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The Fair Tax as an inclusive calculation is 23%. When an item is sold for $1.00, 23 cents is collected as tax. The store keeps to other 77 cents to cover their cost and profits. Alternately, if we do the calculation as a 23 cent tax on a 77 cent item, we get the 29.9% tax exclusive rate. So both percentages are correct for inclusive and exclusive rates respectively; however, 23% is more accurate. In addition, the rate stated in the Fair Tax act of 2005 is the 23% inclusive rate.[1]
The Fair Tax is a replacement of the present income tax system, which is also an inclusive tax. Accurate comparisons of the current income tax and the proposed national sales tax (Fair Tax) must be conducted using inclusive rates, or both rates must be converted to exclusive rates. In other words, we must compare apples to apples. Use the following equation to convert an inclusive rate (Ri) to an exclusive rate (Re).
We are more familiar with the exclusive calculations used for state sales taxes. That is fine. The above $1.00 item excludes the state sales tax, but already includes the federal tax. Once a 6% state tax is added, the total cost is $1.06.
Is it better to use an inclusive or exclusive rate? Use the method that you understand best. Today, we pay about $2.25[2] per gallon of gasoline. Part of the total pump price of gasoline in Florida includes between 45 and 53 cents per gallon of excise, sales, inspection and environmental taxes.[3] These taxes are included in the total pump price of gasoline. The pump price also includes 6% Florida state sales tax. To calculate just the state sales tax on a $20 gasoline purchase, multiply by the 5.66% inclusive state sales tax rate, resulting in the $1.13 sales tax amount.
Using the following table, we can lookup the existing federal income tax rates, and compare them to the effective Fair Tax rates. The rates are listed inclusively and exclusively, allowing us to compare apples to apples or oranges to oranges.
Marginal Tax Rates  If you are interested in the table details, it gets more complicated. However, you can simply use the last two columns to accurately compare the current income tax to the proposed Fair Tax rates for your income level on a tax exclusive basis. Alternately, you can use the middle columns to compare tax inclusive rates.
Notice how simple the Fair Tax is! The Fair Tax is a constant 23% inclusive rate or 29.9% exclusive rate. To fully understand how the table was created, you may need the help of a tax professional.[4]
[1] H.R.25/S.25, `CHAPTER 1, `SEC. 101. IMPOSITION OF SALES TAX, paragraph `(1) states, “`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.” In other words, a 23% inclusive tax rate.
[2] http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html
[3] http://www.gaspricewatch.com/usgastaxes.asp
[4] The Fair Tax replaces all the federal income taxes, including the FICA Social Security and Medicare Taxes. A comparison of marginal rates should therefore include the employees Social Security and Medicare contributions. The Social Security contributions are capped at $90,000. Accordingly, a Social Security plus Medicare rate and a Medicare only rate is listed for the 28% income tax bracket. Your tax bracket may very. Inclusion of the employers’ matching contribution would result in higher rates.
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