Definition
The term fair tax refers to a proposal that would replace all federal income taxes with a single consumption tax. A fair tax would apply only once at the point of consumption, and the proposed rate is 23% in the first year of the plan.
Explanation
Also referred to as FairTax, a fair tax is a proposed solution to the existing system of federal taxes in the United States. The fair tax would eliminate federal income taxes, FICA / payroll taxes (Medicare and Social Security), the alternative minimum tax, estate and gift taxes, as well as capital gains.
The fair tax is a consumption tax and would apply on all goods and services purchased. And while the tax rate of 23% sounds high, the taxpayer’s take home pay would be much greater since federal taxes and payroll taxes would not have been removed from their paycheck.
Supporters of a fair tax claim it would more effectively tax wealthy individuals, increase savings as well as investment, thereby increasing economic growth too. Opponents of a fair tax claim it would decrease taxes for wealthy individuals, and shift the burden to the middle class. Opponents also point out the logistical problems associated with collecting the tax, and the likelihood it will lead to an increase in tax evasion schemes.
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