The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.
[1][2] A key question surrounding the FairTax rate is the ability to be revenue-neutral; that is, whether its proposed monetary numbers would result in an increase or reduction in overall federal tax revenues, and if so how large this disparity would be.
Supporters argue that if the rate seems too high or is otherwise higher, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer.
Americans For Fair Taxation (AFFT) states that early research at Stanford University, The Heritage Foundation, the Cato Institute, and Fiscal Associates have calculated revenue-neutral rates between 22.3% and 24%.
Critics have stated that the early studies failed to properly account for the additional revenue required for the increased government spending needed pay the FairTax on their purchases.
These studies implicitly incorporated some degree of tax evasion in their calculations simply by using National Income and Product Account based figures that presumably understate total household consumption.
[8] Moreover, these studies did not account for the expected capital gains that would result from a reduction in the real nominal value of U.S. government debt and the increased economic growth that economists believe would occur.
[8][11] In contrast to the above studies, one of the leading economists opposing the FairTax, William Gale of the Brookings Institution, published a detailed 2005 study in Tax Notes that estimated a rate of 28.2% (39.3% tax-exclusive) for 2007 assuming full taxpayer compliance and an average rate of 31% (44% tax-exclusive) from 2006–2015 (an increase that accounts for the replacement of an additional $3 trillion in revenue collected through the Alternative Minimum Tax (AMT) impacting the middle class over the 10-year period).
[5][8][15][17] Dr. Karen Walby, Director of Research for the Americans For Fair Taxation, discussed a recent study by Young & Associates on evasion and enforcement that identifies certain key variables which influence the level of compliance (marginal tax rates, likelihood of audit, severity of penalties, etc.)
The studies have implicitly incorporated a significant degree of tax evasion in calculations simply by using National Income and Product Account based figures that understate total household consumption.
[8] In addition, the studies did not account for the capital gain stemming from the reduction in the real nominal value of U.S. government debt and the increased economic growth that economists and FairTax supporters believe would occur.
[8][11] Congress's bipartisan Joint Committee on Taxation (JCT) evaluated a proposal similar to FairTax that included additional exemptions and estimated a revenue-neutral rate of around 36%.