Fair Warning on the Fair Tax

Part I

By Vicky Davis



The other day information began circulating in the email news groups regarding a great new tax proposal called the Fair Tax.   Representative Richard Linder (R-GA) is the lead sponsor of the legislation: H.R. 25 - “The Fair Tax Act of 2005”. 


For reasons that will become obvious, there is big money backing for this proposal.  According to House Ways and Means Committee member, Kevin Brady (R-TX) at a rally in Houston led by Tom Delay1, this proposal originated in Houston. Brady made the statement, “First, let me thank Tom Delay for his leadership.  As in everything important, nothing of significance occurs in America today without Tom Delay’s leadership and abolishing the IRS and replacing this income tax code is going to need his leadership so we also Thank God for Tom Delay”


The marketing of this plan is well underway.  A PAC, ‘Americans for Fair Taxation’2 has been established, a book written by Neil Boortz titled “The Fairtax Book” is being marketed, and my suspicions were confirmed that Aaron Russo’s documentary, ‘America: Freedom to Fascism’ on the unconstitutionality of the 16th amendment was a propaganda movie to generate grassroots support for elimination of the income tax for an unstated, underlying purpose.   The timing of the movie is just too coincidental to the marketing of the Fair Tax proposal for the movie and the Fair Tax proposal to not be related.  The confirmation for me was on the ‘Americans for Fair Taxation’ website3:


"The FairTax proposal integrates such features as a progressive national retail sales tax, dollar-for-dollar revenue replacement, and a rebate to ensure that no American pays such federal taxes up to the poverty level. Included in the FairTax plan is the repeal of the 16th Amendment to the Constitution. The FairTax allows Americans to keep 100 percent of their paychecks (minus any state income taxes), ends corporate taxes and compliance costs hidden in the retail cost of goods and services, and fully funds the federal government while fulfilling the promise of Social Security and Medicare."


The Fair Tax plan proposed is to eliminate the IRS and the income tax system - all to be replaced by a 23% ‘inclusive’ consumption tax (sales tax) at the retail level.  All households will receive a prebate check from the government based on poverty level income to ensure that the basic necessities of life are ‘untaxed’. 


Admittedly, the Fair Tax campaign4 has a lot of appeal if you are foolish enough to be satisfied with the marketing sound bites:  

 The FairTax:

  • Abolishes the IRS
  • Closes all tax loopholes and brings fairness to taxation
  • Maintains our current Social Security and Medicare benefits
  • Brings transparency and accountability to tax policy
  • Allows American products to compete fairly
  • Reimburses the tax on purchases of basic necessities
  • Enables retirees to keep their entire pension
  • Enables workers to keep their entire paycheck

However, if you take the time to listen to the audio and video programs that are linked on the Fair Tax website5, you will be ‘shocked and awed’ yet again.  If you only listen to one program, the suggestion would be that you listen to the audio program of the House Budget Committee hearing that was held on 10/6/20046.   The following is a summary of the information that came out during that hearing:


  • The 23% ‘inclusive’ sales tax rate is actually 30%.  They deceive supporters using mathematical trickery.  Assume you are going to buy a $10.00 item.  The sales tax rate will be 30% making the total $13.00.   They then use the $3.00 tax as a percentage of the $13.00 total to come up with the 23% rate.     3.00 / 13.00  = .23   That’s the reason for the ‘inclusive’ qualifier on the tax rate they give.


  • The Free Tax people claim the prebate check ‘untaxes’ basic essentials to the poverty level is paid to all households.  This means that Bill Gates and Warren Buffet will receive a prebate check in the same relative amount as the poorest households in the country.  The Fair Tax people neglected to consider the losses in income on the poorest of citizens by the elimination of the earned income tax credit, the refundable child care tax credit, the dependency care tax credit and the hope and lifetime learning tax credit.  This results in an annual decrease in household income on the poorest households - those qualifying for the earned income tax credit - of over $4,000 per year.  


  • All taxes paid by corporations will be eliminated.  Consumers will pick up the difference in lost revenue through the sales tax.   


  • Using their numbers - without the deceit, a 30% sales tax will be applied to the purchase of all ‘new’ goods and ALL services.   If you buy a $20,000 new car, the price will be $26,000 with $6,000 sales taxes.  If you buy a new home for $100,000, with the sales tax, the price of that home will be $130,000 with $30,000 going to the government for sales taxes.  But wait… that’s not all.   Sales tax will also be charged on the interest of your mortgage payment.  But wait… that’s not all.  Insurance will be taxable under this system so add 30% more onto your homeowner’s insurance.  And, of course, your mortgage deduction is gone because the income tax system is gone under this program.  If you buy a used home or a used car, there won’t be a sales tax on it but the mortgage interest sales tax and the insurance sales tax still apply.


