(Keep reading to learn how to put this calculator on your site.)
Probably the biggest misconception having to do with the FairTax, is due to a lie perpetrated by DC power brokers and the entrenched leadership of both parties in Congress. They try to lead people to believe that under the FairTax, everyone will pay 23% tax and that such a rate is untenable. The truth is that most Americans will pay less than half that rate under the FairTax and the poor will pay far less.
To help disarm the DC power brokers, as regards this intentionally misleading propaganda, we have created this FairTax Effective Rate Calculator, based on the official 2018 HHS Poverty Levels (updated each year, as soon as the new HHS Poverty Levels are published). By entering your family size and annual retail spending you can quickly determine both you your Effective FairTax Rate and annual Net Taxes, in dollars. A more detailed explanation of this calculator and how the real Effective FairTax Rate and Net Taxes is determined, follows below the calculator.
But stop for a moment and enter your own data or that of any hypothetical family into the calculator and click “Calculate”. If you believe the 23% hype, then prepare to be amazed.
(Get the code for this calculator at the bottom of this article.)
Surprise! If you just calculated your Effective FairTax Rate above, you know that your real FairTax rate would be far lower than the entrenched politicians and Inside-the-Beltway power brokers would have you believe. So now that you know what you will really pay under the FairTax, let’s take it a step further.
Compare your FairTax Rate and Net FairTax dollars to what you paid last year, under the income tax. Start by taking the total amount that you paid (or expect to pay) in federal income tax in 2017, shown on line 63 of your Form 1040. Also, if you’re an employee, add to your income tax total, the 6.2% of your annual salary (up to $118,500 in salary, for 2015) that is taken out of your pay check, as the personal portion of your payroll tax. We’ll ignore the other 6.2% that your employer paid, that much of which ultimately came out of your pocket in the form of lower wages. Now add to that building total, 1.45% of your total annual wages, for the Medicare tax that is taken out of your pay check. At this point, you should have the total amount that you personally paid to the government last year. You paid a lot of embedded tax in your purchases throughout the year. But we’ll let those taxes slide, too, since the chances are extremely high that we won’t need those taxes to make the FairTax look great.
Now compare your total taxes for last year, that you just totaled up, to your Net FairTax, calculated above. It’s a pretty safe bet that you didn’t expect what you just learned.
But let’s keep going. Divide your total income tax, Social Security, and Medicare payment to the government, by your total earnings, before deductions (salary, interest, dividends, tips, lottery winnings, etc.) That’s your fractional tax rate, under the income tax. To get the percentage that you paid in total tax to the government in 2017, multiply that number by 100. That’s your real, effective tax rate, under the current income tax method. That number represents total income tax, FICA, and Medicare payments (after all deductions and exclusions), as a percentage of total income.
The percentage that you just calculated takes into consideration everything that is included in the FairTax. The only difference is that to calculate your tax rate, under a sales tax, you divide total sales taxes paid (after prebate) by total retail spending. Of course, you multiply that fractional result by 100, to turn the result into percentage. So now that you have your effective income tax rate, look back up at the Effective FairTax Rate that you just calculated. The chances are very strong that you do as well or better under the FairTax, as under the current complex and inane bureaucracy.
Before going any further, I want to point out that during the last presidential election cycle, there were a number of politicians calling for a flat income tax. In particular, presidential candidates, Dr. Ben Carson, Sen. Ted Cruz, and Sen Rand Paul all “claimed” that their tax plans would amount to a flat income tax. In fact, of the three plans, only Dr. Carson’s “tithe” was a true flat income tax. The Cruz and Paul plans both contain a VAT (Value-Added Tax), though they try to hide that fact behind deceptive terminology.
But be it a flat income tax or VAT, in most, if not all cases, these calls for a flat income tax are merely intended as a way to keep taxing income, so they can easily move back to a progressive income tax in a couple of years. But worse, under a VAT, the promoters would have the government tax not only business profits, but employee pay, that is a real business expense – not a profit center. So under a VAT, we can expect to not only see the income tax become progressive again in a couple of years, but we will have a dreaded VAT, on top of the income tax.
But look at your Effective FairTax Rate, above, and then compare it to the 17% flat income tax rate that is most commonly proposed in flat income tax bills in Congress. Under the FairTax, a family of two adults and two children would have to spend more than $126,100, before they would pay 17% tax. Suddenly a flat income tax doesn’t look so good, does it?
Of course, some will say that I should mention that the tax schemes that were proposed by Sen. Ted Cruz and Sen. Rand Paul, since the rate that each proposed was substantially lower than 17%. But there are several problems with both of those schemes. To begin with, both of those schemes would impose a personal income tax at an unsustainably low level. As it turns out, both schemes are based rather closely upon the Hall-Rabushka plan, from back in the early 80’s. Those two Hoover Institution economists calculated that the point of diminishing returns for their plan was 17%. Yet, this lawyer (Cruz) and medical doctor (Paul) claim that they can make their very similar plans work with far lower rates than proposed by senior fellows at the Hoover Institution (Robert Hall and Alvin Rabushka). This raises a question. Does being a lawyer or medical doctor endow a person with some magic economics knowledge, of which professional tax economists are unaware?
Even if they could make those rates work, it would only be because both plans would impose a VAT on businesses. A VAT is widely considered to be one of the easiest ways to hide from voters, just how much taxes are being paid. Worse yet, under a VAT, your work is taxed, whereas, under a corporate income tax, your work is a deductible expense. The end result is higher prices at the cash register and no easy way for consumers to determine just how much the VAT is costing them, so that VAT could be easily increased by Congress. In fact many voters would be OK with that, since it would be seen as taxing someone else, even though that tax is passed on to the consumer.
