There is no area of American life that is more polarised than the tax code. Democrats want higher taxes. Republicans want to cut them in half. At least, that’s how the old story goes. However, the debate over the IRS and how much Americans should pay Uncle Sam can be more complicated.
Not all members of a particular caucus agree. Consider the FairTax Act of 2023, a new bill supported by some Republican House members but not all. The legislation’s concept — a universally applied sales tax on consumer goods and services — has been discussed for a long time. It renews itself every year, as it has this year.
Here is everything you need to know about the proposed legislation and how it works.
What exactly is the 2023 FairTax Act?
The ‘FairTax Act of 2023,’ introduced by U.S. Rep. Earl “Buddy” Carter (R-GA) in early January, proposes a national sales tax on the use or consumption of taxable property or services. The sales tax would replace current income taxes, payroll taxes, and estate or gift taxes, as outlined in Subtitles A, B, C, and H of the Internal Revenue Code of 1986.
The proposed legislation would repeal those subtitles and replace them with the Internal Revenue Code of 2023.
Though the bill specifies a 23% tax rate, the “gross payment,” which includes both taxable property and services, is closer to 30% when combined with federal taxes.
The bill, which was conceived by one faction of the Republican Party, does not yet have widespread Republican support and is unlikely to pass. It would have to pass not only the House but also the Senate, which has a Democratic majority. President Joe Biden has already stated that if the bill manages to make it to his desk, he will veto it.
How does FairTax operate?
The ‘FairTax Act,’ if passed, would result in a complete overhaul of the tax system.
The imposed sales tax would effectively replace both the payroll and income taxes. The proposed rate for 2025 is 23%, which will be adjusted in subsequent years. The states would be responsible for administering, collecting, and remitting the sales tax to the Treasury.
Among the exceptions to taxable property and services are:
property or services purchased for commercial, export, or investment purposes property or services purchased for state government functions
The tax revenues would be divided into five categories: general revenue, old-age and survivors insurance trust funds, disability insurance trust funds, hospital insurance trust funds, and federal supplementary medical insurance trust funds.
Based on certain guidelines for family size and poverty, US citizens would receive a monthly sales tax rebate — a Family Consumption Allowance.
The bill also eliminates funding for the IRS’s operations after the fiscal year 2027, which could be a stumbling block for Democratic lawmakers who have pushed for increased allocations to help with oversight.
The bill’s final provision calls for the repeal of the national sales tax if the Sixteenth Amendment, which authorises an income tax, is not repealed within seven years of the law’s enactment.