The proposed FairTax is a national sales tax intended to replace the federal income tax. The proposed rate is 23 percent inclusive ($23 dollars out of a $100 purchase goes to the FairTax). From a presales tax price point-of-view, the national sales tax rate would be 30 percent. The national sales tax would only apply to new consumer goods, which means the purchases of used goods (used car, used appliances, thrift store purchases, etc.) would be exempt from the FairTax.
Under the proposal, businesses would be exempt from paying the sales tax for purchases used for business purchases. The purpose for the exemption is to provide them tax savings that would allow them to lower prices to be more competitive, expand the business, increase investment in research and development, and employ more workers.
A provision of the FairTax proposal was added to accommodate low income individuals and households. As part of the proposal, all households would receive a “prebate”, a rebate of a portion of the national sales tax paid before the expenditures occur. The annual prebate for each household is calculated by multiplying the poverty level income that applies to the size of that household by the inclusive national sales tax rate and would be dispersed in equal monthly payments. The prebate would allow low income households to be able to afford to purchase food and clothing.
The proposed FairTax plan began as a project commissioned by three business men to find a better tax system than the current income tax system. Millions of dollars were invested into extensive economic research that resulted in the FairTax plan. On January 6, 2009, U.S. Rep. John Linder introduced the FairTax proposal (H.R. 25) in the House of Representatives and currently has 62 co-sponsors. On January 22, 2009, Sen. Saxby Chambliss introduced the FairTax proposal (S. 296) into the Senate and has four cosponsors. So far, both bills are still in committees.
More information on the FairTax proposal can be found at FairTax.org.