For this, everyone takes home paychecks free of all federal withholding (both income taxes and Social Security and Medicare). For most this means a huge increase in take-home pay. Retirement, healthcare (and possibly, state income taxes) will still be withheld. Elimination of federal withholding means (roughly) between a 15% and 39% increase in most take home paychecks.
The FairTax prebate is a monthly payment that goes to EVERY family (except illegal immigrants). It eliminates all federal taxes on those below the poverty level and all federal taxation on every citizen's spending up to the poverty level. As a side-effect, it would end illegal immigration to the USA, overnight, by requiring higher consumer prices on those here illegally.
With the prebate payments arriving monthly the actual average taxation on earnings for most citizens will be around 12% --depending on spending. It is a distortion to write that FairTaxes could be added to income taxes because the existing legislation prohibits it--upon pain of sunsetting the FairTax.
The FairTax is not perfect because no system of taxation can be. But the advantages over the income tax system are so obvious it is hard to knock it without making up things like a 30% non-compliance rate--as this author has done. There will certainly be cheating (as is true with every tax) but it is harder with the FairTax because it takes both the seller and the buyer to cheat (unlike income taxes which only require false statements by the earner). 87% of all retailers are now big box stores and they would likely be leery about cheating. The auditor's test is newly straight-forward: did the retailer pay 23% in taxes on all sales--no CPA/tax lawyer driven intricacies to distort or obscure the taxes paid.
For the imperfections of the FairTax this is what we get: The end of entirely self-destructive national taxation of investment and savings. The most favorable tax climate in the world, which will attract trillions in new investment (and millions of good paying jobs). The end to lobbyists influencing the tax code and bloating it into destructive and expensive complexity (which now is the primary reason for CPA's). A fully visible federal taxation rate which requires full disclosure and public agreement before federal spending can increase. The ability of each taxpayer to choose the amount and timing of tax payments--based on individual spending decisions. April 15th becomes just another Spring day.
The FairTax changes the relationship between government and citizen. The IRS can no longer punish political opponents of any current administration because it is abolished. The government is forced to reveal actual taxation without hiding the full effects through payroll withholding. Additional government spending beyond revenues would require an across the board rate hike that will be seen by every consumer. Citizens cannot be pitted against each other in endless class warfare skirmishes to benefit politicians. That said, existing wealth will be taxed when spent--unlike the current tax system which requires more of salary earners than those with accumulated wealth. Millionaires spending more, pay more. These plain facts are hard to equate with socialism as this author has rather hysterically claimed.
It is a big change and it requires running over a culture of corruption and power that infects and advantages both Republicans and Democrats in Washington. This is no small task as every FairTaxer knows too well. Special interests now exploiting the tax code will and have objected . But, at the end of the day a country with 45% of its citizens paying nothing in income taxes, millionaires shielded from taxation by a corrupted political process, taxation of the very things that make the country grow--savings and investments--and anything but transparency and simplicity all argue for a better system for the nation. The FairTax exists today as pending legislation based on research by Nobel prize winning economists. Only the politics--and the distortions--keep it from happening.