Economics Made Economical

Comparing the Fair Tax Rate To Current Rates

Let’s look at a more realistic example of tax. It’s not unrealistic for someone who is above the poverty level to be paying close to 20% from their paycheck toward federal income tax, Medicare, and SS. It’s also not unrealistic to pay a 5% sales tax on all purchases.

Again taking $100 as an easy example, you earn $100, $20 of which is kept by the federal government. You’re left with $80 that, when spent, costs you an additional $4 in sales tax. Keep in mind, too, that that $4 also came from a paycheck that had income tax removed. For $5 of work, you kept $4 and the government got the other dollar.

You go to the store and find something with an $80 price tag. You take it to the cashier who adds 5% sales tax and charges you $84. To earn that $84 you had to have been paid $105 pre-tax.

You now own an $80 item that you really performed $105 worth of work to be able to purchase. You get to have $80 to spend while the government keeps the other $25, $21 of which was taken out as income tax and $4 of which was added as sales tax.

What is the total tax rate that you paid when you earned $105 and were able to spend it on only an $80 purchase?

Inclusive tax: 25/105 = 24%–For every $105 you work for and then spend, the government makes $25 off of you, which is 24% of your total pre-tax earnings.

Exclusive tax: 25/80 = 31.25%–For every $80 worth of things you buy, the government makes $25 off of you, which is 31.25% of your after-tax usable money.

So if you are currently paying more than 5% sales tax and having more than 20% of your paycheck taken by the federal government, your total tax rate is currently at least 24%/31.25% and the Fair Tax’s 23%/30% would save you some money. Plus save you the hassle of ever having to hire an accountant again.




    1. What The Fair Tax Is Not « Econoblog
    2. Even More Benefits of the Fair Tax « Econoblog

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