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A Comparison of the FairTaxSM, the Income Tax,
and the Flat Tax

August 2001
Printable Version

FairTax, H.R. 25
Federal Income Tax
Pre-2001 Law
Flat Tax, H.R. 1040

16th Amendment

Proposes repeal.

No change.

No change.


Individuals do not file. Businesses need only to deal with sales tax returns.

Very complex; 20,000 pages of regulations; I.R.S. incorrect over half of the time.

Withholding continues. Individuals and businesses must still track income and file income tax forms.

Congressional Action

23% Linder/Peterson Fair Tax Act of 2001 (H.R. 2525). Employees receive 100% of pay.  Social Security and Medicare funded from consumption tax revenue, not your paycheck.

(H.J.Res45) - Will repeal the 16th Amendment.

Used by lobbyists and the wealthy for tax-breaks and loopholes.  Used by bureaucrats for social engineering.

Rep. Armey’s H.R. 1040 has some problems, but is far superior to current law. 

Cost of Filing

No personal forms are filed. Significant cost savings.

$225 billion in annual compliance costs. 1

Significant simplification ­ costs are somewhat reduced.


Un-taxes wages, savings, and investment.  Increases productivity.  Produces significant economic growth. 

Taxes savings, labor, investment, and productivity multiple times. 

Imposes a tax burden some of which is still hidden in the price of goods and services. 


Taxpayers pay the same rate and control their liability.   Tax paid depends on life style.  All taxes are rebated on spending up to the poverty level.

The current tax code violates the principle of equality.  Special rates for special circumstances violate the original Constitution and are unfair.

The flat tax is an improvement over the current income tax, but it is still open to manipulation by special interests.

Foreign Companies

Foreign companies are forced to compete on even terms with U.S. companies for the first time in over 80 years.

Current tax code places unfair tax burden on U.S. exports and fails to neutralize tax advantages for imports. 

A flat tax taxes exported goods and does not tax foreign imports to the U.S., creating unfair competition for U.S. manufacturers and businesses.

Government Intrusion

As the Founding Fathers intended, the FairTax does not directly tax individuals.

Current tax code requires massive files, dossiers, audits, and collection activities.

A flat tax still requires personal files, dossiers, audits, and collection activities.


45 states now use a retail sales tax.

The 1913 income tax has evolved into an antiquated, unenforceable morass, with annual tax returns long enough to circle Earth 28 times.

A flat tax just won’t stay flat.  Starting out nearly flat in 1913, the income tax grew out of control with top rates over 90% until the Kennedy administration. 

Interest Rates

Reduces rates by an estimated 25-35 percent. Savings and investment increase. 

Pushes rates up.  Biased against savings and investment.

Reduces rates 25-35 percent.  Neutral toward savings and investment.


Increases investment by U.S. citizens, attracts foreign investment.

Biased against savings and investment.

Neutral toward savings and investment.




Retained with reduced role.


Makes U.S. manufacturers more competitive against overseas companies.  Escalates creation of jobs by attracting foreign investment and reducing tax bias against savings and investment.

Hurts U.S. companies and decreases available jobs.  Payroll tax a direct tax on labor. 

Positive impact on jobs. Does not repeal payroll tax on jobs.

Man-hours required for compliance

Zero hours for individuals.  Greatly reduced hours for businesses. 

Over 5.4 billion hours per year.



Reduced tax rates and fewer filers will increase compliance.

High tax rates, unfairness and high complexity harm compliance

Reduced tax rates and improved simplicity will improve compliance. 

Personal and Corporate Income Taxes

Both are abolished. 


Retained in a different form.



Inhibits productivity.



Increases savings.

Decreases savings.

Increases savings.


The FairTax is highly visible and easy to understand.  No tax is withheld from paychecks.

The current tax code is hidden, embedded in prices, complex, and incomprehensible.  Taxes are withheld from paychecks.

The business component of the flat tax and payroll taxes are hidden and would be embedded in prices.  Taxes are withheld from paychecks.

[1] Testimony by the Arthur Hall, Tax Foundation and before the House Ways and Means Committee, 1998.