Taxing Sales Under the Fairtax: What Rate Works?

Tuerck, David; Bachman, Paul; Haughton, Jonathan; Kotlikoff, Laurence J.; Sanchez-Penalver, Alfonso

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Taxing Sales Under the Fairtax: What Rate Works?

Tax Notes, Vol. 113, No. 7, November 13, 2006

Posted: 10 Nov 2006

See all articles by David Tuerck

Jonathan Haughton

Suffolk University - Department of Economics

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Alfonso Sanchez-Penalver

Suffolk University

There are 2 versions of this paper

Abstract

H.R. 25 and S. 25 would replace the federal personal income, corporate income, payroll, capital gains, alternative minimum, self-employment, and transfer taxes with a single-rate federal retail sales tax known as the FairTax. The FairTax also would provide a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no net taxes on spending up to the poverty level.

William G. Gale (2005) and the President's Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax-inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23 percent rate. This study, which builds on Gale's analysis, shows that a 23 percent rate is eminently feasible and suggests why Gale and the panel reached the opposite conclusion.

Suggested Citation: Suggested Citation

Tuerck, David G. and Bachman, Paul and Haughton, Jonathan H. and Kotlikoff, Laurence J. and Sanchez-Penalver, Alfonso, Taxing Sales Under the Fairtax: What Rate Works?. Tax Notes, Vol. 113, No. 7, November 13, 2006, Available at SSRN: https://ssrn.com/abstract=944040