit notation of "inclusive," he insists that we intend to mislead, even though, as we tried to patiently explain, the coporate tax, individual income tax, capital gains taxes and estate and gift taxes, the flat tax proposal, and every other tax reform proposal introduced uses the exact same method of calculation.

Mr. Miller goes on to concede that 85 percent of those who wrote to FactCheck.org understood the difference between tax-inclusive and exclusive, and then he tellingly spins the remaining 15 percent who misunderstood as evidence that we have misled the public. He ignored our point to him that numerous places on our Web site and in our materials we define the difference between "inclusive" and "exclusive" and he was similarly unmoved by our honest plea that our only alternative for those seeking a comparison to the present system was to express income tax rates in "exclusive" terms which we feel would make us subject to the very charges of misleading the public we are now suffering at Mr. Miller's hands. He also seemed unmoved that, in light of his first stated discomfort, we published again in a most visible manner yet another explanation of the different calculation methods on our Web site.

Doesn’t the fact that 85 percent of the FairTax supporters who contacted FactCheck.org to express their displeasure with the illogical conclusions of the article understood the difference present plain evidence that an overwhelming number of supporters understand the exclusive vs. inclusive rate differences? The only data he uses to justify the statement that most FairTax supporters are unaware of the difference between “inclusive” and “exclusive” taxation nomenclature is the fact that 85 percent of FairTax respondents who made contact with him did understand the difference. How can we or any other reader when presented these facts not conclude that Mr. Miller's logic is either flawed or his conclusions fundamentally disingenuous in presentation?

If in your polling you found the United States Congress had reached an 85 percent approval rating, would you declare that "15 percent of Americans disapprove of Congress?" Certainly not.

4)   Another explicit example of your unfair presentation of the FairTax is your statement that the only way the FairTax Plan becomes revenue neutral is via an “accounting trick.” We spent a considerable amount of time with Mr. Miller on the phone Friday even offering to conference in Dr. Laurence Kotlikoff, a respected economist who has written on this very area in an effort to put Mr. Miller's charges of an "accounting trick” to rest. When he refused this offer, we suggested that he, at the very least, modify his language to more fairly indicate that a difference of opinion on this highly complex subject exists and that Dr. Kotlikoff’s scholarly paper on the subject published in Tax Notes, to date has not been refuted or criticized even by Mr. Miller’s advisor, Mr. Gale, who recently lost a debate at AEI on the subject. We had understood from Mr. Miller that he would, at the very least, use less pejorative language that would indicate a difference of opinion on this subject by experts, but such a change has not been made to the article.

This unfounded accusation of “trickery” on the part of me, my board of directors, my staff, consulting team, independent researchers, and our hundreds of thousands of supporters nationwide is insulting and without merit and would seem to require of any fair editor the wholesale revision of this section, if not deletion.

5)   I was stupefied that Mr. Miller did not bother to take the time to investigate our assertion that the President’s Advisory Panel did not conduct an in-depth study of the FairTax Plan itself, but instead based its findings regarding the benefits of a national retail sales tax on a study of a self-created consumption tax plan. While Mr. Miller briefly mentions the fact that the panel failed to release its methodology, why not take the time to investigate our supportable assertion that the presidential panel never conducted an in-depth analysis of the FairTax Plan itself? In fact, I specifically asked Mr. Miller to request clarification on this point from the Treasury Department and/or from members of the 2005 panel a responsible request that seems to have fallen on deaf ears.

6)   It is also concerning to me that your organization’s first contact with Americans For Fair Taxation/FairTax.org regarding your story was merely the afternoon prior to your hoped-for publication date. Certainly it would have been fairer had we been given a greater opportunity to work through Mr. Miller’s questions on the FairTax days in advance a benefit that was undoubtedly bestowed upon FairTax detractors.   Our sources indicate that some of your “advisors” on this article were contacted about a month ago.

