An Illustrated Guide
To Understanding The
An Abbreviated History of Taxation
in the United States
The Impacts of the 16th Amendment
The Better Way – The Fair Tax
Kerry D. Bowers
Panhandle Co-District Director
Florida FairTax Educational Association
This document and the materials herein may be copied or
otherwise used as desired for a factual presentation about the
FairTax. The graphics and literature are from sources within the
public domain or created by the complier and offered freely for
use by the public without additional limitations or restrictions.
From Federalist Paper No. 62 (published in 1787)
"The internal effects of a mutable policy are still more calamitous. It
poisons the blessings of liberty itself. It will be of little avail to the
people that the laws are made by men of their own choice if the laws be
so voluminous that they cannot be read, or so incoherent that they
cannot be understood; if they be repealed or revised before they are
promulgated, or undergo such incessant changes that no man, who
knows what the law is today, can guess what it will be tomorrow. Law is
defined to be a rule of action; but how can that be a rule, which is little
known and less fixed?"
Principal author of the U.S. Constitution and the
4th President of the United States of America.
This program will provide you essential information about taxation in America that will greatly
benefit your preparations to become a well-informed and polished FairTax representative. This
document, in pdf format, and the slides in MS Power Point ®, can be accessed through the
Florida FairTax Educational Association website at www.flfairtax.org or at
www.fairtax.org/florida-panhandle where it is listed under the FairTax training menu. You are
invited to use any of these materials to develop your own FairTax training programs.
The objective of this program is to make you a better informed citizen about the history and
impacts of federal taxation in America and then introduce you to the FairTax and a better way of
collecting federal taxes that will restore fairness, simplicity, transparency and economic growth
not achievable with the current tax system.
The history of taxation in America is as broad and diverse as the whole of American history. It
was the tyranny of taxation by the British Crown upon the colonies that induced a minority of
colonists to seek independence as a new nation wherein they would be free from unrepresented
subjugation to an overpowering centralized authority. Our focus in the next few minutes will be
on some of the major events that have shaped our tax system so that you will have a basic
understanding of where we have been, better assess where we are now, and use the benefits of
history to help us determine where we may want to go in the future.
Article I of the U.S. Constitution defines the composition, authority, responsibilities and other
fundamental matters of the legislative branch in our government. Within the context of
legislative authority, and granted specifically to the House of Representatives, is the power to lay
and collect taxes. Article I, Section 2, Paragraph 3 provides the first specific mention of taxes in
our Constitution. It states, “Representatives and direct Taxes shall be apportioned among the
several States which may be included within this Union according to their respective Numbers
The authors of the Constitution favored the position of the Southern states in declaring that direct
taxes may only be applied through apportionment as is done in determining the number of
representatives from each state to the House of Representatives. They feared that the Southern
states would be disadvantaged in direct taxing based upon the number of people (or capitation)
since many of the people in the south were slaves. They were also concerned about direct taxing
land owned by individuals because the South contained plantations with great quantities of land,
but were not as financially productive as the same area of land mass in the increasingly
Article I, Section 8 provides the specifics of what kind of taxes and why such taxes will be
implemented by the Congress … “To lay and collect Taxes, Duties, Imposts and Excises, to pay
the Debts and provide for the common Defense and general Welfare of the United States; but all
Duties, Imposts and Excises shall be uniform throughout the United States.” Duties are taxes
that may be levied upon both imports and exports; imposts are taxes on imports subject to tariffs
which are required to be paid before port offloading; and excises are taxes on certain goods
produced within the country levying the tax. In any case, where taxes were to be levied they
would be levied the same in every state.
It is important to grasp the implication that the U.S. Constitution authors placed upon the
implementation of consumption taxes which duties, imposts and excises are, but in an indirect
application to the final consumer. Alexander Hamilton, a signatory to the U.S. Constitution and
first Treasurer of the United States, had this to say about consumption taxing in Federalist Paper
No. 22 , "Imposts, excises, and, in general, all duties upon articles of consumption, may be
compared to a fluid, which will in time find its level with the means of paying them. The amount
to be contributed by each citizen will in a degree be at his own option, and can be regulated by
an attention to his resources. The rich may be extravagant, the poor can be frugal; and private
oppression may always be avoided by a judicious selection of objects proper for such
Secretary Hamilton was describing the nature and value of consumption taxes in that an
individual would pay taxes only to the degree to which they could purchase items and forgo
oppressing themselves personally by purchasing only that which could be afforded. This is
contrary to the income tax which will oppress without regard to individual needs leaving only
that amount of income determined by the government as to what it thinks you require for your
personal needs. He also illustrates the "progressive" nature of consumption taxes wherein those
with the means to do so can buy more and subsequently pay more taxes through their purchases,
while those of less income can be frugal in their purchases and experience less taxation in the
It should be noted too that while a consumption tax is progressive, it can also be considered
"regressive" as it has come to be known in modern times. It is regressive because the percentage
of income that goes into taxes paid for the basic necessities of life (food, housing and medicine),
which every person needs regardless of income, can be a considerably higher percentage of
income for a lower wage earner than that for a higher wage earner.
Article I, Section 9, Paragraph 4 provides further amplification of the intended restrictions to
direct taxation upon the citizens of the United States, “No Capitation, or other direct, Tax shall
be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”
This is testimony again to the great concern the founders had for the direct taxation of the people
without regard to apportionment and also to the rise in power of an all consuming central
Though some infringements of these Constitutional rights with respect to federal taxing would
arise and then be squelched, they would stand for 124 years when, at last, the progressive
movement of the early 20th century modified them through the adoption of the 16th Amendment
to the U.S. Constitution. It is also worth noting that the U.S. Constitution, which created our
three branches of government, was handwritten on just 4 pages of parchment. The Bill of
Rights added but one more page.
After ratification of the U.S. Constitution in 1789, and up to the American Civil War, the
revenue necessary for the operation of the federal government and for the defense of the nation
was collected principally through excise taxes (which were imposed on such items as tobacco,
sugar and documents); direct taxes (as collected from assessments on land, homes, slaves and
estates); customs duties; the sale of public lands; and through the issuance of Treasury notes. The
collection of revenues for the Federal Treasury was delegated to the states (as it would be under
The first federal income tax in the United States was a product of the Revenue Act of 1861. It
was enacted with the intent to provide a reliable source of income to pay the interest on bonds
sold by the government to finance the Union’s participation in the American Civil War.
However, the Act did not achieve implementation and was superseded the following year.
The 37th Congress did enact and implement an income tax through the Revenue Act of 1862.
Interestingly, this form of taxation was adopted from the British that imposed income taxing as a
means of financing their participation in the Crimean War.
The tax, which included a $600 deduction, was a two-tiered system whereby 3% was levied on
income amounts between $600 and $10,000 and 5% on amounts over $10,000. Using the
“Consumer Bundle Index” rating, $600 in 1862 would compare to a salary purchasing power in
2009 of about $71,000, thus very few people actually paid income taxes during the Civil War as
would be the case today based on that salary amount.
The act also implemented the first tax withholding which was limited to the salaries of
government employees and to the dividends paid to corporations by the government. It would
also create the office of Commissioner of Internal Revenue, the earliest predecessor to the
Internal Revenue Service (IRS).
As the cost of the Civil War rose until its conclusion in 1865, so did the percentage of tax
assessed against those whose incomes exceeded the $600 deduction.
