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snippits from: http://www.factcheck.org/taxes/unspinning_the_fairtax.html

There is no such thing as a Fair tax. What they don’t tell you is a new Chev or Ford will cost over $10,000.00 more in federal sales tax. Plus the state sales tax. If you don’t believe it do the math yourself.

"the bipartisan Advisory Panel on Tax Reform had “calculated that a sales tax would have to be set at 34 percent of retail sales prices to bring in the same revenue as the taxes it would replace,

A new Chevy can cost upwards to $40,000.00, times a least 30% federal sales tax. 12,000.00 plus the $40,000.000 makes a new Chev cost 52,000.00. Add your state sales tax to the $52,000.00. And hold your hat for the Fair Tax lie.

Plus double taxation for the retired.

The 23 percent number in H.R. 25 is the equivalent of the 4.8 percent in the previous example. To calculate the real rate of the sales tax, we have to determine the original purchase price of an item. We can begin with the same $100 item, keeping in mind that a price tag that reads $100 has sales tax already built in. If our tax rate is 23 percent of the tax-inclusive sales price, then of the $100 final price, $23 of those dollars will be for taxes, meaning that the original pre-tax price of the item is $77. To get $23 in taxes on a $77 item, one must impose a 30 percent tax. In other words, a 23 percent sales tax on the tax-inclusive sales price is equivalent to a 30 percent tax on the actual price of the item.

many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax inclusive.

Even if Kotlikoff is correct that a 31.2 percent rate is revenue-neutral, there remains some reason to doubt that the rate actually would be that low. The FairTax proposal assumes a 100 percent tax base on consumption. By way of contrast, most states that have sales taxes have roughly a 50 percent tax base. With the FairTax’s 100 percent base, consumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:

* Purchases of new homes
* Rent
* Interest on credit cards, mortgages and car loans
* Doctor bills
* Utilities
* Gasoline (30 percent in addition to current taxes, which would not be repealed)
* Legal fees

At today’s prices, gasoline would cost almost $1 per gallon more. A $150,000 new home would run $195,000 – plus the 30 percent tax that the buyer would pay on the interest on the mortgage. In short, the FairTax taxes everything that one buys, with the one notable exception of education. Any exceptions to the tax base (for instance, eliminating rent or credit card interest from the tax base) would require an offsetting increase in the rate. We stand behind our earlier analysis of the FairTax. The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax. And it is revenue-neutral only through an accounting trick. It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair." http://www.factcheck.org/taxes/unspinning_the_fairtax.html

When calculating consumption taxes (i.e., sales tax) you calculate it on an inclusive basis. When calculating an income tax you calculate it on an exclusive basis.

How then would you compare two different items in terms average individuals could comprehend ... unless you speak in the same terminology.

So to compare apples to apples instead of apples to oranges you speak to tax inclusive, as folks are familiar with this for sales tax. You try to muddy the waters by attempting to explain that with the income tax you pay less is less as a percentage. Throwing percentages around and talking incessantly about the different dollar amounts calculated does one thing ... it confuses people

The income tax can actually discourage work and savings. What does the consumption tax discourage ... possibly working, but not if you want to eat. But it could and would discourage buying luxuries maybe. A consumption tax would not discourage savings.

Now an income tax with all its exemptions and exclusions and deductions further sullies the rate as it allows the rich to shelter portions of their income from taxation, something the 'Average Family' can't do (to the same extent). A flat tax doesn't cure it because it would be on earned income ... it wouldn't touch some of the investment income that the wealth have had for years (stocks, bonds, trusts).

Although the FairTax isn't perfect it is more perfect than the present IRS code and more palatable than a Flat Income Tax. Could we work together to better the FairTax instead of changing one outmoded Income Tax for another of the same. Our efforts would be better spent.

Which version of the Flat Tax is your favorite; 1) Armey-Shelby; 2) Steve Forbes; 3) Hall and Rabushka; 4)Wyden and Emanuel; 5) Arlen Spector's; 6) Milton Friedman's Negative Income Tax; 7) The Kemp Commissions Plan; 8)Phil Graham's Plan; and there are others.

There are questions: A) Does the Flat Tax get rid of any other taxes now in existence? Say Capital Gains or AMT.; B)How 'generous' is the allowance/exclusion going to be up front?; C) What exemptions, if any are in the plan?; D) What is the rate of tax?; E) Is it a flat tax on income or on consumption?; F) Where are business in the tax, in or out?; G) The Flat Tax is a form of a Value Added Tax (VAT) - so what stops business increasing the costs?; H) Will the Flat Tax end companies participation in pension funds without a deduction?

Many many questions go unanswered because there are so many competing Flat Tax proposals.

There is confusion about the rates because we are not talking apples to apples. (Income tax to Income tax OR Sales tax to Sales tax). So we must look at things slightly differnt. It is not an attempt to bamboozel anyone.

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[Taken from http://fairtaxblog.blogspot.com/2004/09/inclusive-vs-exclusive-tax-rate.html]

Tuesday, September 28, 2004

Inclusive vs Exclusive tax rate

The FairTax is a 23% inclusive sales tax. It's important to understand what that "inclusive" means so that you understand what the rate really means. When you compute a tax on a dollar you can either compute it inclusively or exclusively.

For example, the sales tax you are used to at the cash register today is an exclusive rate. The rate is applied to the price you pay exclusive of the tax applied. So if you are used to a state sales tax rate of 8% and you purchased something that was worth a dollar you would pay $1.00 + 8% of $1.00 = $1.08.

The income tax you pay is usually computed as an inclusive rate, it is applied against the dollar you earn inclusive of the amount you are paying in taxes. So if your income tax rate is 25% and you earn $1.00 then your tax is $0.25 and you get to keep $0.75.

The FairTax 23% sales tax rate is an inclusive rate. What this means is that I hand the cashier $1.00 to pay for something then $0.77 goes to pay for the good, and $0.23 of goes is paid in taxes. This is different than the way you are used to thinking about sales taxes. The reason the FairTax rate is quoted this way is to assist in comparison with current payroll and income taxes.

If you earn $1.00 but pay 15.3% in payroll tax and 10% in income tax, but have no federal sales tax then your purchasing power per dollar earned is $0.747.

If you earn $1.00 under the FairTax but and pay 23% inclusive in sales tax for a retail purchase of a new good or service then your purchasing power per dollar earned is $0.77. Please note however that your purchasing power per dollar earned for used goods is $1.00. Also remember that for every dollar that you earn and choose to save or invest you get $1.00 worth of savings and investment.

So quoting the FairTax rate inclusively makes it easier to compare the FairTax with the existing income tax, but makes it harder to compare it with the existing sales taxes. Just to make things clear, the exclusive rate for the FairTax is 30%.

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They may be tax but all taxes are not the same. All taxes have theirown unique attributes which do not easily compare even to other taxes. So an analogy is made in order using the terms attributable to one tax to explain another.

The bottom line result is the ultimate dollar amount of tax is the same. The rate is different but the result is the same.