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The impact of the FairTax on
American manufacturing, agriculture, trade, and
international competitiveness

What is the FairTax plan?
The FairTax plan is a comprehensive proposal that replaces all federal income and payroll taxes with an integrated approach including a progressive national retail sales tax, a rebate to ensure no American pays federal taxes up to the poverty level, dollar-for-dollar revenue neutrality, and the repeal of the 16th Amendment.

What is the current situation for U.S. produced goods under the present income tax?
Manufacturing’s share of the U.S. economy has been in a relentless decline to less than 50 percent of what its share of GDP was in the 1950s. Employment in manufacturing as a share of total U.S. employment has fallen proportionately. Starting in 1970s an additional factor has exacerbated this trend: The growing relative competitive advantage of foreign competitors due to border-adjusted taxation not afforded U.S. manufacturers under the federal tax code. As a consequence a trade deficit in goods began in 1971 and has increased ever since. The U.S. trade deficit in goods for 2003 was $547 billion, the bulk of which was due to the $469 billion manufacturing trade deficit. The merchandise deficit is predicted to continue to grow.
The United States, which was the world’s largest creditor in 1982 has since become the world’s largest debtor as a consequence of the relentless growth of the trade deficit.

“U.S. manufacturers cannot realistically be expected to compete effectively until this foreign tax advantage is remediated by replacing current U.S. income taxation with comparable border-adjusted taxation as an urgent requirement for federal tax reform.”

Value added in manufacturing as a % of GDP
1953 29.66%
2003 12.7%
Decline 57.2%

Percent manufactured goods consumed in US that are produced in the US, 2001

GDP in manufactures 1,423.0 billion
Net imported manufactures 368.9
Total US Consumption Manufactures 1,791.9

% Consumption Manufactures Produced in US 79.4%



The FairTax plan reduces the cost of
American manufacturing and agriculture considerably.
Under the FairTax, American-manufactured or grown goods and services no longer enter the marketplace burdened with hidden corporate taxes, the cost of compliance with such taxes, and Social Security employee matching. This amounts to an average cost reduction of 22 percent for goods and 25 percent for services. Said another way, American goods become 22 percent more competitive, while American services see a 25-percent improvement.
This non-partisan legislation (HR 25/S 25) abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes with one simple, visible, federal retail sales tax – collected by existing state sales tax authorities. The FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. So it is also cost neutral the final retail cost for American consumers changes little, if any, under the FairTax. However, the wholesale/export cost is reduced considerably.

How do US goods incur federal taxes today, while imported goods do not?
Let’s buy a bottle of California wine. Or a Boeing 737. Or some Kansas wheat. Or Caterpillar D10R dozer. Or some consulting services from PricewaterhouseCoopers. While your invoice will not show it, included in the cost you’ll pay is your share of each provider’s corporate income taxes. And you’ll pay for the tax department, accounting firms, and law firms that figure those taxes and defend the audits. While the taxes themselves can go below zero in a bad year, those compliance costs just keep on toting up. And then there is the matching of each employee’s Social Security contribution.
In the price you pay are all three costs (taxes/compliance/matching) for the company that provides the glass bottles containing the wine. And the cork provider. And the label printer. And the ink supplier. And the label glue manufacturer. And the tires on the 737. And the fertilizer for the wheat. And the paint on the dozer. And the Blackberrys carried by your PwC consultant.