Can the Fair Tax Act Stimulate Thoughtful Reform?

The Fair Tax Act is not new, but it is newly relevant. While this longstanding federal legislative proposal sparks pointed opposition, these discussions shed light on fundamental flaws in the U.S. tax system that require a more effective overhaul.

The Fair Tax Act, which appears headed to a House floor vote at some point this year, is politically contentious – not only between Republican and Democrats, but also within the Republican party. Given that heated political issues sometimes veer from the facts, it is important for tax leaders to keep the following in mind:

• The proposal is sweeping: The FairTax Act would do away with the corporate income tax, payroll tax, individual income tax, and estate and gift taxes; it also would abolish the Internal Revenue Service (IRS). In place of those taxes and oversight, a national sales tax and rebate would take effect. The new national tax on sales would apply a 23 percent tax on gross receipts. The rate is tax-inclusive, which means that it would translate to an effective rate of 30 percent. State sales taxes would remain in force. In place of the IRS, the proposal calls for outsourcing the administration of the national sales tax to states that collect sales tax (and to the Secretary of the Treasury, or another state, in states without sales taxes). The proposal would create two new agencies within the Department of the Treasury: an Excise Tax Bureau and a Sales Tax Bureau. A more comprehensive rundown of the proposal is available on the Tax Foundation’s Fair Tax FAQs page. 
• The Fair Tax Act is not new: The proposal has been introduced in every Congress since 1999. On January 9, 2023, Rep. Earl “Buddy” Carter (R-GA) introduced it again.  Since its initial introduction 24 years ago, the bill has not reached a house vote once (or, for that matter, received a hearing). The Fair Tax Act’s newfound attention stems from widespread reporting that the House Speaker committed to holding a House floor vote on the Fair Tax Act. 
• Nor is it likely to become law: President Biden has indicated he would veto the bill if it passes Congress, which remains highly unlikely.  Grover Norquist – who is no fan of the IRS or the federal income tax – estimates that 90 percent of House Republicans would vote against the bill, which he also says, “would stand no chance” in a Senate vote. “Replacing our current tax code with a national sales tax would create a system of double taxation on retirees,” Norquist writes in The Atlantic. The Wall Street Journal’s editorial writers also expressed strong opposition to the Fair Tax Act, encouraging the Ways and Means Committee to kill the proposal. 

That said, the Fair Tax proposal’s staying power suggests that the U.S. sales tax system has some major flaws, including a narrowing tax base, a tendency to stick it to lower-income taxpayers and tax pyramiding. Leading voices on taxes, like the Tax Foundation and the State Tax Research Institute, are aware of these issues and furthering thoughtful discussions and research concerning potential fixes.