2016 FairTax Rate & Real Dollar Calculator

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(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 2016 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 2015, 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 2015, 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 there have recently been 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 “claim” that their tax plans amount to a flat income tax. In fact, of the three plans, only Dr. Carson’s “tithe” is 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 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 $122,800, 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 proposed by Sen. Ted Cruz or Sen. Rand Paul, since the rate that each proposes would be substantially lower than 17%. But there are several problems with both of those schemes. To begin with, both of these 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). Does being a lawyer or medical doctor endow them 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 $56,700 in a year and that doesn’t include purchases of used items, savings, investment, and education spending. Then consider the miserable failure that has been the European VAT. In the end, with a VAT, you will pay much more in embedded taxes than you do today and many times more than you would pay under the FairTax.

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 that 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. It only serves to keep the poor, poor. The FairTax prebate is therefore, the sales tax version of the income tax’s standard deduction.

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 up to 6
C1 = 0 if less than 7 children, otherwise, 1
C2 = 0 if less than 8 children, otherwise, 1 for each child beyond 7
        (i.e. 8 children = 1, 9 children = 2, etc.)
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 * $11,880 ) + ( C * $4,140 )) * 0.23  = P

However, this year, the poverty levels have changed for the 7th child and above. The base poverty level for each child is $4,140, up to the 6th child. The poverty level increases to $4,150 for the 7th child only and then to $4,160 for the 8th child and beyond. This calculator takes these changes into effect. So if you’re interested in the full equation, for larger families, here is what it looks like:

((A * $11,880)+(C*$4,140)+(C1*$4,150)+(C2*$4,160))=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 “2015” 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. Alternatively, you can wait a few days for your cache to be cleared automatically. The next time the widget loads, it should be the 2016 version.

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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Comments

2016 FairTax Rate & Real Dollar Calculator — 8 Comments

  1. there is a mistake with this calculation. The final calculation should be ((S*.23)-P)/I=R where I = Total Combined Gross Income

  2. Jeshua, thanks for pointing that out. In fact, there are two ways to look at this. Since the FairTax is a sales tax, you are only taxed on spending, regardless of how much you earn. On the other hand, those who understand the difference like to tie it back to income, since this makes the FairTax look even better. I chose to use the first way of looking at it for two reasons. First, the FairTax is so strong, even when looking at it from that viewpoint that there is no need to boost the numbers, even with something that could be reasonably argued to be factual. The second reason was that I knew that someone would come along and point this out, giving me an opportunity to make the point that I used the most conservative scenario and still the FairTax effective rate is phenomenally low. It’s like the infomercial guy, who says, “But wait, there’s more”. It just sounds better if you let someone else make that point. Thanks for being the first person to point this out.

    • I see your point; however, I do think it may be confusing or even a turn off to potential new Fair Taxers that are trying to compare it to the tax they currently pay on their income if you are telling them to compare it only to what they spend instead. For example, when I calculated it the way you showed I got an effective tax rate of 28% which is higher than what my combined Federal Income and FICA tax rate is after using the standard deduction; however, when I calculated it based on my estimated spending each year with my adjusted formula from my previous comment I end up with an effective tax rate of 8-9% which is significantly lower than what my current Federal Income & FICA taxes are. With the rate generated by your original formula, which is accurate when viewed in the right context, it is hard to get excited about what the Fair Tax has to offer me; however, looking at the rate generated by my adjusted formula suddenly has me wanting to know more about the Fair Tax. This said, I do realize that, while there are two drastically different tax “rates” generated by this slight tweak, the actual tax dollars spent are exactly the same.

      • Jshhua, I’ve tried everything that I can to figure out how you came up with 28%. I used the worst case scenario, which is a single person, spending $1 billion per year and only came up with 22.997%, when using the three formulas that were presented in the article. The above calculator rounded it to 23%. If you followed the formulas, it’s not possible to come up with anything over 22.9999%.