Gentlemen, I have provided you with a concise rebuttal to many of the glaring inaccuracies and biased commentary found in the at-issue article. This type of unfair writing is inexcusable and does great harm to our honest effort. It is for these reasons and more that I must assure you that we will do what is necessary to make these facts known.

Therefore, I must once again reiterate my request that you immediately take down the article in question and/or allow us to post our attached rebuttal on your Web site.  Furthermore, I ask that you immediately schedule a time where we can meet with Mr. Miller and a FactCheck.org editor to discuss our stated concerns. 

Should you not meet this request, I will be posting our rebuttal on our Web site and will publicly release our claims after 2:00 p.m. EDT today. My hope is that we can work towards a fair and amicable resolution of this issue without having to move our conversation to the public forum.

I look forward to your positive response to my stated concerns.

Warmest regards,

David Polyansky signature



David C. Polyansky
Chief Operating Officer



A FairTax(SM) rebuttal
Response to FactCheck.org article “Unspinning the FairTax”

May 31, 2007

The FactCheck.org/Joe Miller article conclusion:

“We stand behind our earlier analysis of the FairTax.
     (A) The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax.
     (B) And it is revenue-neutral only through an accounting trick.
     (C) It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.
     (D) It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.”

The letters in parentheses have been added to aid the reader in following the response.

Introductory remarks

Americans For Fair Taxation’s many supporters throughout the country attempt to consistently monitor reports and representations about the FairTax from Web sites, media outlets, and public figures.  Recently, we noted that FactCheck.org a site apparently devoted to “objective” analysis had taken a very biased tone against the FairTax and was propagating false and misleading statements.  We shared with FactCheck.org our view that tax reform, like so many other national public policy issues, must be resolved in the crucible of public opinion based on accuracy.  And because of the impartial reporting for which FactCheck.org is supposed to be devoted, we expressed to them grave concern that false and misleading facts appeared on their site in “Unspinning the FairTax” posted on May 31, 2007.  We did so in the hope they might correct the misstatements and ensure that future reporting is more accurate. 

The ability of the American people to properly analyze candidates and the policy they support is only as good as the accuracy in the analysis and reporting.  And that, in a nutshell, is the very important mutual goal we share.

Unfortunately, we were successful only in part.  Despite our telephone discussion with Joe Miller of FactCheck.org, FactCheck.org refused to correct blatant errors; for example, insisting that presentation of a chart on distribution that purported to be the FairTax but actually was an entirely different tax plan was acceptable.  We pointed out to FactCheck.org that the FairTax taxes all consumption above the poverty line equally at 23 percent.  We explained why the FairTax was more progressive and was revenue neutral.  We also detailed that under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow.  According to measures that capture real-world economic effects, the gains disproportionately go to low- and middle-income groups.  Americans For Fair Taxation regards such an outcome as fair, just, and equitable. 

We will continue to work to ensure accurate reporting on behalf of Americans For Fair Taxation.  In the meanwhile, we want our supporters to understand the nature of FactCheck.org’s mistakes and biased effort.

(A) The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax.

This sentence is false and misleading.  The FairTax is a 23 percent tax as measured by the same basis we measure all of the federal taxes it replaces.

The FairTax rate, measured the way existing U.S. federal taxes are measured, is a tax imposed at 23 percent.  As Americans For Fair Taxation has noted in every opportunity on our Web site, in testimony, and in public position papers the FairTax rate can be considered to be 30 percent, but only if one measures the FairTax in a “tax-exclusive basis.”  The fact that, by FactCheck.org’s own admission, 85 percent of our supporters who contacted your organization in regards to the article “get it” says that we must be doing a good job of explaining the importance of this distinction.  (To further ensure that this is understood, we have revised this explanation and posted it on our home page.  The text of this explanation appears at the end.)

