When Rep. Kevin McCarthy (RCalif.) finally secured the votes necessary to become the next House speaker, it required concessions to dissenters within his party. Members of the House Freedom Caucus demanded, among other things, a vote on the Fair Tax Act, which has been introduced in the current session.
The Fair Tax Act, while likely doomed by a Democratic Senate and White House, represents the first serious challenge to the American tax code in recent memory. Versions of the act have been proposed since at least 1999. While it has never been voted on in the House, it has been endorsed by multiple Republican presidential candidates and Libertarian presidential candidate Gary Johnson.
The bill would overhaul the nation’s entire tax code, scrapping all federal taxes in favor of the FairTax, a 23 percent national retail sales tax. Proponents argue that the 23 percent number is comparable to a 15 percent income tax plus the 7.65 percent payroll tax rate employers pay. In return, taxpayers would keep every cent of their paychecks and only pay taxes on the money they spend.
That shift would have major and immediate consequences. Annual tax returns and W-2s would cease to exist. People who make their money on the black market would be taxed at the same rate as anyone else. The enormous compliance costs currently associated with filing one’s annual taxes would be cut significantly. With only one tax and no deductions, the entire process of funding the government would be more precise and transparent.
There are also tradeoffs. For one, around 40 percent of American households currently pay no federal income taxes, most of whom are in the bottom two-fifths of income earners. Under a FairTax system, those households would marginally increase their take-home pay but take it on the chin at the grocery store.
To account for the regressive structure of a pure consumption tax, the Fair Tax Act provides for a monthly stipend, which supporters call a “prebate.” All American citizens, regardless of need or income level, would receive a “sales tax rebate” to offset their estimated monthly tax liability for essential purchases. Currently, the Social Security Administration dispenses monthly benefits to nearly 70 million people; the Fair Tax Act would increase that number to include every single adult.*
The bill’s sponsor, Rep. Earl “Buddy” Carter (RGa.), said, “Instead of adding 87,000 new agents to weaponize the IRS against small business owners and middle America, this bill will eliminate the need for the department entirely.” Abolishing the IRS is central to FairTax supporters’ message: The cover of 2006’s The Fair Tax Book featured the agency under a red circle-slash.
Under the FairTax, however, another federal agency would have to take its place to adjudicate which purchases qualify. A retail purchase is taxed, but buying manufacturing equipment to produce retail goods is not; if a manufacturer purchases equipment but then later decides to resell it, then that would require a payment of sales tax after the fact. This post hoc transaction would presumably require a central compliance authority similar to the IRS.
The Fair Tax Act is a featured bill in the pantheon of longshot legislation. Even if supporters could get it through both houses of Congress and signed by a president, it couldn’t into effect until the 16th Amendment, which officially gave Congress the authority to tax income, was repealed. Amending the Constitution requires the assent of three-fourths of all U.S. states. The Constitution has not been amended since 1992.
*CORRECTION: Under the FairTax, the prebate would be given to every American.