After the Civil War, the focus on other means of raising revenues decreased the interest in
income taxes which, combined with tax rate decreases and increases in standard deductions,
resulted in the repeal in 1872 of the Revenue Act of 1862. The collection of federal revenues
following the repeal of income taxes would come principally through tariffs, duties and excise
taxes on liquor, beer, wine and tobacco.
In the years following the repeal of the Civil War income tax there would be new attempts to
reinstate a similar taxing system, again focused more on the wealthy rather than the entire
population. One of the more interesting attempts came with the 1894 Wilson-Gorman Tariff Act
in which the Congress included a 2% tax on individual incomes that exceeded $4,000. The
popularity of this act was fostered by the fact that tariffs were more of a financial burden upon
the working class (a regressive tax) and did not equally impact the growing wealth among the
owners and executives of major industries in America.
However, in a landmark case in 1895, Pollock versus Farm Loan and Trust Company, the U.S.
Supreme Court ruled the income tax unconstitutional as a violation of the Constitutional
prohibition on direct taxes. The ruling was based on the fact that taxing income associated with
rents and real estate sales amounted to a direct tax on land without regard to apportionment – a
violation of the Constitution. It also found that taxing state and municipal bond income was a
violation in principle of federalism (and intergovernmental tax immunity) wherein the federal
government should have no power to tax the instrumentalities of the state. Unfortunately, the
court did not go far enough by including all other forms of income to include salaries, which may
have forever precluded the introduction of income taxes again by the U.S. Congress.
As America entered into the 20th century, progressive movements within the federal government
sought to close the financial gap between the working class and the wealthy. Among those that
began strongly advocating for inheritance taxes, corporate taxes, and an income tax was
President Theodore Roosevelt who had an apparent disdain for those that came by wealth
through inheritance verses those having earned it in a “life of labor”. The pace towards a new
breadth of taxation continued into the Presidency of William H. Taft who, recognizing the
potential for a Supreme Court reversal of any income tax, recommended in 1909 that Congress
amend the Constitution in order that the income acquired by citizens of the United States may be
subjected to direct taxation without regard to apportionment among the states. Again, the focus
was on economic justice between the laborer and the wealthy, with the thought being that only
the wealthy would bear the burden of any income taxes.
In 1913, the citizenry of America witnessed the greatest transition of power from the people to
the federal government in the form of the 16th Amendment to the U. S. Constitution.
The amendment states …“The Congress shall have power to lay and collect taxes on incomes,
from whatever source derived, without apportionment among the several States, and without
regard to any census or enumeration.”
With the ratification of the 16th Amendment came the Revenue Act of 1913 which created the
Bureau of Internal Revenue, formerly known as the Commissioner of Internal Revenue, and the
start of the income tax system that continues to this day.
And so it begins, starting with a 1% tax on incomes over $3,000, $4,000 if married, and
increasing at 1% intervals to a 7% tax on those with incomes over $500,000. The $3000 dollars
in 1913 would be the equivalent of over $270,000 in 2009 using the "unskilled wage measure"
and thus, very few Americans were affected by the income tax … or so they believed.
Joining the new income tax in 1913 was the very first Form 1040, only 4 pages in length and that
included a full page of filing instructions. At that time, the law required filing to be completed
by 1 March in the year following the year in which federal taxes were assessed.
Income taxes, which few Americans owed for the next 30 years, were typically paid by the
taxpayer in a lump sum on or before the filing date, which switched from 1 March to 15 March
beginning in 1918.
A federal government response to the Great Depression of the 1930s was the Social Security Act
which was signed into law in 1935 followed by collections beginning in 1937. Social Security
was originally intended to provide a monthly benefit to workers at age 65 who had paid into the
program over the life of their career. However, and as time progressed, benefits from the
program were extended to the retiree’s family, the survivors of deceased workers, and to the
disabled under the Supplemental Security Income program. The retirement age for benefits was
also decreased to age 62 and cost-of-living adjustments were added to the plan. Social Security
payments were made in lump-sums between 1937 and 1940, the least being 5 cents and the most
$58.06. When monthly payments started in 1940 there was a 40-to-1 ratio of workers to retirees.
Today that ratio has dropped to 3-to-1. In 2008, the Social Security Administration paid out over
$516 billion to 41.6 million Old-Age and Survivors Insurance (OASI) beneficiaries and another
$109 billion to the 9.3 million beneficiaries under the Disability Insurance (DI) program.
According to the Social Security Administration's 2009 Annual report, both insurances, OASI
and DI, will be adequately funded only through the next 10 years and then head into default by
In 1943, Congress passed the Current Tax Payment Act which required employers to withhold
federal income taxes from their employees. This measure was taken to secure a constant level of
funding to finance America’s involvement in World War II. This act has cost individual
Americans in the years since its passage hundreds of billions of dollars in investment losses by
taxing the first dollar earned rather than paying one lump sum on the filing date. In evidence of
the deceit of some members of Congress towards the American people, they addressed the fact
that the public would soon become immune to the amount of taxes they were paying over the
course of a year verses paying a one-time and, what would now be, a very large lump-sum
This paragraph is taken from the Department of the Treasury Fact Sheet regarding the
reinstitution of employer withholding of federal taxes in 1943 …
“This greatly eased the collection of the tax for both the taxpayer and the Bureau of
Internal Revenue. However, it also greatly reduced the taxpayer’s awareness of the
amount of tax being collected, i.e. it reduced the transparency of the tax, which made it
easier to raise taxes in the future.”
It was the Current Tax Payment Act that eased Americans into a new catch phrase to describe the
money they earned … “take home pay”!
In 1953, the Bureau of Internal Revenue was renamed to the Internal Revenue Service or IRS as
it is better known today.
The federal tax filing date was changed from 15 March to 15 April beginning in 1954.
In 1965, President Lyndon Johnson, as part of his “Great Society” program, signed into law
Medicare and Medicaid. Medicare is a federal program (Hospital Insurance and Supplementary
Medical Insurance) that provides additional health care coverage principally to those having paid
into the system, while Medicaid is a state program supplemented with federal revenues that
provides health care coverage to those unable to otherwise afford it. In 2008, the Centers for
Medicare and Medicaid Services (CMMS) paid out $468.2 billion for 45.2 million Medicare
beneficiaries and $190.6 billion for up to 61.9 million enrolled Medicaid beneficiaries at some
point during the year. The states’ contribution to Medicaid was $142.6 billion and the total
federal and state expenditures was $333.2 billion. The top ranking recipients of federal revenues
are now the Social Security Administration, the Center for Medicare and Medicaid Services and
in third place, the Department of Defense. At nearly $1.3 trillion dollars, the combined Social
Security and Medicare/Medicaid outlays were almost 57% of the total net income to the federal
government from all tax sources. Under the present system, the Medicare fund will be in default
by 2017 as indicated in the CMMS 2009 Annual Report.
The Internal Revenue Code of 1986, enacted by Congress in Title 26 of the United States Code
on 22 October of the same year, and as since amended, is the governing U.S. tax code.
By 2005 the code had been amended by Congress over 14,000 times.
The 110th Congress, after two years in session, updated the IRC 969 times before their
adjournment on 31 December 2008.
Now we will turn our attention to some of the impacts of the 16th Amendment to the U.S.
Question … what is the maximum amount of taxes that can be collected from your income
obtained from any source?
The answer is 100%.
