FairTax Versus Obama Tax Plan

Policy Goals

Current System

Obama Plan

FairTax Plan

Tax Reform

Incredibly complex tax system with multiple layers of taxation on the same money: tax on income, wages and salaries, and savings. Four out of five American workers pay more in payroll taxes than they do in income taxes.

Tax proposals deal with the tax on income and do not address the tax on wages and salaries (payroll taxes).

Addresses the entire tax system, replacing all income & payroll taxes including capital gains taxes, self-employment taxes, estate and gift taxes, and the AMT with a single rate tax on consumption.

Middle Class tax cut

A middle class couple earning 50,000 in wages pay $4,093 in income taxes and $3,825 in payroll taxes for a total of $7,918 in taxes (15.8 percent) -- a tax burden 14.1 percent higher than under the FairTax.

Cuts only income taxes for families making less than $250,000. The typical middle class family will receive $1,000+ in tax relief and have tax rates 20% lower than under President Reagan. Raises the top tax rate to 39.6%

A middle-income married couple with no children under the FairTax -- if they spend $50,000, pays net federal taxes of $6,803 equaling an effective tax rate of 13.6 percent. The effective tax rate increases as spending increases, but never exceeds 23 percent!

Jumpstart the economy

Multiple levels of taxation on savings, labor, investment, and productivity creates a disincentive to work, save, or invest thereby reducing real wages and job creation. Tax preparation costs divert $300 billion per year from productive activity in the economy.

Massive infrastructure rebuilding jobs program, financial assistance to banks, automakers, and other mortgage and financial institutions. Funds borrowed from foreign nations and creating larger taxpayer debt.

Proposal does nothing to eliminate the drag on the economy caused by the current federal tax system.

Independent research confirms the powerful economic effects of the FairTax doubling the size of the economy in 10 years. Beacon Hill Institute predicts GDP 7.9% higher in the first year, 10.9% higher by year 10. Kotlikoff predicts the capital stock to be 12.8% higher by 2010 and 43.7% higher by 2030, leading to real wages 11.5% higher in 2030 than if the current tax system remains in place.

Create new jobs

Massive contraction in labor market, historically high unemployment rates: 10.3 million unemployed persons with an unemployment rate of 6.7% (Nov. 2008)

Create and fund a National Infrastructure Reinvestment Bank with $60 billion over 10 years, to provide financing to transportation infrastructure projects across the nation creating up to two million new direct/indirect jobs and stimulating about $35 billion per year in new economic activity.

Influx of foreign capital attracted to new taxing and economic paradigm spurs robust job growth. Capital formation growth, elimination of drags on economy and elimination of FICA costs leads to higher take home pay and growth in new jobs.

Keep jobs in the U.S.A.

Since 1998, 3.0+ million manufacturing jobs are gone. It is estimated that 1.78 million of these were lost due to exploding US manufacturing trade deficit.

End tax breaks for companies that send jobs overseas. Provide tax credit to companies that maintain or increase the number of workers in America relative to those outside the US , keep corporate HQ in the U.S. and pay decent wages.

Imposes no taxes on exports and corporate profits which keeps jobs in the US by making US companies more competitive and increasing amount of capital to fund manufacturing plants and equipment which increases jobs, productivity, and real wages.

Break grip of lobbyists on Congress

The patchwork quilt of tax loopholes, exclusions, adjustments, and various forms and schedules that we all work so hard to understand reflects the wholesale auctioning off of the tax code over the last several decades at the hands of an army of powerful and well-heeled lobbyists. There are in excess of 70 lobbyists for each member of Congress. About half of the lobbying revolves around obtaining favorable treatment in the tax code.

Prohibiting political appointees from working on contracts or regulations directly related to their prior employment for two years. And no political appointee will be able to lobby the executive branch after leaving government service during the remainder of the administration. Eliminate special interests corporate loopholes.

This proposal does nothing to address the root cause of lobbyist influence selling preferential treatment in the tax code to special interests.

The FairTax - a single rate, uniform tax on all services and new products consumed in the U.S. - eliminates the income tax code and all of its special interest tax preferences, deductions, credits, etc.

It exposes the cost of handing out these tax favors as the enactment of any special interest tax provision increases the rate paid by all taxpayers.

Reduce Poverty

Earned Income Tax Credit households face the highest marginal tax rates creating a disincentive to work. Payroll taxes impose regressive rates on labor.

Tax treatment rebates funds to low income Americans. Infrastructure development jobs program provides employment opportunities.

FairTax prebate untaxes spending up to the poverty level, literally untaxing the poor. Since taxation is based on consumption, the FairTax allows taxpayers maximum choice as to the level and timing of taxation. The FairTax rewards hard work, savings, and the accumulation of wealth, although all wealth is taxed when spent.

Education

College costs are up by nearly 40% in the past 5 years putting a college education out of reach for 2 million qualified students this decade. The average graduate leaves college with over $19,000 in debt. The complicated maze of tax credits and applications leaves many students unaware of financial aid available to them.

Create new $4,000 tax credit worth in exchange for community service. Covers tuition costs at community colleges and 2/3rds of tuition costs at the average public college or university.

