The FAIR Tax Explained

Before the 2006 elections, many Republicans they believed that they had established a permanent majority and could soon begin pushing for long-time fringe Republican causes such as privatizing social security, creating stricter immigration rules, creating a voucher system for schools, and cutting back tax rates for the wealthy. Another one of these proposals was called the FAIR tax, which would change the face of America's system of taxation as we know it.

Here's how it would have worked. The existing tax code which is tens of thousands of pages long would be completely and wholly eliminated. In order to make up for that revenue, a national sales tax would have been passed on all goods sold in the United States. In addition, there would be a "prebate" that would return all of the money you paid in for taxes up to the poverty line. On face, the system looks very appealing.

One of the primary reasons that many want to switch to the FAIR tax is because it will eliminate the entire federal tax code. Currently the federal tax code can be extremely confusing and very hard to make practical use of. There's been a whole field of tax agencies and companies which have been created just to deal with the tax code! With the FAIR tax, the paperwork would be reduced to just a few pages. Retailers would send in the tax money they collect, and then you would be sent a prebate at the end of the year.

The major criticism of a national sales tax idea is that it would be very regressive. Currently the United States has a progressive tax, meaning that wealthier people pay a higher percentage of their income in taxes. With the FAIR tax, everyone would be essentially paying the same tax rate for their purchases. In order to combat this, the proponents of the FAIR tax have created what is called a "prebate." Essentially everyone would receive a refund of all the taxes they paid up to the "poverty line" which is set by the Federal Government. Thus the lowest income people would pay nothing in taxes when all is said in done, and some people would have a very low effective tax rate.