However, even if we assume that this lawyer or this medical doctor could make his tax scheme work, for a family of four to pay even 10%, under the FairTax, they would have to spend $58,250 in a year and that doesn’t include purchases of used items, savings, investment, and education spending.
On top of all this, consider the miserable failure that has been the European VAT. In the end, with a VAT, you would pay much more in embedded taxes than you do today. Of course, under the FairTax, there are no embedded taxes.
But getting back to the FairTax and the way the power brokers and party leadership get to that deceptive 23% number is by conveniently ignoring the FairTax monthly “prebate”. That prebate is the FairTax answer to the standard deduction, that we all currently take advantage of, in the income tax. It’s what makes the FairTax progressive, so as to un-tax poverty.
The purpose of the standard deduction is to un-tax poverty-level income. However, in that regard, it is a dismal failure. The poor still pay embedded corporate income tax in every product or service they purchase – tax that the standard deduction does not and cannot address. The same would apply to a VAT, but at higher levels. The working poor, also pay a 6.2% FICA tax and a 1.45% Medicare tax that cannot be avoided, under an income tax. These last two taxes are eliminated under some VATs. But the VAT itself more than makes up for that loss of payroll tax revenue.
On the other hand, unlike the standard deduction, that fails to un-tax all poverty-level income, the FairTax prebate completely un-taxes poverty-level spending. It’s based on the annually updated Health and Human Services (HHS) Poverty Levels. The prebate for each family is equal to the amount of FairTax that a family of that size would pay in FairTax, at the cash register, if spending at the poverty level on new, retail goods and services. The effect is that spending up to the poverty level for each family, is completely un-taxed.
So while the FairTax rate at the cash register is 23%, only illegal aliens, who don’t get the prebate, will pay that amount. Among citizens and legal residents, only the extremely rich will pay close to that 23% level, after the prebate is accounted for. Due to the prebate, most Americans will pay less than a 10% “effective” rate and the further down the income scale a person is, the lower will be his effective FairTax rate. Play with the numbers in the calculator, to see what I mean.
It’s important to remember that the prebate functions in the way the standard deduction was supposed to function, but never has. Under the income tax, every income-producing family pays tax throughout the year. Then, at the end of the year, the government allows you to take that standard deduction. They are effectively giving you money back, so as to eliminate taxes on poverty-level income. Since the FairTax would no longer tax income, a standard deduction based on income would be irrelevant. But it has long been accepted by economists and politicians of both parties that it is both unfair and unwise to tax poverty. Doing so only serves to keep the poor, poor. The FairTax prebate is therefore, the sales tax version of the income tax’s standard deduction. But the prebate has a decided advantage for taxpayers, since it comes once a month, before you have to pay tax, rather than at the end of the tax year, after you have had tax withheld for a whole year.
Here’s how the prebate and your effective FairTax rate is calculated. It may look complicated, but it’s really very straight forward. Also remember that these equations are only for academic purposes, since the FairTax is all automatic. The only reason for these equations is to give you an idea of what your FairTax rate would be. The following equations are the basis of the above calculator, so you can work the numbers out for yourself, or just fill in the blanks in the above calculator.
We’ll uses these variables in the following equations:
A = Number of adults in the home
C = Number of children in the home
S = Annual household spending on new, retail goods and services
(note that purchases of used items and savings are not taxed)
P = Annual Prebate
T = Net FairTax Dollars paid
R = Effective FairTax Rate
Here is the base equation to determine your annual prebate.
(( A * $12,140 ) + ( C * $4,320 )) * 0.23 = P
Here is the equation to determine your Net FairTax Dollars:
( S * 0.23 ) – P = T
Here is the equation to determine your Effective FairTax Rate:
( T / S ) * 100 = R%
Just keep in mind that the FairTax is based on spending, rather than income. Under the FairTax, if you buy a used car, it’s not taxed. If you buy a used appliance, it’s not taxed. Savings and investment are not taxed, till you take the money out of savings and actually spend it, and then it’s only taxed if you use it to pay for a new, retail product or service.
You now have the tools to calculate your Effective FairTax Rate and Net FairTax Dollars, using your own calculator. But the above calculator does exactly the same thing, automatically, so why not give it a try?
Also, if you don’t already own a copy of “The Rich Don’t Pay Tax! …Or Do They?”, you should get a copy. It’s available in print, Kindle, and Nook formats. You can find it on Amazon, Barnes and Noble and through other booksellers. Click on one of the buttons in the above calculator, to be taken to the appropriate 3rd party bookseller’s page to complete your purchase.
Finally, don’t forget to call your congressman and senators and tell them that you expect them to support the FairTax, as written, without amendment.
If you already have this FairTax Rate Calculator on your website, you need do nothing, to see the changed widget. It updates automatically. If you are still seeing “2017” on the top of the widget, then your browser is probably pulling the widget from cache. In that case, just clear your cache and reload the page. The next time the widget loads, it should be the 2018 version. Alternatively, if you don’t know how to clear your cache, you can wait a few days for your cache to be cleared automatically.
If you don’t have this calculator on your site and want to put it on your site, just copy one of the following blocks of code and paste it into the HTML, for the page where you want it to appear.
>> Use just one of the following… not both. <<
This is the “object” code version that is most widely allowed on forum postings.
For those sites that do not allow “object” code, you might try the following “embed” code.
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