  • All consumer purchases will be taxed at 30%.  Your food, medications, gas, electric bill, phone bill, water bill, etc. will all increase by 30% to pay the sales tax.   If you hire a painter to paint your house, he will be required to collect the 30% sales tax on the service.  If you go to a dentist - or God forbid, you get sick and have to go to the hospital, 30% will be tacked on the bill for the sales tax - and you can bet that your medical insurer won’t pay the sales tax as a part of your benefits package - if you are lucky enough to have medical insurance - which by the way, will be taxed at 30% and of course - no deductions for medical insurance because there is no income tax to deduct from.   


  • Rent will be taxed at 30%.  Federal government services that you consume - including those provided to veterans will be taxed.  The only non-taxable expenditure that I heard during the full three hours of the hearing was that education expenses would be exempt on the theory that education is an investment. 


  • The 30% is exclusive of the state income, sales and property taxes you now pay.  It would be in addition to those taxes.  The federal sales tax would be collected by the states with the Fed’s ‘generously’ giving them a ½ of 1 per cent payment for the collection service.  Since state income tax system were designed to parallel the federal income tax system, the Fair Tax if implemented, would virtually force states to go to an all sales tax system paralleling the federal sales tax system which would raise the effective sales tax rate to anywhere between 50% and 80% depending on where you live and whose numbers you use.


  • As if all of this weren’t bad enough, state and local governments would be required to pay federal sales tax on all their purchases and they would be required to collect a sales tax on all services provided to the citizens in their localities.    That means if you have to call a cop or the fire department, you will be charged for the service and the sales tax will be applied on top.  Even if the cost of the service isn’t charged directly to the consumer, the sales tax will be applied to the locality’s calculated cost of the service and you would pay that amount for the federal sales tax.     


  • They included a provision for the federal government to pay sales tax to itself on all spending including defense, all procurement and presumably inter-departmental chargebacks.  On the surface, you would say that’s silly because it would net to zero.  But because they used a different treatment of prices on the revenue side than they did on the spending side, it resulted in a $500 billion discrepancy that would have to be corrected if the Fair Tax system were to be adopted.  This means that the 30% sales tax would have to be increased to cover the $500 billion shortfall.  To understand the differential treatment, you have to keep in mind that all tax reform proposals have to be revenue neutral.  The Fair Tax people assume that for every dollar you spend currently on goods and services, there is an embedded 22% overhead cost to cover income and payroll taxes.  When they calculated the government spending side of the equation for revenue neutrality, to maintain current programs they assumed prices would decline 22% due to the elimination income and payroll taxes.  When they calculated the revenue side of the equation, they assumed that prices would remain fixed at the current levels, which includes the embedded 22% overhead.  The result of the differential treatment of prices on either side of the equation results in the $500 billion discrepancy. 


  • And of course, no discussion of reform plans would be complete without noting the benefits to Tom Delay’s upper income constituency.  At an income level of about $135,000 the tax liability for the wealthy begins to decline from current levels.  So when you hear the Fair Tax proponents claim that the sales tax is a ‘freedom tax’, you will know that it means freedom from taxes for the wealthy with the corresponding immoral and unconscionable redistribution of the tax burden America’s poor and middle classes.  It would not be hyperbole to call the Fair Tax plan a ‘slave tax’ on the majority of Americans.  


That should be an adequate overview of what Tom Delay and his crew consider to be a ‘Fair Tax’.  The reasons tax reform proposals are being discussed now will be included in Part II of this article. 


Congressional Budget Hearing - Recordings, May be some overlap on files

12/8/2009 - note, the budget hearing is no longer available on the Congressional Website.  The following are recordings of it that I made while I was preparing this paper.  I hope they are complete and don't overlap too much.  I posted them quite long after the fact once I discovered that the hearing was no longer available.

First 30 minutes
Next 1 hour 30 minutes
Third Hour
Final Hour




1. April 15, 2004 Fair Tax Rally with Tom Delay in Houston, video 
2. July 18, 2006 Americans for a Fair Tax, Volunteer Page
3. July 18, 2006 Americans for a Fair Tax, Volunteer Thumbnail Sketch
4. July 18, 2006 Americans for a Fair Tax, Home Page
5. July 18, 2006 Americans for a Fair Tax, News & Video Page
6. October 6, 2004 House Budget Committee Hearing Testimony - Audio only