The Effective AEFA Tax Rate in Charts

06/23/2017

NOTE:  Best displayed on a PC.  Other systems distort the graphs!

The AEFA protects ALL Alabama citizens from taxes on the essentials of life through a Family Consumption Allowance (FCA).  This allowance is received by heads of household on or before the 1st of each month as a monthly rebate of the tax on life’s essentials.  It is simply the equivalent of the income tax standard deduction received monthly rather than as long as a year after it was accrued.   It also removes the marriage penalty experienced with the income tax.  The FCA is based on US Dept. of Health & Human Services poverty guidelines.  To be eligible, each recipient (head of household and dependents) must be a legal U.S. citizen AND Alabama resident with verifiable SSN's to receive the rebate.  It is calculated on family size, NOT income.  It is simply the HHS Poverty Level times the tax rate divided by twelve. 

The attached charts show the Prebate guidelines and several charts depicting the current income and sales tax rates vs. the effective AEFA rate based on money spent, not wages earned.  The area above the blue curve shows the effect of removing the current system.  From $0 to poverty level spending, the Prebate covers taxes at the register.  From the poverty level through the desired spending level during a year, the effective tax rate paid is the percentage resulting from the following set of formulae:

Decide your spending level (S) for the year, then multiply it by 6%.  Subtract the yearly Prebate (P) for your family size in the Schedule to determine your effective tax rate (T).

      (S * 0.06) – P = T

Here is the equation to determine your Effective AEFA Rate:

      (T/ S) * 100 = R%

For a single person, if spending is 1.5 times the poverty level of $12,060 with a yearly Prebate of $723.60 the effective rate would be:

      ($18,090 * 0.06) - $723.6 = $361.80

      ($361.80/$18,060) *100 = 2%

What is learned from this exercise?  Looking at the Effective Rate charts, notice that spending at each poverty level can be illustrated and compared to the current system.  Spending from $0 to the Poverty Level is tax free as a result of receiving the monthly Prebate on or before the 1st of each month.  1.5 times the poverty level yields a 2% effective rate, not 6%.  Twice the poverty level yields an effective rate of 3%.  Four times poverty level spending, 4.5%.  Eight times poverty level spending, 5.3%. And so forth across the spending level.  Notice also the level of spending required to reach the full 6% consumption tax rate on spending for each poverty level is at 16 times each poverty level.

On each Effective Tax Rate chart, notice the blue Effective Tax Rate curve crosses 4% at 3 times poverty level spending, the 5% individual income tax line at 6 times poverty level spending and never reaches the 6.5% corporate tax rate.  Also remember, the AEFA collects the same amount of tax at a 6% consumption rate while being collected only on new goods and services purchased at retail sales for personal use.  The rate is calculated to replace all the income taxes and sales taxes currently collected by the state.  It is revenue neutral because the tax base increases from 1.8 million Alabama income tax filers to 4.8 million residents plus everyone spending money while passing through the state.

Finally, there are three examples of this calculation for spending by a single person, two adults with two dependents, and two adults with seven dependents.


The Effective AEFA Tax Rate in Charts