Measuring the income tax in a tax-exclusive basis would result in completely different rates of the income tax.  For instance, that a middle-income taxpayer in the 25 percent income tax bracket today would be in a tax-exclusive tax bracket of 48.5 percent because they would need to earn $148.50 to have $100 to spend after income and payroll taxes.  In fact, this taxpayer’s total tax-exclusive rate is 67.5 percent because we should consider employer payroll taxes.  According to the President’s Advisory Panel on Federal Tax Reform’s final report, “Economists have found, however, that the burden of the employer’s portion of the payroll tax is largely passed on to employees in the form of lower wages” (page 29).

Somehow, income tax proponents never get around to mentioning that the tax-exclusive tax rate on middle-income taxpayers today is over twice the FairTax 30 percent tax-exclusive tax rate.

Since the FairTax is a replacement for income and payroll taxes, and they are both measured, reported, and quoted on a tax-inclusive basis, it is appropriate to use the 23 percent tax-inclusive rate when referencing the rate.  To do otherwise as FactCheck.org seeks would actually be misleading.  In other words, apples should be compared to apples, not to oranges, and the tax-inclusive rate of the income and payroll taxes today should be compared to the tax-inclusive rate of the FairTax tomorrow.

To quote the tax panel’s final report, “Although tax-exclusive and tax-inclusive rates are both valid ways of thinking about tax rates, the easiest way to compare the retail sales tax rate to the state sales taxes paid by most Americans is to consider the tax-exclusive rate. On the other hand, it is appropriate to compare the retail sales tax rate with current income tax rates by utilizing the tax-inclusive rate” (page 208).  We don’t disagree.  That is why we refer to the rate in the appropriate tax-inclusive manner.

(B) And it is revenue-neutral only through an accounting trick.

This sentence is false.

FairTax.org acknowledges that increased revenue from taxing federal government consumption is exactly canceled by increased costs in the federal budget (as pointed out by the tax panel).  What the tax panel neglected to point out is that this accounting method is used today by the Office of Management and Budget and the Congressional Budget Office. 

The FairTax taxes all consumption, including government consumption, once.  Today, the income tax and payroll tax are imposed on government consumption by taxing government employees and government contractors, making government pay more than it would in the absence of these taxes.  This tax revenue appears in the receipts column in the federal budget, and the added expense is counted in the federal budget as spending (exactly canceling each other out).  Fortunately, at least in this respect, the federal budget is honestly presented.

This tax revenue currently “paid” by the federal government is part of the tax revenue that the FairTax replaces.  The federal government could artificially reduce both spending and tax revenues by exempting its workers and contractors from both income and payroll taxes and lowering wages paid to employees and amounts paid to contractors accordingly.  Similarly, the FairTax taxes government consumption and, like today, the expense and revenue would be reflected on the federal budget as such.  If the FairTax were to exempt government from tax and if federal spending were held constant, then the purchasing power and size of the federal government as a share of the economy would be dramatically increased.  Further, not taxing government consumption would artificially make government consumption appear cheaper and promote increased consumption via government.  So, though a wash, there would be negative economic consequences if the FairTax did not continue the practice of taxing government consumption. [1]   This is not an accounting “trick” any more than it is an accounting trick to tax government workers and the income of government goods and services providers today.

Footnote: [1] For a detailed description of the FairTax base and step-by-step explanation of the rate calculation methodology, see Bachman, et al., 2006

(C)  [The FairTax] will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.

This sentence is false.  And FactCheck.org's own document shows their statement to be false.

FactCheck.org’s statement is based on a U.S. Treasury Department analysis (Figure 9.4 of which is shown) of a plan which is not the FairTax.  The chart and the Treasury study depict an alternative retail sales tax plan invented by the Treasury Department that had a different tax base than the FairTax.  In fact, the chart depicts a “plan” that does not repeal payroll taxes, which are 41 percent of personal income taxes, and leaves out more than $771 billion in regressive taxes that fall mostly on the poor and middle-income wage earners.[2]  Although the chart label refers only to federal income taxes paid, this point is not made in the discussion of the results, thus almost begging for the reader to wrongly infer that the distributional picture portrays the FairTax.  

