NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Jonathan Haughton

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December 2006Taxing Sales Under the FairTax: What Rate Works?
with Paul Bachman, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, David G. Tuerck: w12732
As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level. Bill Gale (2005) and the President's Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. This study, which builds on Gale's (2005) analysis, shows that a 23% rate is eminently feasible and suggests why Ga...

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