        The FairTax is not meant to “dramatically” cut your taxes. But it does have the effect of cutting most people’s taxes somewhat, while cutting the taxes of others a little more. Added to all of the other benefits of the FairTax, it becomes very powerful. The point that this calculator addresses is the misinformation that the DC power brokers put out about the FairTax rate. The message here is two-fold. 1) Contrary to the spin from the DC power brokers, the FairTax most likely does cut the amount of tax that you pay (unless you’re a crook, who doesn’t report his ill-gotten gains). 2) Your effective FairTax rate will most likely be well below the 17% that is most often cited as the flat income tax rate. It’s disarming the establishment on this argument.

  3. It figures. The most succinct and accurate method for calculating one’s effective tax rate under THE FairTax comes from the one person who understands it the best. Thanks for all your efforts, Mr. Gaver. If this legislation is ever passed, it will be because enough people understand it enough to demand it.

  4. John, it was great to hear you on Fair Tax Time radio this evening. I second the comments made by Bill Payne. We really appreciate all that you do in support of the Fair Tax!

  5. What’s could possibly be fair about trading an income tax on foreigners and other privileged participants with a tax on everything~?
    One argument put forward is the end of filing reports on one’s earnings. Yet to get the prebate, you have to verify your income, don’t you~?
    This is a scam. Only the privileged and those paying foreigners have to pay income tax and report those earnings currently. Under the prebate, you have to follow rules of privilege to exercise something that looks like rights, but that is really a privilege. Otherwise The People lose money not currently required for reporting and taxation.

    #OptOutOfSocialSecurity
    #CantTouchThis

    • Mark, one does NOT have to verify his income, in order to get the prebate. In fact, under the FairTax, NOBODY reports income. Retail businesses report SALES. All that a person has to do to get the prebate is verify two things: 1) he and those in his household are alive and 2) they they are legal citizens or permanent residents (that’s as easy as providing a valid Social Security number or a U.S. birth certificate for a child who does not yet have a Social Security number – alternatively a foreign birth certificate showing U.S. parentage). No complex forms. No detailed record-keeping. Just provide social security numbers or one document. That’s it.

      The FairTax also completely un-taxes poverty – something that the current system cannot do. Even those working-poor who don’t earn enough to owe any income tax, still pay 7.65% payroll tax, for which there are no deductions. Also, both those poor who work and those who don’t work, end up paying between 12% and 16% embedded income tax, in the price of every item they purchase, including necessities, ranging from food, to electricity, to clothing, to rent. Then there is the employer’s portion of the payroll tax, which is 7.65%. Most, though not necessarily all, of that 7.65% that the employer portion of the payroll tax is taken out of the employee’s base pay. In other words, the employee’s base pay is not as high as it would be, if there were no payroll tax. Furthermore, that part of that employer portion of the payroll tax that doesn’t go to reduce the employee’s base pay, gets rolled into the price of the products we buy.

      Corporations don’t pay tax. They just pass on the cost of those taxes to either the employee or the consumer. Neither do small businesses pay tax. In the end, only people pay tax. Under the current system, even the poorest of the poor pay around 12% to 16% embedded tax. Even a wino, who lives under a bridge and begs for any money he has, pays embedded tax, when he buys a bottle of wine.

      By contrast, under the FairTax, those spending at or below the poverty line pay absolutely ZERO TAX. A family of 4 (2 adults and 2 children), who spend $32,000 per year, on new retail goods and services, will pay one-tenth of a percent (0.1%) tax, over the whole year, or about $32 for the whole year. That same family, spending $31,800 per year will pay ZERO FairTax. On the other hand, the first time Bill Gates fuels his plane, his net FairTax rate will jump to around 22.9%.

      By the way, I would love to have been able to opt out of Social Security. I calculated it once, based upon my own savings. If I had been able to opt out of Social Security at the age of 50 and even gave up what was in it at the time and instead, invested the same 6.2% of my salary in the same vehicles in which I really was investing (401k, mutual funds, stocks, etc.), I would have far more money to live on, today, and that’s assuming that I don’t take out each year any more than the interest earned in the previous year. Social Security has been so poorly mismanaged that young people today stand a better chance of getting their money back by sending their bank account information, in response to a Nigerian email, than from Social Security.

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