According to the Brookings Institution’s Tax Policy Center, the payroll tax is very regressive with respect to current income, and in 2006 most Americans paid more payroll taxes than income taxes.  “Among households with wage earners, 86 percent have higher payroll taxes than income taxes, including almost all of those with incomes less than $40,000 and 94 percent of those with incomes less than $100,000.” [3]

The chart below shows that for those with incomes less than $23,700, their payroll taxes were over 5 times their income taxes.  For those with incomes between $23,700 and $42,305, their payroll taxes were 2.5 times their income taxes.  Only in the highest income group do income taxes exceed payroll taxes. [4]

[2] See IRS SOI Tax Stats-IRS Data Book: 2006.  Available at http://www.irs.gov/pub/irs-soi/table_1_2006_dp.xls.
[3] Burman and Leiserson, 2007.
[4] Payroll and income tax data.

chart - comparison of income taxes and payroll taxes by group

Since the payroll tax is regressive and is the largest tax paid by lower- and middle-income Americans, ignoring the fact that the FairTax repeals payroll taxes is tantamount to ignoring what the FairTax is when analyzing the FairTax. 

A recent study by Dr. Laurence Kotlikoff, that does analyze the distribution of the FairTax, was conveniently ignored by FactCheck.org, although brought to their attention.  That study finds that the FairTax lowers remaining average lifetime tax rates,[5] thereby enhancing overall progressivity.  This occurs because the reduction in rates is proportionately much greater at the low end of the earnings distribution than at the high end. 

With respect to those earning $15,000 to $200,000 per year compared to those earning over $200,000, his results clearly demonstrate that the former experience a greater percentage tax cut than the latter.  In the following table, each of the income groups between $15,000 and $200,000 has a lower lifetime tax burden under the FairTax.  The two groups above $200,000 ($250,000 single and $500,000 married) also have a lower tax burden under the FairTax.

Let’s look at the middle-aged couple with two children earning $20,000 per year compared to that same couple earning $70,000 per year or $500,000 per year.  In switching to the FairTax, the low-income couple’s FairTax rate is only 1.5 percent versus 11.0 percent under the current system.  The middle-income couple earning $70,000 has a FairTax rate of 11.6 percent compared to 21.3 percent under the current system.  The high-income couple earning $500,000 has a FairTax rate of 20.5 percent versus 35.6 percent under the current system.  The low-income couple gets an 86 percent cut in their average remaining lifetime tax rate; the middle-income couple gets a cut of 46 percent, whereas the high-income couple gets a 42 percent cut. 

[5] The rates referred to above are average remaining lifetime tax rates, which take into account total tax payments net of Social Security benefits that the household will pay in its remaining lifetime.  They measure the household’s future tax burden under the FairTax compared to what it would have to pay if the current tax system remains in place.

Average remaining federal lifetime tax rates the current system vs. the FairTax:

chart - lifetime taxes, individual
Source:  Kotlikoff and Rapson (October 2006), Table 5.

chart - lifetime taxes, married households

In fact, even ignoring economic growth, lower compliance costs, better international competitiveness, higher wages, and other positive effects of the FairTax on the well-being of the American people and adopting outmoded “static” analyses of the distributional impact of the FairTax, households spending up to $50,000 annually will be better off.[6]

Footnote: [6] Tuerck, et al., “A Distributional Analysis of Adopting the FairTax:  A Comparison of the Current Tax System and the FairTax Plan,” 2007.

(D)  It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.

This sentence incorrectly assumes that economic growth will be distributed unfairly.  The FairTax is called “fair” because it disproportionately benefits the poor and middle class and the economic studies support this statement. 

