A few years ago, when I first learned about the FairTax, I was curious about how ti compared to the current tax code, especially with respect to progressivity. So I did some spreadsheets...
In 2004, federal income taxes paid as percentage of
income:
Group, Income Limit, Effective Tax Rate
Top 1%
>$328,049 23.49%
Top 5%
>$137,056 20.67%
Top 10%
>$99,112 18.60%
Top 25%
>$60,041 15.53%
Top 50%
>$30,122 13.51%
Bottom 50% <$30,122
2.97%
The 2005 US Poverty Line for family of 4: $19,350, so the FairTax prebate would be $4450.50.
Using those numbers, and adding a slots for very low
income of $10,000 and a very high income of $1M, let's look at Fair-Tax, assuming all income is spent on
Fair-Taxable stuff:
Spending 100% of income: (income, net FairTax paid,
effective rate)
| Income | FairTax | Effective |
| $10,000.00 | -$2,150.50 | -21.5% |
| $19,350.00 | $0.00 | 0.0% |
| $30,122.00 | $2,477.56 | 8.2% |
| $60,441.00 | $9,450.93 | 15.6% |
| $99,112.00 | $18,345.26 | 18.5% |
| $137,056.00 | $27,072.38 | 19.8% |
| $328,049.00 | $71,000.77 | 21.6% |
| $1,000,000.00 | $225,549.50 | 22.6% |
Clearly, the really poor had negative tax rate, because the prebate is based on poverty level income, so someone earning income below the poverty line will receive prebates that are larger than the taxes they actually paid. People exactly at
poverty-line had 0% tax rate, as expected. The rich people who spend all their income pay
a pretty high rate 22.6%, approaching the 23% limit as expected.
Jacking up savings, since saving (not spending money) is
how to "manipulate" the FairTax. Note, savings rate is around 1% on average in US; experts
recommend at least 10%.
Spending 99% of income, saving 1%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,173.50 | -21.7% |
| $19,350.00 | -$44.51 | -0.2% |
| $30,122.00 | $2,408.28 | 8.0% |
| $60,441.00 | $9,311.92 | 15.4% |
| $99,112.00 | $18,117.30 | 18.3% |
| $137,056.00 | $26,757.15 | 19.5% |
| $328,049.00 | $70,246.26 | 21.4% |
| $1,000,000.00 | $223,249.50 | 22.3% |
Spending 95% of income, saving 5%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,265.50 | -22.7% |
| $19,350.00 | -$222.53 | -1.2% |
| $30,122.00 | $2,131.16 | 7.1% |
| $60,441.00 | $8,755.86 | 14.5% |
| $99,112.00 | $17,205.47 | 17.4% |
| $137,056.00 | $25,496.24 | 18.6% |
| $328,049.00 | $67,228.21 | 20.5% |
| $1,000,000.00 | $214,049.50 | 21.4% |
Spending 90% of income, saving 10%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,380.50 | -23.8% |
| $19,350.00 | -$445.05 | -2.3% |
| $30,122.00 | $1,784.75 | 5.9% |
| $60,441.00 | $8,060.79 | 13.3% |
| $99,112.00 | $16,065.68 | 16.2% |
| $137,056.00 | $23,920.09 | 17.5% |
| $328,049.00 | $63,455.64 | 19.3% |
| $1,000,000.00 | $202,549.50 | 20.3% |
Spending 75% of income, saving 25%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,725.50 | -27.3% |
| $19,350.00 | -$1,112.63 | -5.8% |
| $30,122.00 | $745.55 | 2.5% |
| $60,441.00 | $5,975.57 | 9.9% |
| $99,112.00 | $12,646.32 | 12.8% |
| $137,056.00 | $19,191.66 | 14.0% |
| $328,049.00 | $52,137.95 | 15.9% |
| $1,000,000.00 | $168,049.50 | 16.8% |
If people actually saved at this rate, Social Security
would not be necessary...
At 10% savings rate, the poverty-line family would put
away $2380 annually (10% of $19350 is $1935), plus get $445 in excess prebates
due to their frugality, so it's almost as if they saved $2000 and the
government (other taxpayers) "matched" them $500. If they invested
that $2380 annually at 5% each year for 40 years, they'd accrue $302,655. They
could then withdraw more than $15000 each year almost indefinitely, assuming the
remaining principle continues to earn 5%.
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