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Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation," chapter in Fundamental Tax Reform: Issues, Choices, and Implications

UCD-ITS-RP-08-71

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Suggested Citation: "Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation," (with Laurence Kotlikoff) in John Diamond and George Zodrow, eds., Fundamental Tax Reform: Issues, Choices, and Implications, MIT Press 2008.

The FairTax is a proposal to replace the federal personal income tax, the federal corporate income tax, the federal payroll (FICA) tax, the federal estate tax, the federal gift tax, and the federal generation-skipping tax with a federal retail sales tax, assessed at a single rate. The FairTax also provides a rebate to each household based on its demographic composition. The rebate is set to ensure that households living at or below the poverty line pay no taxes on net.

This paper compares average and marginal labor income and saving tax rates under the current federal tax system and the FairTax. As specified in H.R. 25/S. 25, the legislation that would implement the reform, the FairTax’s tax rate is 23 percent. This tax rate is measured on a tax-inclusive basis, meaning that a dollar’s expenditure would yield 77 cents in consumption after payment of the retail sales tax.