A Comparison of FairTax, Income Tax, and Flat Tax

Current Law
FairTax, H.R. 25
Federal Income Tax
Pre-2001 Law
Armey Flat Tax
H.R. 1040
16th Amendment Proposes repeal. No change. No change.
Complexity Individuals do not file. Businesses need only to deal with sales tax returns. Very complex; 20,000 pages of regulations; I.R.S. incorrect over half of the time. Withholding continues. Individuals and businesses must still track income and file income tax forms.
Home Business Must record all business expenses and is subject to IRS audit?
Must record all business expenses and is subject to IRS audit?
Must record all business expenses and is subject to IRS audit?
Congressional Action 23% Linder/Peterson Fair Tax Act of 2003 (H.R. 25). Employees receive 100% of pay. Social Security and Medicare funded from consumption tax revenue, not your paycheck. (H.J.Res61) - Will repeal the 16th Amendment. Used by lobbyists and the wealthy for tax-breaks and loopholes. Used by bureaucrats for social engineering. Rep. Armeyís H.R. 1040 has some problems, but is superior to current law.
Cost of Filing No personal forms are filed. Significant cost savings. $225 billion in annual compliance costs.1 Simplified. ≠ costs are somewhat reduced.
Economy Un-taxes wages, savings, and investment. Increases productivity. Produces significant economic growth. Taxes savings, labor, investment, and productivity multiple times. Imposes a tax burden some of which is still hidden in the price of goods and services.
Equality Taxpayers pay the same rate and control their liability. Tax paid depends on life style. All taxes are rebated on spending up to the poverty level. Current tax code violates principle of equality. Special rates for special circumstances violate original Constitution and are unfair. The flat tax is an improvement over the current income tax, but it is still open to manipulation by special interests.
Foreign Companies Foreign companies are forced to compete on even terms with U.S. companies for the first time in over 80 years. Current tax code places unfair tax burden on U.S. exports and fails to neutralize tax advantages for imports. Taxes U.S. exported goods, but not foreign imports to the U.S., creating unfair competition for U.S. manufacturers and businesses.
Government Intrusion As the Founding Fathers intended, the FairTax does not directly tax individuals. Current tax code requires massive files, dossiers, audits, and collection activities. A flat tax still requires personal files, dossiers, audits, and collection activities.
History 45 states now use a retail sales tax. The 1913 income tax has evolved into an antiquated, unenforceable morass, with annual tax returns long enough to circle Earth 28 times. A flat tax just wonít stay flat. Starting out nearly flat in 1913, the income tax grew out of control with top rates over 90% until Kennedy administration.
Interest Rates Reduces rates by an estimated 25-35 percent. Savings and investment increase. Pushes rates up. Biased against savings and investment. Reduces rates 25-35 percent. Neutral toward savings and investment.
Investment Increases investment by U.S. citizens, attracts foreign investment. Biased against savings and investment. Neutral toward savings and investment.
IRS Abolished! Retained. Retained. Reduced role.
Jobs Makes U.S. manufacturers more competitive against overseas companies. Escalates creation of jobs by attracting foreign investment and reducing tax bias against savings and investment. Hurts U.S. companies and decreases available jobs. Payroll tax a direct tax on labor. Positive impact on jobs. Does not repeal payroll tax on jobs.
Man-hours required for compliance Zero hours for individuals. Greatly reduced hours for businesses. Over 5.4 billion hours per year. Reduced.
Non-filers Reduced tax rates and fewer filers will increase compliance. High tax rates, unfairness and high complexity harm compliance Reduced tax rates and improved simplicity will improve compliance.
Personal and Corporate Income Taxes Both are abolished. Retained. Retained in a different form.
Productivity Increases. Inhibits productivity. Increases.
Savings Increases savings. Decreases savings. Increases savings.
Visibility The FairTax is highly visible and easy to understand. No tax is withheld from paychecks. The current tax code is hidden, embedded in prices, complex, and incomprehensible. Taxes are withheld from paychecks. Business component of flat tax and payroll taxes are hidden. Would be embedded in prices. Taxes withheld from paychecks.

[1] Testimony by the Arthur Hall, Tax Foundation and before the House Ways and Means Committee, 1998.

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