House conservatives are breathing new life into an old proposal to do away with income taxes, payroll taxes, estate taxes and even the IRS itself in favor of a supersized sales tax that would account for nearly all government revenues.
Versions of the far-reaching plan have been around for decades, and with Democrats controlling both the White House and Senate, the proposal has little chance of making it into law. But frustration over the $80 billion funding boost for the IRS passed by Democrats last year has Republicans wanting to make bold statements about changing the tax code — including scrapping it altogether.
The Fair Tax Act introduced by Rep. Buddy Carter (R-Ga.) and supported by 30 other Republicans would institute a massive 30 percent sales tax on all purchases in exchange for doing away with income, Social Security and Medicare taxes.
That means workers would get to keep the entirety of their paychecks without having to pay out anything to the government. But it also means that buying everything from groceries to automobiles would be hugely more expensive.
Critics of the proposal say it’s impractical and unfairly benefits the rich, while its proponents say it would provide a much-needed simplification of the U.S. tax code, the pages of which numbers in the tens of thousands.
Here are four major things to know about the GOP proposal:
The plan would increase the tax burden on the middle class
Having a sales tax as the only source of public revenue would put a higher tax burden on people making less money. That’s because those with lower incomes tend to spend more of what they make while richer people tend to save more of their incomes, 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.
The advantage to higher earners 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 is a smaller tax burden for the highest and lowest earners and a bigger one for people in the middle.
A 2006 study by the House Small Business Committee on a similar proposal 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 percent of earners, whose share of the federal tax burden would fall from 84.2 percent down to 65.1 percent. People in the middle of the earning spectrum would see their share rise from 3.8 percent to 10.5 percent.
“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.
The IRS would cease to exist in its current form
Supporters of the bill are cheering on the fact that it would drastically curtail the role of the IRS in collecting taxes. Instead, it would be the responsibility of state governments to collect the sales tax and then remit it to the Treasury.
Republicans have long railed against the IRS, attacks that have ramped up in the wake of the $80 billion funding boost for the agency passed by Democrats as part of the Inflation Reduction Act, which will upgrade the agency’s budget from roughly $12 billion a year to $20 billion. Most of the new money is going to additional enforcement measures, such as audits.
“This administration tried to hire 87,000 new IRS agents,” Carter, the bill’s lead sponsor, said in an interview with The Hill. “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 he’s been hearing that Speaker Kevin McCarthy (R-Calif.) intends to bring the Fair Tax Act to the House floor for a vote as part of the deal with more conservative Republicans that eventually allowed McCarthy to win the Speakership after numerous rounds of voting.
“I’ve been hearing that this was part of the negotiations, that it would be brought to the floor for a vote,” he said, qualifying that McCarthy “made no promises to me, and I don’t know that he made promises to anyone.”
While the IRS would be sidelined, if not altogether scrapped, under Carter’s proposal, the bill would still require tax enforcement and compliance, as well as the costs that come along 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 are worried about the message the bill sends
The Fair Tax Act is just one of many bills now being considered in the Republican-led House that have little chance of getting President Biden’s signature but are designed to send a message to voters about Republican priorities.
Despite sharing in the frustration about Democrats’ IRS funding, some Republican strategists are worried that the Fair Tax proposal is sending a message that runs counter to traditional conservative stances on taxation.
Specifically, they’re worried that the change resembles a European-style value-added tax and that the bill’s prebate cash transfer program could lay the 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 worry that the sticker shock of a 30 percent sales tax encountered by voters on a daily basis will overshadow the discussion of canceling an annually levied income tax.
“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 also criticized the bill on the grounds that it would sap the life savings of retirees, who would have had their incomes taxed as they accumulated savings only to find in retirement that their spending was now being heavily taxed.
“There is no perfect system, and I understand that,” Carter said in response. “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 represent an enormous change to the tax system
Doing away with income and payroll taxes in favor of a large and pervasive sales tax would be a fundamental shift in the way the American tax system works and would likely have unforeseen economic consequences.
Some of those may be positive. Getting rid of income taxes would likely make it harder for rich tax cheats to stow their money in places where the IRS can’t find it. Instead, that dark money would be automatically taxed every time it was used to make a purchase.
Other knock-on effects might be more problematic, such as the effect of a large sales tax on consumption and spending patterns that have already been altered by the pandemic and the ensuing period of increased inflation.
“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, of the Tax Policy Center, 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,” he said.