As an example, I am able to explain supply side economics by explaining that tax payments are a brake on the economy and that reducing effective tax rates causes the economy to grow increasing overall revenue.
But the FairTax people are not counting on a larger economy to generate the revenue from what I have read, and from what I am reading. They are using a static model.
Let me try to restate what I don't understand.
As an upper middle class taxpayer right now I pay a substantial amount to the IRS in the form of income tax, plus I pay $X for all goods and services I buy. These prices are estimated to have a hidden premium of 20-25% in order to compensate for the tax related costs.
Under that Fair Tax as an upper middle class taxpayer, I will no longer pay any income tax to the IRS, and neither will any one else. This lack of taxes in the cost of goods and services, will result in a reduction in the price of those goods and services of about 20-25%. Under the Fair Tax, I will pay the same amount for all my goods and services in the end when the government collects the 23% Fair Tax.
The 23% the government collects will replace the money that they had been collecting in taxes embedded in the product. So where does the government collect the money to replace what I am presently paying in income tax?
The Fair Tax rate is not derived from the amount of the embedded taxes included in the prices of goods and services we buy. The fact that they are about the same percentage is a coincidence. The Fair Tax rate is calculated as follows, per this article http://www.fairtaxvolunteer.org/smart/tax_system.html See table 2 at the very bottom:
The tax revenues collected in 2003 (dollars in billions)were income (personal and corporate) $927.7, Estate and gift $22.4, Payroll $717.8, for a total of $1,667.9 (that's trillion for all you mathematically challenged).
The Fair Tax consumption base starts at $7,760.9 in 2003 and then is adjusted with a bunch of items until you get to $8,740. Then the base is adjusted for the prebate in the amount of $1,746.1 to bring the base down to $6993.8. That makes the tax inclusive rate 19.3%, or 23.8% exclusive. The bill's tax inclusive rate is 23%. That doesn't mean that the embedded taxes included in prices is now 19%.
To recap, the fact that the embedded taxes on average are approximately 23% and the Fair Tax rate in the bill is 23% is coincidence. For one thing, the current tax base and the Fair Tax base are not the same, and part of the cost is compliance costs.
One interesting note, The tax base for the purchase of new single-family homes is $310.6. That means that if these were excluded the exclusive tax rate would increase from 23.8% to 25%. That isn't too much, but if we exclude that, why not exclude lawyer fees?