The U.S. Constitution, as amended by the 16th Amendment, does not place any limitation on the
amount of income tax that may be collected and, therefore, may legally seize all of your income
obtained from any source. In the event you do not hold sufficient funds for the collection of
revenues due the federal government, then your property may be seized in lieu of taxes due. The
highest marginal tax rate to date, 94%, was imposed during WWII. President Franklin D.
Roosevelt had sought a 100% marginal rate for all income over $25,000. The highest rate has
varied dramatically since WWII and today stands at 35%. A 2009 example of the potential
consequences of this amendment was the attempt by the 111th Congress to take 90% of the
bonuses paid to employees of financial institutions that were in receipt of federal bailout funding
under the Troubled Assets Relief Program (TARP).
This chart, Table 1 from the IRS website, depicts the federal revenues (in billions of dollars) that
were collected for the tax year 2008. The sources of revenue collection are depicted in the left
column. The additional columns, left to right, depict the total amount collected, the percent of all
revenues each category represents of the total, the amount in each category refunded, the amount
retained by the federal government, and the final percentage each category contributed to the
total retained (net) revenues.
Note that the total net federal revenues were about $2.3 trillion and that individual income taxes
at 45.8% and payroll taxes at 37.9% accounted for the greatest percentage of all the taxes
collected at almost 84%.
The Department of the Treasury’s Office of Tax Analysis (OTA) provides, among other things,
information as to who is paying what percentage of income taxes in America. The American
working populace is divided into fifths and addressed as “quintiles.” As can be seen in the
accompanying chart, the first quintile, or 20%, of the American populace, makes less than
$13,000 per year, while the highest earning 20% makes over $87,000 per year. The process for
computing the percent of income taxes and payroll taxes taken from each quintile is rather
complex because of the aggregate of wages each quintile represents. However, we can see from
this chart that between 40% and 60% (the second and third quintiles) of the wage earners pay no
income taxes. In fact, they may actually receive more than paid in (a result of credits) as
indicated by the negative figures as a percent of income. We can also see that 20% representing
the top wage earners contributes over 84% of the total collected income taxes.
The income tax figures in the chart reflect a progressive tax in which the more you make the
more taxes you are expected to pay. Unfortunately, the Internal Revenue Code has made it
possible to escape paying taxes, and in some cases, potentially pay no income taxes at all even
though you may be in the top 10% or higher wage earning group. An article in the USA Today
Newspaper reported that 7,389 tax filers with reportable incomes over $200,000 in 2005 paid no
income tax. So, the income tax is not entirely progressive as the chart would make it appear and
not just the first two quintiles are escaping having to pay income taxes.
This chart also points out a very important deficiency in the payroll tax system that is different
from the progressive income tax. While low wage earners may pay no income taxes and
possibly receive an earned income credit, they pay a greater percentage of their income in payroll
taxes than those in the highest income quintile. In this chart note that the first 4 quintiles pay
between 9% and 11% of their income in payroll taxes, while those in the top quintile pay 8%.
Actually, this figure for the aggregate of incomes in the top quintile drops dramatically for those
making over the cap for Social Security ($106,800 for 2009). The following examples will
illustrate why this occurs.
A laborer making a salary of $20,000 per year has to pay an individual Social Security tax of
6.2%, plus another 1.45% for Medicare. That comes to a total of 7.65% of gross pay and $1,530
the employee will have deducted from his salary for payroll taxes, but that is not all. The
employer, on behalf of the employee, also has to pay the employer’s half of the payroll taxes
equal to the share paid by the employee; in this case, another $1,530. That is $1,530 allotted for
an employee by the employer that, were there no payroll taxes, conceivably could have gone into
the employee’s salary. Thus the employee could have been receiving a salary of $21,530 versus
We can now look at this two ways. The first is that the employee is giving up 7.65% of gross
salary to cover his share of the payroll taxes due. If we consider the fact that he is also losing out
on the amount the employer contributes on behalf of the employee, then we add the $1,530 to the
salary of $20,000 which equals, again, $21,530. Next, we determine what percentage $1,530
doubled equals, which is $3,060, the amount paid by both employee and employer for the payroll
taxes. Lastly, we calculate the percentage that $3,060 represents with respect to the $21,530
salary figure that the employee could have been entitled to were there no payroll taxes and find
that this employee is actually giving up 14.21% of his potential salary to payroll taxes. As could
be seen in the chart from the OTA, the Department of the Treasury counts both the employer’s
and employee’s share as the amount of income taken from the employee’s salary just as we have
described. The reason why it does not go above 11.4 % in the chart is because some income, as
from savings, is not subject to payroll taxes and credits also reduce the impact of the payroll tax
on this income chart, to list some of the possibilities as to why this number is not higher in the
chart. It is also important to note that income taxes are assessed on the payroll tax paid by the
employee which results in double taxation on the same income, one of many cases in the current
system where income may be taxed multiple times by the federal government alone. Now let’s
look at the other end of the payroll tax spectrum.
In this example the CEO makes $5,000,000 and, because Medicare has no cap, he has $72,500
deducted from his salary while the employer pays another $72,500. Social Security, on the other
hand, is capped in year 2009 at $106,800 which means over $4.8 million of the CEO’s salary
does not support Social Security. Running the figures the same as done for the lower wage
grade, we find that that the CEO contributes only 1.58% of his salary to payroll taxes. Adding in
the employer’s share, the forfeiture for the CEO rises to only 3.12% versus the lower wage grade
example that resulted in a forfeiture of 14.21% of income. The Social Security share (old-age
survivors and disability insurance ) of payroll taxes are a regressive tax because the more money
you make over the cap the smaller the percentage of income that is actually deducted in payroll
taxes. This places a significant disadvantage on those in the lower wage grades who become
mired in an inescapable situation of paying more of their income when they are working
(compared to the wealthy) to receive less than the wealthy when they retire. And, if they take on
a job after beginning receipt of Social Security, they stand to lose some of their benefit to income
taxes when they exceed the relatively low allowable limit for earned income while in receipt of
Social Security benefits.
Now let’s turn our attention to some brief facts about the IRS.
In 2008, the IRS employed and average of 90,647 personnel. The Treasury Department, in which
the IRS is included, is the 4th largest employer in the U.S. Government.
In the same year, the IRS appropriated fund expenditures were over $11.3 billion.
The direct costs for tax collection to the taxpayer was approximately 41 cents per each $100
collected, which sounds reasonable until we look into the costs individuals and businesses
expend for compliance with the tax code as shall be reviewed in a following section.
To facilitate tax filing, the IRS' 2008 documents web page listed 1,087 forms, instructions and
publications (some of which are in Spanish) applicable to code compliance.
The IRS expended $4.8 billion of its $11 billion budget in 2008 for tax enforcement operations, a
high figure because of the scale of tax pay points – over 197 million filers.
At the end of 2008, the IRS had 31,969 pending litigation cases involving almost $21 billion in
disputed taxes and penalties.
As the increasing number of TV commercials for tax attorneys will attest, the taxpayer is “prey”
to both the IRS and attorneys and any litigation result begs to ask the question … is there a
winner? In some way, all lose in the end.
Now we will turn our attention to the root of the problems in our federal revenue collection
Since its inception in 1913, the tax code and its supporting rules and regulations has grown to
more than 70,000 pages, and it continues to grow more and more with every new session of
Congress. No one fully understands the code and no one ever will.
Testimony to the incomprehensibility of the IRC is the IRS’s own position regarding the
document as stated on the Service’s introductory web page to the code.
