gains, alternative minimum, Social Security, Medicare, and self-employment taxes with a federal retail sales tax to be levied once at the point of purchase on all new goods and services. 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