House conservatives have reintroduced an old proposal which would do away with income, payroll, and estate taxes and even the IRS itself, instead adopting a supersized sales tax which would account for nearly all government revenues.
The far-reaching plan has been around in various forms for several decades, but with Democrats controlling both the White House and Senate, it’s unlikely that the proposal will make it into law.
Frustration over the $80 billion funding boost to the IRS, which was passed by Democrats last year, has led Republicans to make bold statements about changing the U.S. tax code, which could go as far as scrapping it altogether.
The Fair Tax Act was introduced by Rep. Buddy Carter (R-GA) and was supported by 30 other Republicans. It would institute a 30% sales tax on all purchases, a significant increase, but would do away with income, Social Security and Medicare taxes.
This would mean that workers could keep the entirety of their paychecks without having to pay anything to the federal government, but everything from groceries to cars would become significantly more expensive.
The proposal’s critics say it’s impractical and unfairly benefits the rich, but supporters say it would provide a much-needed simplification to the U.S. tax code, a document with tens of thousands of pages.
One of the biggest changes is that the bill would increase the tax burden on people in the middle class. The bill would impact those who have lower incomes more than it would those with higher incomes. This is due, in part, to the fact that those with lower incomes tend to spend more of what they make, while richer people are more able to save more of their income, investing in retirement accounts, securities and other types of assets.
“Let’s say you’re a family of four. You need at least $50,000 a year to live before you can save a dime. Under this proposal, every dollar of that income is going to be taxed. On the other hand, if you’re making $1 million a year and you’re saving a portion of that, not all of that income is going to end up being taxed as a sales tax,” Frank Clemente, director of tax advocacy organization Americans for Tax Fairness, said in an interview.
Higher earners are given an advantage that is so pronounced that the legislation includes a “prebate,” a cash transfer program in which taxpayers get regular checks equal to the amount that people at the poverty level would owe in taxes.
The result of this is that the tax burden for the lowest and highest earners in the country is decreased, while people in the middle are left to shoulder the brunt of the burden.
A 2006 study was done by the House Small Business Committee, regarding a similar proposal. It found that the tax burden for people making more than $200,000 and less than $15,000 a year would go down, while the burden for people making something in between would go up.
Moreover, the largest drop in overall tax liability would happen for the top 20% of earners, whose share of the federal tax burden would fall from 84.2% down to 65.1%. Middle class individuals and families would see their share rise from 3.8% to 10.5%.
“Basically, a big challenge with the Fair Tax is … you end up with higher taxes paid by incomes on the low and middle parts of the income scale under consumption taxes than higher earners,” policy analyst Garrett Watson of the Tax Foundation said in an interview.
One of the other biggest changes, which many Republican supporters are cheering, is that the bill would drastically decrease the role of the IRS in collecting taxes, making it the responsibility of state governments to collect the sales tax and remit it to the Treasury.
The IRS has long faced criticism from Republicans, which has only accelerated after the Inflation Reduction Act increased their funding by approximately $80 billion. Most of that new money is going to additional enforcement measures such as audits.
“This administration tried to hire 87,000 new IRS agents,” said Carter, the bill’s lead sponsor. “I think that brought attention to the fact that Democrats want control. They want to have control over you and your paycheck, and this takes that control away from them.”
The Georgia Republican said that Speaker Kevin McCarthy (R-CA) intends to bring the Fair Tax Act to the House floor for a vote, in part due to negotiations with House Republicans who held out against voting for him and eventually allowed McCarthy to win the speakership in return for multiple concessions.
“I’ve been hearing that this was part of the negotiations, that it would be brought to the floor for a vote,” he said, adding that McCarthy “made no promises to me, and I don’t know that he made promises to anyone.”
This would prompt the IRS to be sidelined, if not scrapped altogether, but the bill would still require tax enforcement and compliance and the costs that come with it.
“If we optimistically assume that the Fair Tax brings in roughly the same amount of revenue (as a share of the economy) as the current tax code, annual collection fees per year for states would approach $10 billion. By comparison, the IRS spent about $13 billion per year over the last decade,” John Buhl, an analyst with the Urban-Brookings Tax Policy Center in Washington, wrote in an analysis of the measure.
Some conservatives have also expressed some concern about the message the bill sends, saying that it is just one of many bills that are being considered in the Republican-led House that have little chance of passage at the hands of President Biden but are designed to send a message to voters about Republican priorities.
Although frustrated with IRS funding from Democrats, some Republican strategists are concerned that the Fair Tax proposal sends a message that is counter to traditional conservative stances on taxation.
They are specifically concerned that the change resembles a European-style value-added tax and that the prebate cash transfer program could begin to serve as a groundwork for a universal basic income.
“This creates a universal basic income, and luckily the left has not figured this out yet,” low-tax advocate Grover Norquist said in an interview. “Everybody gets a check, and so you’ve got the basis for the modern definition of European socialism, which is that everybody gets a basic income and work is an option.”
They also expressed concern that the 30% sales tax that voters will see on a daily basis will overshadow the discussion of the annual income tax’s cancellation.
“The ads you can run are that so-and-so wants to add a 30 percent sales tax on top of [prices], which will be devastating to middle-income people. That’s a pretty rough ad,” Norquist said.
He added that the bill would hurt retirees, who had their incomes taxed while they accumulated savings and would now be heavily taxed in retirement.
“There is no perfect system, and I understand that,” Carter admitted in response to Norquist’s comments. “But at the same time, this is as close to perfect as we’re going to get because this gives people the opportunity to control their own paychecks.”
The bill would serve as a major shift in the way that the American tax system operates at large and would likely have unforeseen economic consequences.
While some of those may be positive, such as making it more difficult, if not impossible, for rich individuals to get out of taxes by storing their money in places away from the IRS.
But other effects may have more issues, such as the effect of a large sales tax on consumption and spending patterns, which have been shifted by the pandemic and the increased inflation seen during the Biden presidency.
“Having that high of a rate would actually change behaviors in ways that proponents aren’t really thinking about. It’s going to change behavior in ways that you wouldn’t see if you spread out the burden differently,” Buhl said. “The proponents of the bill are saying, ‘Hey, we’re going to abolish the IRS.’ But I look at it more as they’re actually just outsourcing tax enforcement and compliance to the state level, and so it’s not going to go away.”