“Finally, the IRC is complex and its sections must be read in the context of the entire
Code and the court decisions that interpret it.”
In other words, lacking clarity and simplicity the code requires judicial interpretation which is
then subjected to interpretation by the tax preparer whom must be knowledgeable of the entire
code and applicable court rulings. Unfortunately for you, the taxpayer, this means that the taxes
you owe may be figured quite differently from one preparer to the next depending upon their
interpretation of the code or their interpretation of a court interpretation of the code. Bottom
line, if they are wrong the taxpayer is the one subject to any penalty and is considered guilty by
the government until the taxpayer proves his or her innocence.
March 1988, Money Magazine publishes tax
filing test results for tax year 1987.
IRC and regulations over 27,000 pages.
Test gauged 50 professional tax preparers in
- National CPA firms,
- Regional and local CPA firms,
- Enrolled agents (passed IRS test) and
- H&R Block
Source: CNN Money
KdB Training Inc Graphic
In March of 1988, Money Magazine reported the results of a tax filing test the magazine
conducted in January for the 1987 tax filing year. At this time the IRC and supporting
documents was about 27,000 pages.
The test gauged 50 professional tax preparers in four categories: national certified public
accountant (CPA) firms, local CPA firms, enrolled agents (those independents having passed an
IRS test to conduct tax filings), and H&R Block agents who also had access to a group of
experienced professionals within the corporation to address the more complex issues.
The test example was considered a moderate filing problem for a family of five all with
reportable incomes that combined was over $100,000. The family had moved, but rented out the
previous house and had taken a 2nd mortgage on that house. They also had stocks, municipal
and corporate bonds, mutual funds, savings bonds, Treasury bills and limited partnerships.
The projected approximate answer for this test should have been around $9,000; note the term
“approximate” answer. Since some items were subject to interpretation there is not a clear-cut,
exact answer and that same rule holds today.
The results were that all 50 answered differently as to how much tax this family owed. The
answers varied from $7,202 to $11,881, a 65% difference from the low to the high. The most
consistent in answering closest to the test approximate answer were H&R Block and enrolled
agents. CPA firms tended to be more conservative to overly aggressive in their answer. The
fees to get an answer, nearly right to very wrong, varied from $187 to $2,500.
A greater irony to add to this story, and still true, but to a “reported” lesser extent by the IRS
today, is that if you called the IRS on the same question multiple times, you likely got different
answers each time. So, even those who serve with the IRS cannot fully comprehend the rules
and regulations they are expected to enforce.
Money Magazine Test Results
As of 1998, Money Magazine had conducted
8 similar tests ALL with similar poor results.
Year Preparer’s Results Difference Preparer’s Fees
1987 $ 7,202 - $11,881 65% $187 - $2,500
1988 $12,539 - $35,813 186% $250 - $2,200
1989 $ 9,806 - $21,216 116% $271 - $4,000
1990 $ 6,807 - $73,247 976% $375 - $3,160
1991 $16,219 - $46,564 187% $520 - $4,500
1992 $31,846 - $74,450 134% $375 - $3,600
1996 $36,322 - $94,438 160% $300 - $4,950
1997 $34,240 - $68,912 101% Not Available
Source: CNN Money, Taxback
KdB Training Inc Graphic
Money magazine conducted another 7 tax tests during the next ten years and all had similar
results in terms of the great variances calculated for the amount of income taxes due for the
given example. Interestingly, in 7 of the 8 tests no 2 tax preparers arrived at the same answer
and, in 3 of the 8 tests, every preparer had some mathematical calculation error as well.
The most dramatic variation in test results occurred in the 1990 tax filing test in which the
amount of taxes due varied from low to high by 976% ($6,807 to $73,247). Clearly, the
complexity of the tax code and the challenges that come from the ever-constant changes to the
code make it impossible to reasonably comply with the code even for professional tax preparers.
The IRC places a tremendous and inefficient drain of time on human resources as indicated in
the average annual individual expenditure of 27 hours devoted to tax compliance. This is
everything from keeping up with receipts to actually completing the tax filing.
Together, individuals and businesses expend an estimated 6.6 billion hours annually trying to
comply with the IRC.
The 2008 estimate for income tax compliance costs to Americans was over $300 billion, which
represented 22% of the individual and corporate tax revenues collected in the same year!
One thing that needs to be clear to every American is that corporations do not pay taxes … they
collect taxes … only wage earners can pay taxes. The way that corporations pay higher taxes, as
they are compelled to do so by the IRS when taxes are raised, is through …(1) higher goods and
service prices passed along to the consumer; (2) decreased corporate dividends to investors; and
(3) employee layoffs, especially as corporations say enough and move overseas to avoid the tax
It is worth noting here that when dividends are affected (lowered) by taxes as a result of
corporate taxing, and then the distributed dividends and capital gains to individual investors are
taxed, this again is another form of multiple taxation on the same income which discourages, in
this case, investment in American businesses.
All goods and services Embedded
purchased by consumers Taxes
contain embedded taxes
that can be a significant
percent of the total cost.
Embedded taxes include:
- Hidden Withholding Taxes
- Hidden Corporate Taxes Actual Product or
- Hidden Compliance Costs
- Tariffs, Duties, Imposts, Excises
Source: U.S. Constitution, The FairTax Book, FairTax.org
KdB Training Inc Graphic
In the cost of every product and service purchased by consumers are elements of taxation
imposed upon the producer and or service provider that are passed along to the consumer. The
inclusive amount, typically referred to as "embedded taxes", can vary considerably based upon
the accumulation of such taxes and tax compliance costs throughout each stage of the production
process for products or in the delivery of services. The embedded federal taxes can include
hidden withholding taxes (both income and payroll), corporate taxes, and tax compliance costs.
Tax compliance costs can take on many forms that may include paying for accountants, covering
IRS imposed penalties and interest, and business opportunity losses for greater productivity that
occur as a result of consequential tax avoidance. These costs are in addition to any inclusive
federal tariff, duty, impost or excise tax levied on the product or parts thereof in the assembly of
the final product.
As most Americans are already aware, the burden of corporate income taxes upon our nation’s
businesses and, ultimately, the consumer, has compelled many businesses to move their
headquarters or entire business operations overseas to better compete financially with foreign
corporations both abroad and in the U.S.
A critical aspect of the tax burden is its impact on business decisions in which many, if not all,
businesses routinely make decisions based on the tax consequences which results in “opportunity
losses”. The losses to American productivity and economic growth from decisions based on tax
consequences have been estimated to be in the trillions of dollars with a resultant loss in tax
income in the hundreds of billions of dollars.
A tremendous impact to the supply of money in the United States is the fact that a lot of
American currency is not deposited in U.S. financial institutions, principally due to the tax
burden that is incurred on investments and savings in this country. This tax burden in the U.S.,
and other countries too, has given cause for considerable “cross-border” deposits into offshore
financial centers (OFCs).
The International Monetary Fund through the Bank for International Settlements reported OFC
estimated holdings in 1999 to be over $4.6 trillion. Because of the changes in reporting such
figures since the 1990’s only a best guess estimate can be made of the current OFC holdings
which is projected at more than $11 trillion and up to $13 trillion.
The Penalties of the IRC
Federalist Paper No. 45
"The powers delegated by the proposed Constitution to the federal government are few and
defined. Those which are to remain in the State governments are numerous and indefinite. The
former will be exercised principally on external objects, as war, peace, negotiation, and foreign
commerce; with which last the power of taxation will, for the most part, be connected. The
powers reserved to the several States will extend to all the objects which in the ordinary course
of affairs, concern the lives, liberties, and properties of the people, and the internal order,
improvement, and prosperity of the State. The operations of the Federal Government will be
most extensive and important in times of war and danger; those of the State governments in times
of peace and security."