The FairTax levies no tax on education tuition at all levels: primary, secondary and college. The college student or their parents don’t have to file any tax forms to get tax free tuition. Education tuition is not consumption; it is an investment in intellectual capital.

Increase flow of capital into the U.S.

The income tax system imposes the highest marginal corporate tax rate in the world, impelling companies to locate overseas and market back to the U.S.

Obama plan does not address this issue.

Zero tax on corporate income allows companies with investments or plants abroad to bring home overseas profits without paying income taxes, thus resulting in more capital available for investment in U.S.

Improve trade and reduce trade deficit

The income tax favors imports over U.S. production by exempting imports from U.S. tax, and it penalizes U.S. exports by allowing foreign nations to impose taxes when our goods enter their shores. This adds up to an average 17 percent price advantage over U.S. produced goods, which greatly depresses U.S. exports and costs us jobs.

Pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports.

Puts imports and domestic goods on a level playing field. Exports are not subject to the FairTax, since they are not consumed in the U.S. ; but imported goods sold in the U.S. are subject to the FairTax because these goods are consumed domestically.

This makes US goods more competitive at home and abroad. FairTax is border adjustable tax consistent with WTO criteria.

Effect on non-filers and illegal immigrants

An estimated 18% of "taxpayers" have simply dropped out of the system and no longer file returns. The income tax fails to capture the cash payments and other undocumented transactions with illegal immigrants.

Requires undocumented immigrants who are in good standing to pay a fine, learn English, and go to the back of the line for the opportunity to become citizens. Remove incentives to enter the country illegally by cracking down on employers who hire undocumented immigrants.

Non-filers and illegal immigrants are taxed when they purchase goods and services for consumption. Illegal immigrants who do not have a valid SSN will not receive the prebate. Hence, the FairTax fosters coordination of tax and immigration policy.

Social Security and Medicare taxes and funding

Labor foots the bill with a highly regressive 15.3% payroll tax on wages up to $102,000 and 2.9% Medicare tax imposed thereafter.

Proposals made to increase FICA taxes for workers making over $102,000 by removing wage cap. Increases payroll taxes for 10 million workers. Regressive nature of FICA remains in place. This proposal violates campaign promise not to raise taxes on those making less than $250,000.

Repeals 15.3% payroll tax. Dedicates a portion the FairTax revenues to funding Social Security based on total wages and the current payroll tax rates. Social Security benefits are adjusted to preserve purchasing power.

Promote and protect home

Little of the mortgage interest deduction goes to low and middle income persons. This deduction excludes the nearly two-thirds of Americans who do not itemize their taxes. And among itemizers, the 71% of filers with adjusted gross income of less than $50,000 received only 24 % of the total MID.

Create a universal refundable mortgage credit of 10 %. Non-itemizers will be eligible for this credit providing the average recipient with approximately $500 per year in tax savings.

Makes home ownership more affordable because the FairTax does not tax used homes - the majority of home bought by first time home buyers. Reduces interest rates by 25%, removes tax costs embedded in the price of new homes, and the savings and investment needed to buy homes is not taxed multiple times. No tax returns have to be filed to receive this benefit no individual has to file tax returns under the FairTax.

Karen Walby, Ph.D., Director of Research, Americans For Fair Taxation, December 12, 2008.

FairTax Bibliography

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

What the Federal Tax System is Costing You Besides your Taxes, Americans For Fair Taxation Whitepaper, April, 2007.
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
http://www.fairtax.org/PDF/Open_Letter.pdf

The Prebate Explained, Americans For Fair Taxation White Paper,
http://www.fairtax.org/PDF/FairTaxPrebateExplained2007.pdf
.

Karen Walby, The FairTax: Fundamentals and Facts, A FairTax Whitepaper, April 9, 2007.
http://www.fairtax.org/PDF/FairTax-Fundamentals_and_facts-070122.pdf

David Tuerck, et.al., "The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model," The Beacon Hill Institute at Suffolk University, February 2007; and Jokisch and Kotlikoff, Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax, September, 2006 available at http://people.bu.edu/kotlikoff/Simulating%20the%20Dynamic%20Macroeconomic,%20October%204,%202006.pdf

Promoting home ownership: How the FairTax’s benefits for homeowners exceed the mortgage interest deduction, Americans For Fair Taxation Whitepaper.
http://www.fairtax.org/PDF/PromotingHomeOwnership.pdf

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

Kotlikoff, Laurence J.and Sabine Jokisch, "Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax," National Tax Journal, forthcoming.
http://people.bu.edu/kotlikoff/FairTax%20NTJ%20Final%20Version,%20April%2024,%202007.pdf

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.
http://people.bu.edu/kotlikoff/Comparing%20Average%20and%20Marginal%20Tax%20Rates%2010-17-06.pdf

David G. Tuerck, 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.
http://www.beaconhill.org/FairTax2007/FairTaxBaseandRate3-15-07FINAL.pdf

David G. Tuerck, 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.
http://www.beaconhill.org/FairTax2007/DistributionalAnalysisFairTaxBHI4-25-07.pdf

Paul Bachman, 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.
http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf

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