What is the Fair Tax?

As a start, let's first define what the Fair Tax is. It's a national retail sales tax (NRST) on everything purchased, goods and services, at the retail level. So, when you buy a newspaper, groceries, landscape services, beer, gasoline, a home, ... whatever you purchase, this NRST will be included. And I say "included" rather than "added." This is meant to be an inclusive tax ... the price of the goods or service will include the tax, much in the way the state and federal taxes on gasoline and cigarettes are currently applied.

There are a few exceptions, the NRST is NOT applied to:

• The purchase of used goods.
• Business-to-business purchases (i.e., raw materials or equipment) used in the production of other goods and services.
• Expenditures for Education (i.e., college, private school, community college classes, etc.)

This NRST will replace the following taxes:

• Personal Income Tax
• Self-Employment Tax
• Corporate Income Tax
• Employment Taxes (i.e., Social Security, Medicare - both Employee and Employer portions)
• Estate Tax (i.e., Inheritance or "Death" Tax)
• Gift Tax
• Capital Gains Tax
• Alternative Minimum Tax

The plan is designed to be revenue neutral, which means the rate would be set so that the amount of revenue received via the Fair Tax would be equal to the revenue currently received via the above listed taxes that would be replaced. And, what is this rate? The last time the rate was calculated it was estimated to be 23%. So, if you bought something for $100, $23 of that would be for the NRST. Remember, the NRST is inclusive, so the $23 would NOT be added to the $100, it would be included.

From the perspective of the average Joe, what would this change mean?

First, you would automatically get a pay raise. There would be no federal income tax or social security or medicare taxes taken out of your paycheck. So, while your gross income would remain the same, your net, or take-home-pay, would immediately increase. And, now that your employer is no longer paying their share of social security and medicare costs, your gross pay may increase as well.

Second, there would be no income tax return to file. When April 15th rolls around ... there's nothing you have to do. No records to keep, no forms to fill out, no tax software or accountant services or H&R Block. How great would that be?

Third, the concept of before and after-tax expenditures would be gone. There would be no need for a health care or dependent care expense account. Likewise, there would be absolutely no chance of losing funds placed into these accounts because you didn't spend them all. Also, any money you choose to set aside for retirement or other investment purposes would no longer be subject to, what many see as arbitrary, government restrictions or penalties for unauthorized withdrawals. Your money is now yours, with no strings attached. You can use it when and how you wish ... without the government butting into your spending decisions.

Fourth, you'd be paying the NRST on every purchase of a new good or service at the retail level.

Fifth, you'd be receiving a monthly pre-payment from the federal government to reimburse you for the amount of NRST you would be expected to pay in the coming month on the basic necessities of life.

Yes, you read that last one correctly, the federal government will be advancing you the cost of the NRST on the basic necessities of life ... and that will be the topic of my next post.