A group of Republicans are pushing a so-called Fair Tax Act – here's how it works
A group of House Republicans are pushing to eliminate most federal taxes and replace them with a federal sales tax in a plan that would also abolish the Internal Revenue Service. But tax experts warn the so-called Fair Tax Act is not so fair to working families while giving the wealthiest Americans a break.
The bill, HR25, would eliminate all individual and corporate income taxes, capital gains, payroll taxes and estate taxes while imposing a 23% sales tax on goods and services. However, tax experts point out that the way the tax is calculated, Americans would pay closer to 30% more for everyday purchases.
John Buhl, a researcher at the Tax Policy Center, said this would hit the middle class the hardest. Currently, there are deductions, both standard and itemized deductions, that help offset the income tax, but those would be eliminated.
"Those people will see tax increases and they could be quite sizable," Buhl said of the middle three income quintiles under the plan.
While the bill would likely lead to a hike for middle-income Americans, it does include a monthly "prebate" for families depending on size and income, so lower-income families would likely not feel as big an impact — but the greatest benefits would go to those with the highest incomes.
"The wealthiest of the wealthy would actually see the biggest tax cuts from this switch," Buhl said.
Like middle-income Americans, older Americans would likely also face a greater tax burden if moved to a regressive tax system, tax experts said. The move would shift when many retirees pay taxes from when they are currently taken — upon withdrawal from retirement accounts — to purchases. Current rates are typically less than 30%, so the change in how much they pay in taxes would depend on consumption, but it could add up. For people with Roth IRA retirement accounts, there is also a threat of their money being taxed twice — since people paid taxes on the money when it was earned, and will pay again when it is spent. Students could also face a greater tax burden as they are charged at a higher rate when they buy something rather than on how much they make
The Fair Tax Act was introduced earlier this month by Rep. Buddy Carter of Georgia along with a group of conservative Republican co-sponsors, who claim the bill would simplify the tax code and make it more fair.
According to Garrett Watson of the Tax Foundation, the shift might be a simplification for an individual taxpayer because it removes having to deal with income taxation rules, but would make it more complicated for businesses.
"Some of this is just shifting where the complexity is dealt with," Watson said.
Similar proposals have been regularly introduced by a group of Republicans since 1999, but have never been given a floor vote. Some conservative Republicans have been pressuring House Speaker Kevin McCarthy to change that, given the slim GOP majority in the House.
Republicans have also been fighting to reverse billions of dollars in new funding for IRS enforcement included in the Inflation Reduction Act. But the Fair Tax Act would abolish the IRS altogether, instead outsourcing the work to states, which would be responsible for collecting the national sales taxes for the Treasury.
With the collections being transferred to states, the Fair Tax Act allows for states to keep .25% of what they collect to pay for administrative costs. The Tax Policy Center estimates this would wipe out any savings the federal government gets from the elimination of the IRS budget.
Congress is facing a looming battle over the debt ceiling as Republican lawmakers call for the U.S. to rein in spending. But tax experts believe a move to a national 30% sales tax could deepen the deficit.
As Garrett pointed out, the proposed rate was determined years ago, and so it is outdated. Some analyses over the years suggest it would take closer to a 40% sales tax for such a plan to break even. The proposal is currently broad in what goods and services Americans would pay taxes on, so any exemptions would put a further dent in collections.
Democrats Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries lambasted the Republican proposal Wednesday, claiming it would further burden families who are already being crushed by soaring inflation. Schumer said the proposal would be dead on arrival in the Senate.
"I love their 30% sales tax," President Joe Biden said sarcastically on Tuesday – also taking a crack at the Fair Tax Act during a meeting with congressional Democrats at the White House. "We want to talk a lot about that."
In a recent op-ed, the Wall Street Journal editorial board also lampooned the effort – calling the Fair Tax Act a "gift to Democratic campaigns to retake the House."