Sunday, October 03, 2004

FairTax Effective Tax Rate

In order to fully understand the impact of the FairTax on various spenders you must speak about the effective tax rate. The FairTax is applied at the cash register at a uniform rate of 23% inclusive on all retail sales of new goods and services. However, because of the Family Consumption Allowance the effective rate on each dollar you spend will vary depending on how much you spend and how large your household is.

The effective tax rate is the total amount in FairTax that you pay divided by the number of dollars that you spend. Since the Family Consumption Allowance refunds to you the amount of tax you would be charged if you spent up the the poverty line for your household the effective tax rate for the FairTax will always be lower than the 23% rate. To compute the effective tax rate:

s = spending
a = family consumption allowance
r = FairTax Effective Tax Rate
r = (0.23*(s-a))/s

You can look up the amount of Family Consumption Allowance by household size and marital status here.

If you examine the tables of the Effective FairTax Rate below for single and married households you will notice that the FairTax is quite progressive. Please note these tables reflect effective tax rates on spending on new goods and services, not income. The FairTax doesn't care home much you make, only how much you consume. (Note: if you click on a table cell you will see a detailed explanation of the calculation that produces the contents of that cell displayed below the table.)

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