Imagine this: Instead of paying federal taxes to the IRS, you pay them to your local cafe every time you buy a latte or to your supermarket when you make a grocery run — or to countless other businesses when you make purchases.
That’s a future proponents of the Fair Tax Act would like to see. The idea of implementing a national sales tax in lieu of our current federal tax apparatus is once again gaining steam after Rep. Buddy Carter (R. Ga.) introduced the bill to the House of Representatives earlier this month, and House Speaker Kevin McCarthy has agreed to bring the bill to a vote.
“This bill will eliminate the need for the [IRS] entirely by simplifying the tax code with provisions that work for the American people and encourage growth and innovation,” Carter said in an announcement.
The Fair Tax Act is unlikely to become law due to opposition from Democrats, and President Joe Biden has already said that he will veto the bill if it does manage to pass both the House and the Senate.
Still, the proposal has many wondering what a national sales tax or "fair tax" would look like.
What does the Fair Tax Act propose?
In its current context, the Fair Tax Act is partially a response to the Inflation Reduction Act, a sprawling tax and climate law that — among many things — provides the IRS with $80 billion. The agency is expected to use the funds to hire 87,000 IRS agents to crack down on tax evaders and modernize outdated processes.
In his announcement, Carter said that the infusion of billions of dollars will “weaponize the IRS against small business owners and middle America” and that the Fair Tax Act would abolish the IRS altogether.
However, the act proposes much more than dismantling the IRS, and the framework has been around for decades. In its current iteration, the Fair Tax Act would get rid of every type of current federal tax — including payroll, self-employment, estate, death and corporate taxes — and replace them with a nationwide 23% retail tax that happens at the checkout counter for new goods and services.
According to Americans For Fair Taxation, a single-issue nonprofit group that has been advocating for the Fair Tax since 1995, used goods and business-to-business purchases are not taxed under the plan.
The 23% rate is “tax-inclusive,” meaning the percentage you pay is calculated based on the total price of your purchase. In everyday practice, the national sales tax rate under the Fair Tax Act would effectively be 30%.
For example, if you bought $100 worth of goods at the store, you would pay $30 in sales tax, for a total of $130. The “tax-inclusive” method of calculating the rate is that $30 of $130 is 23% — not 30%.
The framework also provides for a monthly universal "prebate," in which Americans would receive a check from the government equivalent to 23% of the cost of living at the federal poverty line. This provision was designed to offset tax for the basic necessities and assist lower-income families.
How a national sales tax would work
Instead of filing your taxes to the IRS each year, the taxes you pay to the federal government would be calculated when making a purchase online or at the store. The exact amount you pay would vary depending on your spending habits, though the rate would be 23% (tax-inclusive) on purchases for everyone.
Logistically, the law would require all states to participate and start collecting the new federal sales tax — in addition to any state-level sales taxes they may already collect. According to the Institute on Taxation and Economic Policy, five states do not currently collect any sales tax and would have to implement new systems to comply.
And under the federal sales tax proposal, all retail goods would be taxed, while many states currently exempt certain types of goods from taxes like clothing and groceries.
To ensure states and businesses are complying, the Fair Tax Act would create two new federal agencies under the Department of the Treasury: an Excise Tax Bureau and a Sales Tax Bureau. They would essentially take the place of the IRS.
Would a 'Fair Tax' be better than our current system?
Proponents of the Fair Tax framework say that the system would lower taxes on families and businesses while supercharging the economy.
Americans For Fair Taxation notes that upwards of 250 million people (including tourists who would be subject to the higher sales tax) would be paying into the federal system, whereas about 155 million Americans are currently filing federal taxes. AFFT also estimates that the plan would unleash economic growth. In the first year of implementing the plan, the organization says GDP would balloon by 10.5%.
Not everyone is sold on the concept, though, and projecting how such a fundamental change to the U.S.’s tax system is difficult for researchers.
“There is no historical precedent for a country to enact a high-rate, enforceable, national sales tax,” an analysis of the Fair Tax from the Brookings Institution states. “That does not mean it is impossible, but extreme caution would be appropriate.”
In contrast to AFFT’s estimates, the Brookings report suggested that GDP growth would be much more moderate — up to 2% over 10 years. Additionally, the top 1% of earners in the country would receive an average tax cut of $75,000, according to Brookings, while the bottom 90% of earners would see a tax hike.
The analysis noted, however, that if households are grouped together by consumption level (and not by income), the bottom two-thirds would see a tax break, and the top third would pay more overall — but with the households at the top still receiving a tax cut of about $75,000.
Because of the lack of precedent domestically or internationally, it’s unclear exactly how a national sales tax would change household budgets and the U.S. economy, though the debate is sure to rage on. The Fair Tax version of a national sales tax was first introduced in Congress in 1999 and has been re-introduced in each subsequent session of Congress since then. But the concept is older still. In the early 1980s, one MIT economist even argued that a national sales tax was a way to slow the economy down, reducing inflation and boosting the national savings rate.