As can be taken from the previous slides, the current system of income and payroll taxing can
impose severe burdens and thus, severe penalties on the American taxpayer. Because the system
is beyond the reasonable comprehension of those to whom it is directed, it can be assumed to be
an “absolute” penalty system in that you never know if you fully complied with the system or
that you penalized yourself in attempting to comply.
You are penalized because you have to “pay to pay your taxes” … a sad irony on Americans.
You are penalized when you inadvertently overpay your taxes and it is not caught in audit. In
other words, you penalize yourself accidentally, or you did not understand the IRC, or you chose
to not take deductions because you felt intimidated by the IRS backlash if you made a mistake.
You are penalized when you underpay your taxes and it is caught in audit. In this case, you owe
the underpayment, plus interest and the possibility of a penalty.
Unlike the early days of income taxing when you paid by 1 March of the next year a lump sum
for the previous year taxes, withholding today places a huge penalty on Americans' investments
by adding a loss amounting to more than $24 billion a year. This is because you are taxed on the
first dollar earned and do not get to enjoy the benefits that dollar may contribute to your savings
and investments growth.
You are penalized by a system that facilitates double-plus taxation as a result of hidden costs and
embedded taxes. In fact, you pay taxes on the payroll taxes you pay since they are not deducted
from the taxable income amounts upon which you are assessed income taxes.
You are penalized as an honest taxpayer when the deficit increases because of dishonest
You are penalized by the regressive payroll tax system if you make less than the Social Security
Your freedoms are penalize as the IRS is the U.S. Government’s most legally invasive agency
delving into the personal lives of EVERY legal wage-earning American.
Failure to comply with a code that you and no one else understands can cost you nearly all that
you own, financially and materially, or you may share your retained assets with a tax attorney in
an attempt to preserve them from the IRS.
Let us now turn our attention to a better means of taxation where all of these penalties and other
such unnecessary and oppressive burdens should not occur.
A Better Way – the FairTax
From Federalist Paper No. 35
“There is no part of the administration of government that requires extensive information and a
thorough knowledge of the principles of political economy so much as the business of taxation.
The man who understands those principles best will be least likely to resort to oppressive
expedients, or to sacrifice any particular class of citizens to the procurement of revenue. It might
be demonstrated that the most productive system of finance will always be the least
Recognizing the inefficiencies and burdens of the Internal Revenue Code, three prominent Texas
businessmen, Leo E. Linbeck, JR, Robert C. McNair, and Jack T. Trotter, put their minds and
money together in a major effort to find a better way to collect tax revenues.
In 1995, the Texas businessmen formed a nonprofit corporation, Americans for Fair Taxation
(AFFT), that would conduct research focused on the recommendations of individuals and
businesses for a new tax collection system.
Over $20 million was donated from across the country to fund the research which is to this day
the most professional and thorough ever executed to develop an alternative to the current
inefficient and widely ineffective system.
The research used modern marketing techniques such as focus groups, telephone polling,
advertising and website tools in addition to the enlistment of expert marketing support from
Fortune 500 companies.
Through the research and the analysis of the data by premier economists form numerous
academic institutions such as Rice, Harvard and MIT, to name a few, AFFT identified the goals
for a new system consistent with the recommendations from American taxpayers.
First, the new system must collect revenues no less than those collected through the existing
system, in other words, be revenue neutral.
It must be simple to understand and transparent in all aspects of application.
The system should remain progressive and “untax” the basic necessities of life for every income
The process of collecting the revenues must be cost-effective and efficient for all parties – no
“paying to pay your taxes”.
It must be considerably less intrusive, abusive, coercive and corrosive than that imposed by the
current IRC and IRS.
And last, let’s make it voluntary!
The answer to you , the American taxpayer, The FairTax!
From Federalist Paper No. 21
"It is a signal advantage of taxes on articles of consumption, that they contain in their own
nature a security against excess. They prescribe their own limit, which cannot be exceeded
without defeating the end proposed –that is, an extension of the revenue. When applied to this
object, the saying is as just as it is witty that, "in political arithmetic, two and two do not
always make four." If duties are too high, they lessen the consumption; the collection is
eluded; and the product to the treasury is not so great as when they are confined within proper
and moderate bounds. This forms a complete barrier against and material oppression of the
citizens by taxes of this class, and is itself a natural limitation of the power of imposing them."
The Better Way
The FairTax replaces individual income taxes,
self-employment taxes, corporate taxes,
capital gains taxes, estate taxes, gift taxes,
alternative minimum taxes, social security,
Medicare and Medicaid taxes (payroll taxes).
The FairTax plan will implement a national
sales tax also known as a consumption tax.
The FairTax will be eliminated after 7 years if
the 16th Amendment is not repealed.
The Internal Revenue Service (IRS) will be
abolished under the FairTax.
Source: The and Forbes Magazine
Source: U.S. Dept of the Treasury FairTax Book, FairTax.org
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The FairTax replaces individual income taxes, self-employment taxes, corporate taxes, capital
gains taxes, estate taxes, gift taxes, alternative minimum taxes, social security taxes and
Medicare – Medicaid taxes, otherwise known as payroll taxes.
The FairTax plan will implement a national sales tax also known as a consumption tax.
The FairTax plan includes a "sunset" provision that directs the elimination of the FairTax if the
16th Amendment to the U.S. Constitution is not repealed within 7 years after the enactment of
the FairTax. The principal reason for this provision is to eliminate the possibility of having both
a national sales tax and an income tax which can only exist with the 16th Amendment.
Legislation introduced to the 111th U.S. Congress by Iowa Representative Steve King through
H.J. RES 16 (House of Representatives Joint Resolution) proposes an amendment to the
Constitution that would repeal the 16th Amendment.
There will be no need for the large IRS since the states will be the "administering authorities" for
the national sales tax. In place of the IRS at the federal level there will be a “Sales Tax Bureau”
residing within the Department of the Treasury and an "Excise Tax Bureau" to administer those
excise taxes that remain and not administered by the Bureau of Alcohol, Tobacco and Firearms.
Under the FairTax, you will receive all the pay that was previously withheld by your employer
for federal income and payroll taxes. For the self-employed, this means keeping 15.3 % more in
just payroll taxes alone, plus any income taxes that were due under the old system.
Employers will need only report minimal information to the Social Security Administration on
behalf of their employees for employment credit, as is done today in order to receive
appropriately portioned benefits later.
None of your savings or investment accounts will be taxed by the federal government, rendering
IRAs and other such federal tax-exempt or deferred programs unnecessary.
There will be no individual federal tax filing!
The National Sales (Consumption) Tax
Retail Sales Services
The FairTax plan imparts a 23% inclusive sales
tax (30% exclusive) on all NEW goods sold at
the retail point of sale and on all services.
There will be no Federal taxes on used items
or on items used specifically for investment.
The FairTax will replace some embedded
tax elements in products and services costs.
