The Fair Tax Act proposes a tax on all new merchandise and services in place of all income taxes, payroll taxes, corporation taxes, and taxes on dividends, interest, and capital gains. Critics of the Act, which proposes a 23% inclusive tax, have confused the issue by saying that this law is in reality a 30% tax. To clear up this misinformation, consider the following explanation.
The 23% tax is included in the stated price of each item or service. Thus for a $100 item, $23 goes for taxes, and the remaining $77 pays the cost of the item. This is the same as saying that if you are in the 25% income tax bracket, for every $100 you earn, $25 goes for taxes and you keep $75. On the other hand if you divide $23 by $77 you come up with a 30% tax; but to be fair, your income tax rate by this same method would be calculated by dividing $25 by $75, which is 33%. And if you add in your $7.65 payroll tax for social security, you now pay $32.65 and keep $67.35, which is really a 48.5% tax. Thus the 30% Fair Tax rate looks good.
Patrick R. Burkett