The FairTax is a proposed change to federal tax laws that would repeal all federal income taxes, including personal, corporate, capital gains and estate taxes, and replace them with a national retail sales tax. The proposed legislation would apply a sales tax rate of 23 percent on the transaction value of any new purchase or service.
A 23 percent rate may seem high – especially to low-income earners for whom consumption accounts for the largest portion of their take-home wages. However, it’s low-income and middle-income families who will benefit the most, thanks to the “prebate” system, which would eliminate the taxation of household necessities and make a fair tax plan more progressive.
Families would pay taxes on goods and services only if they spend above the poverty level. The amount that families would be able to spend tax free would depend on their size. For example, a family of four would be able to spend up to approximately $24,240 annually tax free.
The rebates would have the greatest effect at low spending levels, where they could lower a household’s effective rate to zero or below; at higher spending levels, the rebate has less impact.
*the effective tax rate is the rate of taxes paid post-prebate to expenditures (i.e. $6,803/$50,000)
The FairTax would see many Kentuckians benefit because of the low-income nature of the state. Kentucky currently has the fourth lowest median income in the U.S. with a median income of $41,458.
This means that many Kentuckians would see a reduction in the amount of taxes that they pay and thereby allowing them to keep more of their paycheck. With more discretionary income available, citizens across the commonwealth will be free to spend, invest and save at their choosing.