Source: The and Forbes Magazine
Source: U.S. Dept of the Treasury FairTax Book, FairTax.org
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The FairTax plan will impart a 23% inclusive sales tax, meaning that the percent of tax on the
sale is represented by the combined amount of tax and product or service price, which together is
also addressed as the "gross amount". For example, when you buy an item, 30% of that item’s
cost to the retailer will be equivalent to the tax the consumer pays. Therefore, a $77 product will
cost you $100 of which $23, i.e. 23%, is the inclusive tax. This is just like the current tax on
your income. If $100 of your income is taxed at the marginal tax rate of 25%, then you pay a
25% inclusive rate and a 33.3% exclusive rate. But, unlike the income tax where you pay an
average tax on all your income, with the FairTax you only pay a tax when you purchase a
product or service. Of course, you still may have to pay state and local taxes on that product or
service just as you do today.
The additional good news about the FairTax is that it is only applied to new products and not
used goods or investments, which means items will be taxed by the federal government once and
only once with the exception of those items subject to tariffs, duties, imposts and excise taxes as
is the case today.
The FairTax will eliminate corporate taxes, self-employment taxes, income taxes, payroll taxes
and potentially provide for significant reductions in corporate tax compliance costs, all elements
of the embedded taxes in the costs of products and services today. The elimination and or
reduction of these elements could, as many FairTax papers allude, result in no increase in the
cost of products and services once the FairTax is implemented in their place. But, the fact is that
the prices of goods and services following the enactment of the FairTax will be determined by
the same two things that determine prices today: (1) what is the existing money supply as
produced by the federal government which varies the value of the American dollar, and (2) what
is the market, i.e. the consumer, willing to pay for such products.
An important point to consider here is that many of the embedded taxes that would be eliminated
by the FairTax will principally be eliminated from products manufactured exclusively, or nearly
so, in the U.S. Imported products for which embedded taxes originate in the country of origin
will continue to incur the effects of those embedded taxes as well as from tariffs and other import
taxing imposed by the U.S. As such, imported products will most likely see the full weight of the
FairTax in the resultant price … maybe a good thing for competition with prices of products
produced in the U.S.
A good, capitalistic, free-enterprise logic wants us to believe that the cost of the aggregate of
products and services we purchase will not vary so much by removing the embedded taxes and
replace them with the FairTax. But, what if that did not occur and the prices on the day the
FairTax is enacted raised prices an additional 30% above the pre-FairTax price? As we will see
later, mechanisms built into the FairTax legislation will accommodate this possibility and not
necessarily result in an overall federal tax increase for consumers. In fact, most in the lower and
middle income brackets should see a measurable decrease in the amount of federal taxes they
pay under the FairTax versus what they had been paying in income, payroll and embedded taxes.
The federal revenue collection process for the retailer or service provider has been greatly
simplified under the FairTax. Each month, businesses will file a report on the previous month
sales activities and make the appropriate remittance of taxes. Small sellers, as identified by the
FairTax plan owing less than $20,000 in taxes in any one month of a calendar year, will remit
taxes directly to the state administering authority as determined by the authority. All other
sellers will remit taxes into a separate bank account from which the administering authority will
withdraw the tax revenues on a routine schedule.
Sellers filing timely reports and making on-time tax remittances, as well as the administering
authorities, may retain an "administrative credit" equal to the greater of $200 or one-quarter of 1
percent of the taxes assuming that this amount is no more than 20% of the pre-credit taxes due
(more on credits to follow).
Business and Non-Profit Exemptions
No Federal tax on services Bill’s
or goods sold business-to- Window
business if done so for Co.
resale, to produce taxable
products or services, or for
other bona-fide business
Non-profit organizations will
have tax exempt privileges
similar to those under the
current tax system.
Source: The FairTax Book, FairTax.org
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Under the FairTax there will be no tax on goods or services that are sold on a business-to-
business basis for resale, to produce taxable products or services, or for other bona fide business
purposes. This will eliminate the cascading of embedded taxes that occurs in the production of
The FairTax will not be imposed on dues, contributions and similar payments to qualified non-
profit organizations. Qualifying non-profit organizations will be issued qualification certificates
by the state administering authorities which the organizations may use to make tax exempt
purchases of taxable products and services the same as for business-to-business and export sales.
If the non-profit provides a taxable product or service in connection with contributions, dues or
similar payments, then such products or services shall be treated as taxable and taxes will be due
at the fair market value of such products or services. All the forgoing with respect to non-profit
organizations is very much parallel to the 1986 IRC requirements for qualification and tax
The Tax Rebate FairMart
The FairTax “untaxes” the basic necessities of
life via a rebate also known as a “prebate”.
Prebates will be issued the first of each
month to “legal” individuals and families
registered with the administering authorities.
Prebates are based on the taxes that would
be paid for goods and services up to the
poverty levels established by the Department
of Health and Human Services. Source: The FairTax Book, FairTax.org
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There is an ideology held by many citizens in this country that the taxing of food, housing and
health care, which are the "basic necessities" for life, should not be taxed. However, what is
food to one person may not be considered food by another. Housing or medicine to one person
may not be considered housing and medicine to another. So, to avoid the potential conflicts of
interpretation as to what is or is not a basic necessity and to stay away from again getting into
special exemptions and deductions on these items as exists under the current IRC, a clear
delineation was determined and a means of untaxing these items has been proposed through a tax
rebate mechanism also called a "prebate".
It is call a prebate because it will be issued the first of each month as a "before-the-fact" payment
rather than an "after-the-fact" payment as is done with refunds under the existing IRC. You get
the tax return before you actually spend the money which would be inclusive of the taxes for
which you have already been reimbursed. The prebate will be issued to "legal" individuals and
families who have registered individually or as a family with their state administering authority.
Registration will be done annually and must include the name of all the eligible family members
and their Social Security card numbers. This means that those in the U.S. illegally and having
previously escaped paying their full share of the American tax burden will pay their share under
the FairTax but not be eligible for the prebate.
The prebate amount is based on the taxes that would be paid on goods and services up to the
poverty level for individuals and families as established by the U.S. Department of Health and
This chart shows the 2009 poverty levels per family numbers established by the Department of
Health and Human Services (DHHS).
This is the 2009 FairTax rebate schedule from which the rebate is determined. Note than unlike
the DHHS poverty schedule for 2 people, this schedule eliminates the “marriage penalty” that
exists in the poverty schedule when the number advances from 1 to 2 people.
As an example, we will look at a family of 4; dad, mom, and 2 kids, to see how the prebate
program works. The annual allowance for a family of 4, using the 2 parent +2 row, is $29,140.
The inclusive federal sales tax that would have been assessed on this amount of goods and
services at 23% would be $6,702 ( $29,140 x .23 ). This is the annual prebate amount which is
then divided by 12 to get the monthly prebate amount which, in this case, is $559. This means
that a family of 4, who has registered all the family names and Social Security numbers with the
administering authority, will receive $559 at the beginning of every month throughout the year.
The great thing about this too is that it does not matter if they spent or even made $29,140 or
$10,000,000, every family of 4 gets the same amount – no class discrimination.
Now that we have addressed the prebate, we can return to consider what would be the
consequences of the FairTax being enacted and the prices of products and services rising by
30%. As we have already stated, and this is true of prices yesterday, today and tomorrow, they
will be determined by the value of the dollar (money supply) and the market's reaction to the
A good indication of the "effect" of taxes is the "effective tax rate." There are several
applications of this rate, but this description will follow the rate with regard to the "sacrifice" that
taxes have on the taxpayers' ability to purchase a quantity of goods and how much is sacrificed
back to the government with one tax system versus another.