The FairTax entirely untaxes the poor and reduces the tax burden on the near poor substantially.  The FairTax taxes all consumption above the poverty line equally at 23 percent.  The FairTax is progressive, and by two out of three commonly used measures of progressivity is more progressive than the current system.  Finally, and most importantly, under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow.

By measures that capture real-world economic effects, the gains disproportionately go to low- and middle-income groups.  Americans For Fair Taxation regards such an outcome as fair, just, and equitable.  We believe that the American people do as well.

The Gini coefficient is a widely used measure of inequality that varies from 0 (perfect income equality) to 1 (perfect income inequality).[7]   The Gini coefficient for current expenditure per capita is 0.51, which indicates relatively high inequality.  The FairTax reduces the Gini coefficient to 0.48, which is a reduction in inequality.  On the other hand, the Gini coefficient for current income per capita is 0.47, which increases slightly under the FairTax to 0.54.  According to this measure, the FairTax makes spending after tax more equal and income after tax somewhat less equal.[8]

[7] For an explanation of the Gini Coefficient, see http://en.wikipedia.org/wiki/Gini_coefficient.
[8] Tuerck, et al., op. cit. 

chart - inequality of income and spending

A tax concentration coefficient is another standard measure of tax burden inequality.[9]  A high number means that the burden of the tax is highly unequal, i.e., it is not evenly distributed among income groups but rather is concentrated in the upper income group.  Thus, the higher the number, the more progressive the tax.

As can be seen from the chart below, the FairTax has a higher tax concentration coefficient than any other tax except the estate and gift tax and is therefore more progressive than income and payroll taxes as measured by its impact on expenditure per capita.[10]

[9] A tax concentration coefficient is a variant of the Gini coefficient.  It also varies between 0 and 1.0.
[10] Tuerck, et al., op. cit.

chart - progressivity of taxes

Laurence Kotlikoff of Boston University, using a methodology considering lifetime effects, found that virtually every income and age cohort would be better off under the FairTax but that those in the lower-income groups are disproportionately better off.  For example, take a middle-aged couple with two children earning $20,000 per year compared to that same couple earning $70,000 per year or $500,000 per year.  The low-income couple gets an 86 percent cut in their average remaining lifetime tax rate; the middle-income couple gets a cut of 46 percent, whereas the high-income couple gets a 42 percent cut.[11]  
His study uses a dynamic life cycle general equilibrium model to simulate the impact of the FairTax on the U.S. economy.  The inclusion of demographics, including a realistic initial age structure of the population, realistic mortality rates, and realistic fertility rates means that the model is able to show how the economy fares over time in the absence of tax reform compared to how the economy fares with the FairTax enacted.  Switching to the FairTax precipitates a very major increase in the U.S. capital stock and real wages over the course of the century, prevents what would otherwise be a doubling of the highly regressive payroll tax, and effects very major welfare gains, particularly for the poorest current and future members of society.  Implementing the FairTax at 23 percent gives the poorest members of the generation born in 1990 a 13.5 percent welfare gain.  Their middle-class and rich contemporaries experience a 5 and 2 percent welfare gain, respectively.[12]

Only studies that adopt a one year or very short horizon and look at income class show the FairTax to be less progressive than the current system.  These studies use data showing that poor people in the aggregate spend many times their income year in and year out which is, of course, impossible.  What is really going on is that many who are counted as poor are business owners who lost money, students living off of their parents, or those with illicit or unreported sources of income.  The studies are inherently flawed.

To be accurate, FactCheck.org should include the Kotlikoff studies on distribution that specifically examine the FairTax.

[11]  See Table 5 in Kotlikoff and Rapson, 2006.
[12] Jokisch and Kotlikoff, 2007.


