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FairTax - Income Taxes vs. Sales Taxes

FairTax - Who Loses?


Not all consumers will be effected equally by these changes. We'll next look at who will win under a national sales tax and who will lose. Changes in government policy never effects everybody equally. Americans for Fair Taxation estimates that the typical American family will be over 10 percent better off than they would be under the income tax. Even if you believe these claims, not all individuals and families are typical, so some will benefit more and some will benefit less.

Who might lose under a national sales tax?

  • Seniors. People do not earn income at a steady rate during their lifetime. The bulk of most people's earnings occur before the age of 65. People over the age of 65 have vastly reduced incomes and live off the savings they earned while employed. A switch to a sales tax will be in effect taxing them twice. They've already paid a lifetime of income taxes and now they have the opportunity to live off of their savings and consume, they'll be taxed on that consumption. Unless special consideration is given to the current generation of seniors, they will end up paying a disproportionate share of taxes.

  • The Poor Generally the working poor pay very little (if any) income tax. However everybody needs to consume to survive. The poor get hit twice under such a scheme. Currently the poor pay little tax, where now they'll have to pay taxes on their consumption, so their total tax bill will rise dramatically. The poor also spend a larger proportion of their income on consumption goods to survive, so they'll pay a larger percentage of their income in taxes than wealthier individuals. The FairTax advocates realize this, so their plan includes sending each American family a rebate or "pre-bate" check each month to cover the necessities of life. The size of the checks will be designed so that a family right at the poverty line would not pay a cent in taxes. Of course, the higher the allowance made for the poor, the higher the tax rate everyone else will pay in order to cover federal spending.

    Economist William G. Gale at the Brookings Institute has determined that most low income families will pay more taxes. "Under the Americans for Fair Taxation proposal, taxes would rise for households in the bottom 90 percent of the income distribution, while households in the top 1 percent would receive an average tax cut of over $75,000."

  • Families Currently the income tax has all sorts of deductions for small families such as earned income credits and child care credits. These would disappear with the elimination of the income tax. A sales tax, other than for purposes of the rebate, would not distinguish between families and individuals. Gale states that the "enactment of a broad-based, flat-rate consumption tax like the sales tax ... would hurt families with incomes less than $200,000, because of the loss of tax preferences, but would help families with income above $200,000, due to the dramatic reduction in the top tax rate." Given that the rebates are given based on the poverty line, and the poverty line does not dramatically increase between a one-person and two-person family, this is not surprising.

  • IRS Employees and Income Tax Lawyers Part of the appeal of the proposal is that it will make the IRS irrelevant.

Next we'll look at who wins under a change to a national sales tax.

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