A true comparison
During U.S. Rep. Chet Edward's question-and-answer session on local radio this week, I heard a common misrepresentation in reference to the fair tax. Edwards said that one negative of the fair tax is that it was really a retail sales tax of not 23 percent but 30 percent. Which is true? Is the fair tax a 23 percent or a 30 percent tax?
Remember that those who would oppose the fair tax want to use the more threatening 30 percent to discourage support. In truth, the explanation for the discrepancy in expressed percentage lies in economic terminology, not in dollars paid.
Economists express taxes as inclusive or exclusive. Let's use our current income tax system and express the tax in two ways. If you earn $100 and pay $23 income tax (23 percent tax) you keep $77 and the tax is $23. This expresses the tax as tax-inclusive. Now express the same tax as tax-exclusive. The same $100 is earned and $23 is subtracted (excluded) from the $100; therefore the rate is $77 per $100 or 30 percent ($23 divided by $77 equals 29.87 percent). The end result is that you keep $77 and the tax is $23. The only thing that changed is the way the tax is expressed.
The fair tax is expressed as an inclusive tax so that it can be compared to our current income tax, which is also expressed as an inclusive tax. It is the only fair way to compare them. As a scare tactic, many who oppose the fair tax want to express income tax on an inclusive basis and the fair tax on an exclusive basis.