Other points made by FactCheck.org

[C]onsumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:

(E)  Interest on credit cards, mortgages and car loans

This sentence is misleading.  The FairTax does tax the loan service charges or fees charged by the lending institution to the borrower.  If the lending institution does not separately state these charges, but rather rolls them into the interest rate for the loan, then a portion of the interest is really hidden services charges.  The FairTax taxes only that small portion of interest.  For example, on a typical home mortgage only about one-half of one percent of interest is subject to tax.  This represents the value of the financial intermediation services provided (such as loan origination fees, loan servicing fees, etc.) that are disguised as “interest” today.  Thus, on a $200,000 mortgage the FairTax liability (calculated by the bank) would be $230 per year or only $19 per month.

A more noteworthy effect of the FairTax on interest, which dwarfs the above, is that the FairTax will bring down interest rates by about 25 percent.[12]  This would reduce the homeowner’s payment from approximately $1,200 per month to $1,014 per month, a monthly savings of $186 per month (based on an average existing mortgage rate of 6.0 percent which decreases to 4.5 percent under the FairTax.)

(F)  The result is that many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax-inclusive.

When 85 percent of the public understands a relatively complex tax issue, then it would seem that FairTax is (1) not being misleading and (2) doing a pretty good job of explaining the issue.  We would bet that those same people do not know that the current income, payroll, capital gains, alternative minimum, and estate taxes are also expressed as tax inclusive, which is the whole reason for making the honest comparison in the first place.

(G)  In other words, proponents assume that no one will cheat on taxes.

No, but we do assume that the FairTax will do a better job of reducing the amount of cheating that is rampant today.  The FairTax would reduce tax evasion by reducing the marginal tax rates and therefore the incentive to cheat and by increasing audit rates and therefore the likelihood of tax evasion being caught.  Audit rates would increase because audits would be much simpler and more could be undertaken (assuming that appropriated enforcement resources are held constant).  Overall administration and enforcement would be more efficient, given the vastly reduced number of collection points (e.g., there are about 20 or so million taxpayers under the FairTax versus 155 million today).

Footnote: [12] Several economic studies have estimated that switching from an income tax system to a consumption tax system such as the FairTax would result in an interest rate drop of approximately 25 percent.  See, e.g., Golob, John E., “How Would Tax Reform Affect Financial Markets?” Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter, 1995.

Revised explanation of 23 percent rate vs. 30 percent rate

Perhaps a simple example will explain best. 

Assume there is a worker named Joe who earns $125 and spends all of his earnings.  Let’s further assume that the government requires him to pay $25 in taxes.

If the government put a tax on Joe’s income, he would earn $125 before tax and would have $100 after tax to spend at the General Store. Thus, Joe has to earn $125 to have $100 to spend.  Joe would also have to file an income tax return.

If the government put a tax on what Joe spends, he would earn $125 and would have $125 to spend at the store.  Of the $125 paid by Joe to the storekeeper, $100 would be for the goods he bought at the store and $25 would be taxes that the storekeeper would send to the government.  Joe would not have to file a tax return, as the storekeeper sends the tax in to the government.

Either way, Joe pays $25 in taxes and the government gets $25 in taxes.  With a tax on income, Joe pays the $25 directly to the government, and with the tax on spending (sales tax), he pays the $25 in taxes indirectly when he buys something from the General Store.  The General Store sends the tax that Joe paid to the government.

chart - Joe's taxes - example

We may report the tax rate as $25/$125 = 20 percent, which is the tax-inclusive rate (meaning that the tax is included in the base).  Alternatively, we may think of the tax rate as $25/$100 = 25 percent, which is the tax-exclusive rate (meaning the tax is excluded from the base).
The 23 percent FairTax rate set out in HR 25/S 1025 is a tax-inclusive rate, as is the current individual income tax, whereas most state-level sales taxes are quoted on a tax-exclusive basis.  For ease of comparison, Americans For Fair Taxation gives the tax rate both ways.  Both rates pertain, since the FairTax is a tax on spending that is replacing an income tax system, and 23 percent correctly represents the tax burden compared to the current income tax system.

