According to proposed policy, every household of the United States is also eligible to receive a sales tax rebate each month. This rebate is equal to the product of (1) the sales tax rate of 23% and (2) the family consumption allowance divided by twelve. One of controversial aspects of the FairTax reform is the ability to be revenue-neutral, which means whether it would generate the same amount of overall federal tax revenues. Supporters of the FairTax claim the 23% rate is revenue-neutral while opponents disagree. Another common criticism of the FairTax is that it is regressive. That is, lower level income households bear a larger than equitable portion of the tax burden because most of their income is spent on essential daily need consumption items. Simultaneously, the proponents of the reform argue that the FairTax can be progressive due to exemptions or rebates. This particular paper aims to analyze both sides of the debate and provide necessary empirical evidence based on the previous literature research regarding the controversial nature of the FairTax.
In The Wealth of Nations, Adam Smith, the father of modern economics, laid out certain criteria forejudging tax structures and tax policies. Specifically, he felt that equity, explicitness, simplicity of compliance, and economy of administration should be the cornerstones of any tax system. The current federal tax system is criticized as being too complicated and unfair (Slemrod, 58). Efforts to simplify the current tax system, e.g., Tax Reform Act of 1986, are often viewed as ineffectual in creating a fairer or simpler system (Hite and Roberts, 121). For example, the President's Advisory Panel on Federal Tax Reform (2005) points out that "our current tax code is a complicated mess. Instead of clarity, we have opacity. Instead of simplicity, we have complexity. Instead of fair principles we have seemingly arbitrary rules. Instead of contributing to economic growth, it detracts from growth" (20).
Consequently, many federal tax reform plans have been proposed, including a variety of consumption-based plans such as a flat tax, a value-added tax (VAT), and a national retail sales tax. The idea of replacing the federal tax system with a national retail sales tax has been increasingly discussed in the United States since the 1990s. Among the various national retail sales tax proposals, the FairTax legislation introduced by House Representative John Linder and Senator Saxby Chambliss has attracted more cosponsors than any other fundamental tax reform bill. The legislation's formal name is the Fair Tax Act of 2007 and a number of congressional committees have heard testimony on it.
It is important to emphasize that in its essence FairTax is a retail sales tax, a form of consumption tax that is imposed on the