A group of House Republicans is pushing 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 that 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 personal and corporate income, capital gains, payroll 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 close to 30% more for everyday purchases.
John Buhl, researcher at the Tax Policy Centre, 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 they will be eliminated.
“Those folks will see tax increases, and they could be pretty big,” Buhl said of the middle three income quintiles under the plan.
While the bill would likely result in an increase for middle-income Americans, it includes a monthly “prebate” for families based on size and income, so lower-income families likely won’t feel as big of an impact — but the biggest benefits would go to those with the highest income.
“The richest of the rich would actually see the biggest tax cuts from this transition,” Buhl said.
Like middle-income Americans, older Americans are also likely to face a greater tax burden if they are moved to a regressive tax system, tax experts said. The movement will change when many pensioners pay tax from when they are currently taken – when withdrawing from pension accounts – to buy. Current rates are usually less than 30%, so the change in how much they pay in tax will depend on consumption, but it can increase. For people with Roth IRA retirement accounts, there’s also the threat of their money being taxed twice — since people paid taxes on the money when it was earned and will pay again when it’s spent. Students may also face a greater tax burden as they are charged a higher rate when they buy something instead of how much they earn
The Fair Tax Act was introduced earlier this month by Representative Buddy Carter of Georgia with a group of conservative Republican co-sponsors, who argue the bill would simplify the tax code and make it fairer.
According to Garrett Watson of the Tax Foundation, the shift could be a simplification for an individual taxpayer because it removes having to deal with income tax rules, but will make it more complicated for businesses.
“Some of this changes only 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 pushed House Speaker Kevin McCarthy to change that, given the slim GOP majority in the House.
Republicans have also fought 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 entirely, instead outsourcing the work to states, which would be responsible for collecting the national sales taxes for the state treasury.
When collections are transferred to states, the Fair Tax Act allows states to keep 0.25% of what they collect to pay for administrative costs. The Tax Policy Center estimates that this would wipe out any savings the federal government gets from eliminating the IRS budget.
Congress faces a looming battle over the debt ceiling as Republican lawmakers call on the US to rein in spending. But tax experts believe that a move to a national 30% sales tax could exacerbate the deficit.
As Garrett pointed out, the proposed rate was set years ago and is therefore out of date. Some analyzes over the years suggest that it will take close to 40% sales tax for such a plan to break even. The proposal is currently broad in relation to which goods and services Americans will pay tax on, so any exemptions will put a further dent in the collections.
Democratic Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries criticized the Republican proposal on Wednesday, arguing that it would further burden families already broken by rising inflation. Schumer said the proposal would be dead on arrival in the Senate.
“I love their 30% sales tax,” President Joe Biden said sarcastically Tuesday — also taking a swipe at the Fair Tax Act during a White House meeting with congressional Democrats. – We want to talk a lot about it.
In a recent op-ed, the Wall Street Journal editorial board also highlighted the effort — calling the Fair Tax Act a “gift to Democratic campaigns to retake the House.”