UPDATE: 2015-FairTax Prebate Explained
Most people see the prebate as just a way to untax the poor; or to convert a generally regressive sales tax into what we will come to know as the (progressive) FairTax. Those are all great and wonderful reasons to enact the FairTax but for some people it just isn’t enough. The FairTax is much, much more.
How about you take a minute to look at it from another angle? The prebate does what was mentioned above, and effectively I might add, but it also closes loopholes that the current (and any other income) tax system will leave open to corruption. Loopholes in the tax system allow lobbyists to lobby for tax breaks, they allow politicians to pick winners and losers, and they cost taxpayers money (as opposed to saving us money, which is the reason for having them). See: Solyndra!
The FairTax prebate eliminates the loopholes that our corrupt politicians exploit for their own money-making purposes. By eliminating those loopholes, the lobbyists who lobby for tax breaks have no power in DC and the politicians they employ have no strings to pull.
Because there are so many misconceptions, this page is dedicated to the FairTax Prebate.
- “The prebate is a mass welfare entitlement system for all Americans” – The prebate is no more an entitlement than our standard deductions or our current annual tax refunds are. The prebate is nothing more than a monthly tax refund instead of an annual refund; and because EVERBODY gets the same amount (based on the size/type of your family) it eliminates “class warfare” by being fair to all. If you do not wish to accept the prebate, you do not have to register for it. It is completely voluntary.
- “The FairTax is ANTI-FAMILY” – On the contrary, the prebate is PRO-Family because the amount we receive is based on the Size/Type of our family. For instance, a Married Couple with no children receives $417/mo. Whereas a Married Couple with 4 children receives $710 per month.
- “The maximum prebate per person is only $187 per month” – Actually, it’s $209 per month now. I know that doesn’t sound like a great deal, but lets put that in perspective for you: That is an additional $2,508 per year, or an extra $1.25 per hour added on to your paycheck (not including the income taxes that are being replaced too). For those of you making just over minimum wage, what could you do with an extra $1.25/hour?
- “The prebate will cost $600 Billion Dollars to administer” – I’m sure this number was rounded up, then exaggerated, then rounded up again, but the actual “Administrative cost of the Prebate” has been estimated at $486 Billion per year. BUT! Yes, there is a but. It is also estimated that the IRS and its 70,000 pages of tax code causes ~$1 trillion a year drag on our economy each year. And that doesn’t account for the $13 Trillion in annual U.S. dollars and business assets that our tax code has driven off shore.
- “The Prebate is regressive” – Actually, it is the prebate that makes the FairTax such a progressive tax. If you look at the image below titled “The Prebate Makes the FairTax a fair tax”, you will see the percentages in the column aptly named “Actual FairTax Rate After Prebate”.
- “The ‘rich’ will pay less” – See “The Prebate is regressive” (above).
- “The Prebate is a Republican scheme to un-tax the rich” – In no way does the prebate even come close to “untaxing the rich”. What the prebate does is “untaxes every legal U.S. citizen” up to the National Poverty Level (as set by the Department of Health and Human Services annually). Again, if you look at the image below titled “The Prebate Makes the FairTax a fair tax”, you will see the percentages in the column aptly named “Actual FairTax Rate After Prebate” and see that it does not “untax the rich”.
1. The prebate functions the same as the standard deduction and personal exemptions do under the current income tax. Everyone believes that life’s necessities should not be taxed. The prebate is a more efficient method of not taxing necessities than having complicated rules about what constitutes a necessity.
2. The prebate makes the FairTax a progressive tax because it untaxes the poor. While everyone pays the same tax at the retail counter, when you take into account the prebate, the effective tax rate is 0% for those at the poverty level ($26,400 for a two adult/two children family), 11.5% for the same family at twice the poverty level ($52,800), and 17.3% for the same family at four times the poverty level ($105,600).
3. Only legal residents of the United States can qualify for the prebate; illegal immigrants cannot.
4. The prebate is not a “handout”. It is the refund of taxes paid (albeit, in advance). The FairTax has no exemptions so the prebate funds the tax on spending up to the poverty up front.
5. According to the GAO, the current tax system doles out $800 billion in what are called tax expenditures (tax exemptions, deductions, preferences, loopholes, etc.). In stark contrast to the current system, and in concert with the constitutional concept of uniformity of taxation across all citizens, the FairTax treats all taxpayers equally compared to the way the current system rewards ‘friends’ with its $800 billion.
6. The FairTax prebate is estimated to be about $450 billion which would be distributed to all legal residents in an equal manner; so much per adult and child in each household. Unlike the current system, it has no marriage penalty so a couple gets double of what a single person gets, and they both get the same amount for each child.
Karen Walby, Ph.D.
Director of Research
In the Bill (HR-25)
- ‘CHAPTER 3–FAMILY CONSUMPTION ALLOWANCE
Previous Prebate Posts
Testimony Submitted by Dr. Karen Walby
Chief Economist, Americans For Fair Taxation
To the House Ways and Means Committee
Hearing on Tax Reform and Consumption-Based Tax Systems
July 26, 2011
Purchase of Living Essentials Tax-Free via the Prebate
Under the FairTax, all Americans consume what they see as their necessities of life free of tax. While permitting no exemptions, the FairTax (HR25) provides a monthly, universal prebate to ensure that each family unit can consume tax-free at or beyond the poverty level, with the overall effect of making the FairTax progressive in application. This is not an entitlement, but a rebate (in advance) of taxes paid – thus the term prebate. Everyone pays taxes at the cash register.
Although everyone pays the same tax rate at the cash register, the effect of the prebate is to increase effective tax rates (annual taxes paid divided by annual spending) as the level of spending increases, a progressive tax rate structure. For example, a person spending at the poverty level ($29,420 for a family of four) has a 0% effective tax rate, the prebate rebates all of the taxes they paid. Whereas someone spending at twice the poverty level has an effective tax rate of 11.5%, and so on.
Administering the prebate under the FairTax would also be far simpler than administering the EITC, credits, or deductions under the current system – far cheaper and far less intrusive. The cost to administer the prebate is miniscule compared with the combined compliance costs and administrative burden of the income tax. When the state sales tax authorities process the prebate applications they will validate all names and Social Security numbers against the Social Security Administration (SSA) database. States already do this in relation to the administration of other state/federal cooperative programs such as unemployment benefits and child support enforcement. The states will submit the prebate distribution file to the SSA which will provide the prebate in the form of a paper check via U.S. Mail, an electronic funds transfer to a bank account, or a “smartcard” that can be used much like a bank debit card—already in use to provide other federal benefits.
The prebate is estimated to be about $500 billion, which is a much smaller figure than the estimated cost of all the deductions, exemptions, and tax credits under the current income tax system. For 2006, the total of all of these tax breaks exceeded $945 billion (estimate by the Joint Committee on Taxation). The FairTax provides for both civil and criminal penalties for knowingly filing a fraudulent prebate application. The civil penalty is equal to the greater of $500 or 50 percent of the claimed annual prebate amount not actually due plus repayment of any falsely due prebate amounts. A criminal penalty of imprisonment for up to one year may also be imposed.
1. Who will administer the Prebate? As of the FairTax Act of 2011, per ‘Sec. 304 (link above): “The Social Security Administration shall provide a monthly sales tax rebate to duly registered qualified families in an amount determined in accordance with section 301.” Smartcards and Direct Electronic Deposit Permissible- The Social Security Administration may provide rebates in the form of smartcards that carry cash balances in their memory for use in making purchases at retail establishments or by direct electronic deposit. Rumor also has it that the prebate will be administered through either a Visa or Mastercard Credit Card system for simplicity.