The Fair Tax in Pretty Pictures

Originally published 8/4/2005. Links were valid at time of publication.There has been some confusion over “double taxation” and I thought that perhaps a simple graphic might be able to help visualize how this stuff works.

The first thing to realize is that you should read the book. 🙂

The second thing to realize is that we pay more in taxes than just on our income. We pay social security taxes, we pay inheritance taxes, we pay the corporate taxes (that’s the taxes that corporations pay that would otherwise be put into development or even employees or shareholder’s pockets).

The Fair Tax proposes eliminating those taxes on a national level. Of course, this has nothing to do with State Income Taxes, so it’s not like we’re scot free. This means that your paycheck would look something like this:

We also pay hidden taxes in the cost of every single item we buy – taxes that companies must pay to the government in order to ship their widgets. The FairTax proposes – as part of eliminating those taxes – that they be replaced with a 23% consumption tax. Since the taxes are estimated to be around 22%, it comes out as something of a wash. So, say we’re talking about purchasing a $100,000 house as an example (in reality, homes have an embedded tax of about 25%, but the exact percentage isn’t the point here):

So, the Fair Tax Plan has a 1-2 punch when considering purchasing something. It addresses 1) Income Tax and 2) Embedded Taxes. So, under the current system, here’s what happens when you take your current paycheck and try to use it to buy something:

As you can see, because you start off with less money, you’re going to wind up with less money in your pocket.

However, let’s look at the 1-2 punch with the FairTax Plan. Not only are you keeping more of your money to start off with, but with the embedded taxes removed from the same item you bought, you wind up with far more money left over:

This is not to say, of course, that this thoroughly or adequately explains the entire Fair Tax plan. Again, read the book.

But, at the same time, sometimes it helps me to visualize things, and this is supposed to help you understand how during a transition you are not being double-taxed.

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