It is both inaccurate and misleading to say, using the above example, that the income tax is 20 percent and the sales tax is 25 percent.  This implies that the sales tax burden is higher, when in fact the burden of the two taxes is precisely the same either both taxes are 25 percent or both taxes are 20 percent.


Americans For Fair Taxation (AFFT), “Promoting home ownership: How the FairTax’s benefits for homeowners exceed the mortgage interest deduction,” February 2007.  Available at http://www.fairtax.org/PDF/PromotingHomeOwnership.pdf.

AFFT, “The FairTax and economic growth,” April 2006.  Available at http://www.fairtax.org/PDF/TheFairTaxAndEconomicGrowth.pdf.

AFFT, “The FairTax prebate explained,” February 2007.  Available at http://www.fairtax.org/PDF/FairTaxPrebateExplained2007.pdf.

AFFT, “What the federal tax system is costing you besides your taxes,” April 2007.  Available at http://www.fairtax.org/PDF/WhatTheFederalTaxSystemIsCostingYou.pdf.

An Open Letter to the President, the Congress, and the American people Concerning Reform of the Federal Tax Code.  Available at http://www.fairtax.org/PDF/Open_Letter.pdf.

Arduin, Laffer & Moore Econometrics, “A Macroeconomic Analysis of the FairTax Proposal,” June 2006.  Available at http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf.

Bachman, Paul, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck, “Taxing Sales under the FairTax:  What Rate Works?” Published in Tax Notes, November 13, 2006.  Available at http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf.

Burman, Leonard E. and Greg Leiserson, “Two-Thirds of Tax Units Pay More Payroll Tax Than Income Tax,” Tax Notes, April 9, 2007.  Available at http://www.taxpolicycenter.org/UploadedPDF/1001065_Tax_Units.pdf.

Chamberlain, Andrew and Gerald Prante, "Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991-2004,” Tax Foundation Working Paper No. 1, March 2007.  Available at http://www.taxfoundation.org/files/wp1.pdf.

Jokisch, Sabine and Laurence J. Kotlikoff, “Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax,” National Tax Journal, forthcoming, 2007.  Available at

Kotlikoff, Laurence J. and David Rapson, “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation,” NBER Working Paper No. 12533, revised October 2006.  Available at

President’s Advisory Panel on Federal Tax Reform, “Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System,” November 2005.  Available at http://www.taxreformpanel.gov/final-report/.

The FairTax Act of 2007, 110th Congress, introduced by John Linder, January 4, 2007.  Available at http://thomas.loc.gov/cgi-bin/thomas.

Tuerck, David G., Jonathan Haughton, Keshab Bhattarai, Phuong Viet Ngo, and Alfonso Sanchez-Penalver, “The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model,” The Beacon Hill Institute at Suffolk University, February 2007.

Tuerck, David G., Jonathan Haughton, Paul Bachman, Alfonso Sanchez-Penalver, and Phuong Viet Ngo, “A Distributional Analysis of Adopting the FairTax:  A Comparison of the Current Tax System and the FairTax Plan,” The Beacon Hill Institute at Suffolk University, February 2007.

Tuerck, David G., Jonathan Haughton, Paul Bachman, and Alfonso Sanchez-Penalver, “A Comparison of the FairTax Base and Rate with Other National Tax Reform Proposals,” The Beacon Hill Institute at Suffolk University, February 2007.

What is the FairTax Plan?
The FairTax Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment.  This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.  The IRS is disbanded and defunded.  The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn.  The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

What is Americans For Fair Taxation (FairTax.org)?
FairTax.org is a nonprofit, nonpartisan, grassroots organization solely dedicated to replacing the current tax system.  The organization has hundreds of thousands of members and volunteers nationwide.  Its plan supports sound economic research, education of citizens and community leaders, and grassroots mobilization efforts.  For more information visit the Web page: www.FairTax.org or call 1-800-FAIRTAX.