Fattening up Take Home Pay

One of the most attractive elements of the FairTax idea is the fact that after enactment, Americans will take home their whole paycheck, free of federal withholding of income taxes and Social Security and Medicare payroll taxes. This increase in “take home” pay will act as a permanent economic stimulus.

Some perennial critics who seem to live only to pick at the FairTax proposal have suggested that it is misleading to use the shorthand, “take home your whole paycheck” because health insurance co-payments, retirement fund deductions and state and local taxes are often also withheld from paychecks and won’t be affected by passage of HR 25, the FairTax legislation now pending in Congress.

In an effort to be crystal clear that paychecks will get much larger after enactment of the FairTax, recent communications have almost always appended the statement “…free of federal withholding and payroll taxes.” Naysayers aside, the largest deductions from most people’s paychecks are Social Security taxes (7.65%) and income tax withholding. The elimination of these two federal taxes withheld from your take home pay will dramatically increase most Americans' paychecks. Even for those whose income is so low that no income tax payments are withheld from paychecks, the additional almost eight percent in take home pay can be a lifesaver.

For the self employed, the effect of elimination of federal payroll taxes and withholding can be far more dramatic. The self-employed pay a full 15.3% of wages up to about $100,000 of annual earnings toward FICA (Social Security and Medicare) taxes. Income tax payments are made not out of every paycheck but are estimated and paid quarterly. Both erasing the “self-employment” tax, as the FICA payments are commonly called for this group, and the elimination of quarterly and annual income tax payments can mean a very dramatic increase in funds available to the self-employed.

Most American workers live somewhere between the two extremes and will also see dramatic increases in available income for savings, spending, investment and peace of mind. In essence, the FairTax allows each American to decide, through personal consumption choices, the timing and amounts of federal taxes paid. To see what your paycheck will look like after enactment of the FairTax, just take a hard look at your own pay check “stub” and add back into your future take home pay the amounts now withheld for FICA payments and income taxes.