The following example illustrates the effect of what happens when prices are not changed after
enactment of the FairTax and the full 30% FairTax is exclusively applied to the cost of a product
(it could be a service as well).
In this 2009 IRS tax return example, we are using a single income earner whose gross annual
salary is $50,000. The taxpayer's single exemption and standard deduction amounted to $9,350
which is subtracted from the gross income (salary) to determine the taxable income. In this case,
the taxpayer owes $6,344 in income taxes on the taxable income which places the last dollar
taxed in the 25% marginal tax bracket. In addition to this amount of income tax, the taxpayer
has also paid $3,100 in Social Security and another $725 to Medicare/Medicaid. The total
federal income and payroll taxes paid is $10,169 leaving the taxpayer with $39,831 to purchase
The taxpayer in this example pays an "average tax" which is figured by dividing the income
taxes paid (T) by the amount of gross income (I): $6,344 / $50,000 = 12.7% average tax rate.
The highest "marginal tax rate" as taken from the 2009 tax tables is 25% (inclusive). The
statutory rate, the rate determined by law, is also recognized as the highest marginal rate, 25% in
this case. When adding all the taxes together, income + payroll, we will see how much is
sacrificed in terms of the available purchasing power.
Now, suppose there were 50,000 widgets available at the widget store that cost $1 under the
current income tax. With the after-tax income (aka take-home pay) the taxpayer could buy
39,831 widgets at $1 each. (We will not consider the state and lower level effect of taxing in this
example though it works the same for both systems of tax collection.)
The effect (sacrifice) of the income and payroll taxes, in this case, is the effective tax rate of
20.3%. This rate is determined by dividing the amount of widgets that could be bought with the
after-tax pay (39,831) by the total available amount (50,000), thus (39,831 / 50,000), and then
subtracting that product from 100% (100 - 79.7 = 20.3). This results in an effective tax rate of
20.3%. In other words, the taxpayer sacrifices 20.3% of all the widgets he could have bought
had he not had any taxes to pay with his $50,000 salary. So, he leaves 10,169 for the
government and takes home 39,381. Now, let us turn to the FairTax.
Under the FairTax, the taxpayer keeps all his salary and he gets an additional individual prebate
of $2,496 for the year 2009. This means that under the FairTax the individual has a total of
$52,496 available to buy widgets, but the widgets have now risen to a gross amount price of
$1.30 due to the 23% inclusive, 30% exclusive national sales tax. However, if we divide the
available income by the amount of the widgets: $52,496 / $1.30, we see that we can now buy
40,381 widgets under the FairTax versus only 39, 831 under the present income tax. This results
in a lower effective tax rate of 19.3% with a new statutory rate of 23%. So, the FairTax wins out
well in this example as it would in most others as well. In fact, the better results will occur in the
lower and middle income brackets for most average family sizes and living conditions.
The important point to keep in mind when comparing the current system against the FairTax is
that the current system will, in almost all cases, impose some federal taxing through the payroll
tax even though no income taxes were paid or earned income credit was provided to the claimant
(see slide 21, Family Income and Tax Distribution). To capture the full benefit of the current
system may also require extensive knowledge of the code, and as amended yearly, or paying for
someone else to provide their "advertised expertise" to itemize and recoup or withhold applicable
individual income taxes. In such case, time and money is expended for an absolute penalty
system and the subsequent stress and concern of a potential audit furthers the cost Americans pay
for an inefficient and absolutely unnecessary tax collection system.
The FairTax, on the other hand, imposes no federal tax (excepting excise taxes as with the
current system) until the taxpayer has surpassed their annual consumption allowance and, even
then, the amount of tax to be paid can be controlled through thrift purchases of used items or
otherwise limited individual consumption. There is also no additional expenditures in time,
money and stress to comply individually with the FairTax beyond registering with the state
administering authorities each year the name, social security numbers and address of the
individual or family in order to receive the rebate/prebate. All-in-all, a much better system and a
more cost-effective system, particularly for the lower and middle wage earners who suffer such
high-percentage losses to income and payroll taxes under the current code.
For a calculation of your taxes now verses what you can expect from the FairTax go to the
FairTax calculator at http://www.fairtax.org/site/PageServer?pagename=calculator .
The FairTax encourages productivity by not increasing the tax burden on American workers as
their pay increases. Unless a taxpayer chooses to increase his or her spending, then additional
income, as from a second job, will not be subject to federal taxes.
There will be no taxes on qualifying education and training services since such services should
ultimately contribute to increased American productivity and economic growth.
One of the great advantages to the FairTax is how it captures revenues from economic activities
in the country that were previously not accessed. In 2008, the United States was the host to a
record number of more than 58 million international visitors who spent an estimated $112 billion
while in the country.
The contribution of those visitors to our general and Social Security revenues under the FairTax
could have been in excess of $25 billion.
Underground economies include both legal (shadow economy) and illegal activities wherein
money exchanged for goods or services between parties constitutes a taxable income that is not
reported and taxed (drugs and prostitution as examples).
It is estimated that underground economies represent between $1 and $2 trillion in monetary
exchanges which amounts to federal revenue losses in the hundreds of billions of dollars each
The FairTax will more efficiently and effectively capture tax revenues from underground
economies when money from such exchanges is used to purchase legal goods and services from
Removing corporate taxes, withholding taxes and the tremendous measures in time and money
expended trying to comply with the current tax code will help to lure businesses back to America
or encourage foreign companies to establish businesses in this country for the first time.
American-built products destined for foreign sales without embedded taxes will have a greater
opportunity to provide more competitive pricing in overseas markets.
The elimination of income taxes on savings and investments will lure the $11 to $13 trillion in
offshore financial centers back to America where it will be deposited or invested in U.S.
financial institutions. This will increase the money available for loans, decrease the interest
rates, and provide money for corporate capital improvements, thus jobs! The elimination of gift
and estate taxes and the recognition of America's outstanding system of laws will add
immeasurably to the incentive to invest or reinvest in America.
Under the FairTax, governments will pay their share of the tax depending upon what service the
government entity performs and at which level, federal or state (including municipal,
governments within the state). Government agencies will be considered to be of two categories,
those that are "enterprises" and those that are not. All government agencies, federal and state,
that are not an enterprise will pay the sales tax on all goods and services purchased the same as a
Government enterprises are those agencies within any federal or state government that provide a
product or service for which the consumer directly pays for such product or service. A good
example of a federal enterprise is the U.S. Post Office which charges the public for products and
services (stamps and mail delivery services as examples). A municipal enterprise may be the
utilities some state-level governments provide to their citizens for which the public pays directly
for the product and service. In the case of all government enterprises, they will charge the sales
tax on their offered goods and services the same as any commercial business, which is very
appropriate given they compete with commercial enterprises as well. Government enterprises
will then be eligible for business-to-business purchases without paying the sales tax on goods
and services purchased by them for use within the enterprise or for resale. Also, and a very
important point, any subsidy given to a government enterprise by the government will be
assessed a 23% tax on that subsidy, which can occur, for example, when the federal government
subsidizes Amtrak to keep it in business. This may reduce and possibly prevent the competitive
advantage to funding government enterprises through intra-governmental associations not
available to the commercial enterprise for sustainment.
