If your ears now perk up and you begin hearing talk about Fairtax in the press, one of the most common complaints you'll hear is that "this plan will be hardest on our poor." EHHHHH, not true. In fact, the Fairtax plan assures that poor Americans do not pay Federal taxes.
This is done through the "prebate". But first, let's recognize two important points. First, consumer costs will remain virtually the same as embedded taxes are removed from retail costs. On average, goods and services have an embedded cost of 22% (the actually cost per sector varies by 4 or 5%, but I don't have the numbers in my head at the moment). So a 23% tax will on some goods will cost slightly more than current prices, for others slightly less, and for most the difference will be negligable because of the second point...
We'll all be bringing home more. Currently, even if the Federal government "refunds" every dime you've paid in taxes, you've still lost money in opportunity costs. You could have invested those funds and earned intrest, or even more likely for many of us, paid off debts (mortgage, credit cards, etc.) and reduced the cost you've incurred from those debts. Under the Fairtax, payroll taxes including Federal Income Taxes, Social Security Taxes, and Medicare Taxes will no long be withheld. In fact, they will be collected through the retail sales tax. So we will all be bringing home more money.
Now the "prebate".
At the begining of each month, every American household will receive a check from the government to reemburse that household to the level of taxation at the poverty line. Let me explain it another way...
Every household has to spend a certain amount of money to subsist, well, at least we can calulate that amount on average. This minimum amount is called the "poverty line". The amount it takes for basic, no frills life. LIke a car with no cd player or air conditioner.
The Fairtax calculates the amount of taxes each household would pay to this limit, then "advances" those funds to each house. In other words, you'd get a check each month to cover the cost of taxes you'd pay to live at the poverty line.
In 2005, a married couple with no children would hit the poverty line at $19,140. The amount of tax you'd pay to that line is $4,402. Divide that by 12, and you'd receive a check each month for $367.
For a single individual such as myself, $9,570 is the poverty line this year. So the first $2,201 in taxes I'd pay would be refunded. That's a monthly check for $183.
And that is BEFORE you pay the tax. In otherwords, this check offsets any taxes you might pay. And if you spend less by growing your own food or making your owe clothes or being energy effiencient as possible, then you can bank the money, invest it, or otherwise spend it how you like.
Keep in mind you paycheck no longer includes withholding. So you are bringing home MORE money. AND prices will remain virtually unchanged.
Another point to be made, that poor and middle class often buy used items. These are never taxed. Used clothes, used cars, used homes. No taxes.
So you can see that the poorest of us will not pay taxes. In fact, studies of spending habits show that this is be a vastly more progressive tax than we currently have in place with the rich paying a far greater share of the national tax burden.
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