All other federal agencies that are not an enterprise or providing an educational or training
service will be assessed a 23% tax on the agency's payroll. This is the same case as for the
master of a household that would pay the sales tax on behalf of the "taxable services" provided
by his servants and laborers in the home. In this case, the master of the home and the federal
government are referred to as "taxable employers". As such, the entire federal payroll, excepting
pay for those employees in government enterprises and education and training services, will be
subject to the 23% tax on the applicable payroll . This is not an income tax, but an overall
payroll tax sometimes addressed as an excise tax. This does not entirely apply to state-level
governments in that such application would be contrary to "intergovernmental immunity". In the
case of state governments, those agencies which provide a good or service directly to a public
consumer, but without an exchange of money, as in a government enterprise, the payroll of such
agencies shall be assessed a 23% tax.
A job service agency within a state is a good example of a service rendered directly to the public
and for which the public does not pay directly for the use of the agency’s services. Since the job
service agency does not meet the conditions for an enterprise the state would remit a 23% tax to
the federal government on the payroll for this agency. The tax assessment on government
payrolls is actually increased only about 15.35 % since the federal government and state agencies
subscribing to Social Security and Medicare already pay a 7.65% assessment on employee wages
(at least up to the cap for Social Security) that is eliminated under the FairTax. With regard to
the total budget for the various government agencies today, this is most likely not a major
adjustment and economic growth will most likely lessen the impact as with the private sector
The FairTax has been reintroduced as a bill to both houses of the 111th Congress by
Representative John Linder, 7th District, Georgia and by Georgia Senator Saxby Chambliss.
The House bill is H.R. 25 and the Senate companion bill is S.296.
The cosponsors are 54 in the House and 4 in the Senate, but with a total Congressional support
base of over 80 as of December 2009.
The bills are in the respective finance committees in each house where they await debate and
sufficient support before being brought to the floor for a vote.
H.R. 25, just 131 pages, is intended to replace the more than 70,000-plus pages of the IRC and
its supporting documents. The current list of rules and regulations is more than 11.1 feet tall,
while you can hold the FairTax bill in your hand and easily read it in a couple of hours.
The FairTax presents tremendous advantages to businesses that are not possible under the current
IRC. Elimination of corporate taxes makes American products more cost competitive at home
and overseas against foreign products.
A simplified tax code results in simplified reporting and remitting procedures that greatly
reduces code compliance costs in both time and money.
The administration credit provides an incentive for businesses to comply with the new code.
Where losses occur and taxes were paid, again, simple procedures are established to promptly
recoup taxes already paid on such losses.
The employer no longer has to deal with employee and employer tax withholdings for income
and payroll taxes.
No business-to-business taxes eliminates multiple, embedded taxes and may well lower prices.
Government enterprises assessing the sales tax on goods and services eliminates the financially
competitive advantage held over commercial enterprises.
The elimination of estate taxes, also known as death taxes, will encourage entrepreneurship when
businesses can be passed from generation to generation without a severe tax burden (especially
beneficial to small family-owned farms).
Last in this list among many more advantages is the focus that can be put on the productivity and
growth of the business without regard to what the tax consequences may be.
FairTax Advantages for Seniors
Receive all Social Security payment + rebate.
Social Security indexed to compensate for tax.
Tax amnesty on exempt/deferred investments.
No income or payroll tax withholdings.
No individual tax filing = no compliance costs.
No estate tax to imperil family inheritances.
No gift taxes to obstruct gifting to anyone.
No capital gains of the sale of a home.
Economic growth providing reduced inflation.
Source: The and Forbes Magazine
Source: U.S. Dept of the Treasury FairTax Book, FairTax.org
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The FairTax for senior citizens means receipt of two payments from the Social Security
Administration, one for the standard benefit payment as before and the prebate.
Given that seniors will not have the benefit of receiving more in a paycheck as a worker would in
the receipt of all the formerly withheld taxes, the FairTax bill provides an indexing mechanism
that is combined with the annual consumer price index figures to determine the increase in the
Social Security benefit necessary to compensate for price increases from the sales tax.
All tax exempt and tax deferred programs to which seniors have invested their incomes will be
exempt from paying any taxes on withdrawal and thus there is no need for such restrictive and
complicated programs under the FairTax.
Seniors wishing to return to work will not be penalized by having their Social Security benefit
reduced for income taxes as can occur when income exceeds certain limits today.
No individual tax filings each year means no compliance costs which can be excessive for
seniors in time and money.
No estate taxes means passing all your estate to your heirs without a tax liability to them and no
complicated planning by you to avoid tax burdens.
The elimination of gift taxes allows you to give to anyone, any amount, without any tax
consequences to the benefactor.
Many seniors own their homes and at some point may wish to downsize or move to more
favorable locations and under the FairTax they can sale their homes without any capital gains
Last in this list from among many more is that the Fair Tax should reduce prices or at least
inflation rates as the economy grows from the tax benefits which will stretch the senior's dollar
more than under the current system.
The FairTax may be the most advantageous to the lower wage earner. First of all, the employee
gets to keep all the pay previously withheld for taxes.
This is especially beneficial with regard to the regressive payroll taxes that consumed a
tremendous percentage of the taxpayer's wages.
The prebate mechanism may entirely free the lower wage earner from paying any federal taxes.
There will be no more need to collect and keep up with receipts for tax purposes as there will be
no more tax filing required by individuals.
This also results in no compliance costs for the individual and reduced or almost eliminated
compliance costs for the small business owner that may operate without a substantial income.
The application of the FairTax is the same for all and is completely transparent which exposes
when and how much tax an individual is actually paying.
To financially assist anyone that wants to improve their employment potential, and thus, their
income, the FairTax does not tax education and training services.
Lastly among this inconclusive list, the FairTax will greatly increase the employment
opportunities and potential for income growth as the economy develops under a pro economic
The Better Way in Summary
The FairTax …
Simple to understand and implement
Transparent with no special exemptions
Does not penalize productivity
Untaxes education and business expenses
Rebate untaxes sales up to the poverty level
Taxes tourists and underground economies
Increases investments in the U.S., thus
- More money and lower interest rates
- More capital investment (more jobs)
More money for personal consumption
Across the board progressive and fair! Source: U.S. Dept of the Treasury FairTax Book, FairTax.org
Source: The and Forbes Magazine
KdB Training Inc Graphic
In summary, the FairTax is …
Simple to understand and implement
Transparent with no special exemptions
Does not penalize productivity
Untaxes education and business expenses
The rebate untaxes sales up to the poverty level
Taxes tourists and underground economies
Increases investments in the U.S., thus …
– Lower interest rates
– More capital investment (more jobs)
More money for personal consumption
Across the board progressive and fair!
After implementing the FairTax, April 15th should become a national holiday to recognize
America’s new independence from tax tyranny.
Recommended reading to learn more about the FairTax includes the best sellers, The FairTax
Book, by Neal Boortz and Congressman John Linder and FairTax, The Truth by the same
authors in which they respond to the critics’ comments from their first book. Also recommended
is Governor Mike Huckabee’s book, Do the Right Thing, in which he devotes an entire chapter
to the FairTax.
What you can do to promote the FairTax?
Sign the petition at www.fairtax.org.
Join the Florida FairTax Educational Association at www.flfairtax.org.
Get involved with your local AFFT and FFTEA.
Pass the word at every opportunity.
Advertise with signs, stickers on your car, shirt and cap logo.
Write to your representatives and media publications.
Do not accept … “It won’t happen.”
Please take the time to learn more about the FairTax using the vast amount of resources linked
through the websites at www.fairtax.org and www.flfairtax.org and please consider joining or
contributing to both the Americans For Fair Taxation and the Florida FairTax Educational
End of Presentation