A Closer Look at the Fair Tax Act

The word "taxes" is seen engraved at the headquarters of the Internal Revenue Service in Washington, on May 10, 2021. (Andrew Kelly/Reuters)

The Fair Tax Act of 2023 is not a new idea. It was first proposed to the House of Representatives in 1999. Since then, it has been brought up again before Congress several times—this time by the Republicans in January 2023.

The main idea behind the Fair Tax Act, says FairTax, is to eliminate the Internal Revenue Service and income taxes and replace it with an across-the-board tax of 23 percent on all new purchases. One thing that likely helped to bring this act to the fore is that the IRS received $80 billion to hire 87,000 new agents to increase taxpayer customer service. It has already been funded, but the Republicans want it repealed.

The goal of the proposed fair tax is to eliminate all other taxes. If passed, you will no longer see any money taken out of your paycheck for Social Security and Medicare. Instead, you will receive 100 percent of your paycheck every time. Those proposing the act say that the new tax will cover everything and be able to maintain Social Security and Medicare at the same level. It will also pay for all government services.

The act does not, however, eliminate or reduce state and local taxes. It applies only to federal taxes.

How the Tax Works

The only time that you will pay taxes under the proposed new tax is when you buy something. All of your new purchases will have a 23 percent tax attached to them.

Instead of having multiple taxes, it combines everything into one tax. There will no longer be a federal income tax. Because of this, people can save more money—unless they spend all their income each year.

The Prebate

Ensuring the poor will not be overtaxed, the Fair Tax Plan intends to give people earning less than the federal poverty level a prebate. It is a monthly rebate that is prepaid to cover any taxes on necessities. It would help remove most of the taxes the poor would encounter for essential items.

The People It Will Affect

According to a document prepared by the U.S. Senate, the only people that will be paying this tax are those who make more than the poverty level.

The Plan and the 16th Amendment

The 16th Amendment, ratified on Feb. 3, 1913, gave Congress the right to impose a national tax. The plan intends to eliminate this amendment. If that is not possible within seven years after the bill passes, Congress says the plan and new national sales tax will be eliminated.

Elimination of Most Other Taxes

Once the Fair Tax Act is fully implemented, most other taxes will no longer be levied. It will eliminate income tax, payroll tax, estate tax, and gift tax. Some exemptions from the new national tax will apply, such as for intangible property, used property, and property used for business, investment, or export.

Advantages of the Plan

Along with making it simpler to calculate your taxes—which will no longer be necessary—the plan does have several advantages, including:

• Employees will bring home 100 percent of their paycheck, minus state and local taxes. People living in states without an income tax would bring home more money.
• The Fair Tax Act eliminates the need to fill out any more tax forms every year. All paperwork will be done by sellers and businesses. They will be responsible for collecting and forwarding to the state, which will send the taxes to the government.
• There would no longer be a need for the IRS—it would be abolished. It would reduce the cost the government pays to fund it. Instead, a new government agency would have to be created to handle and dispense the money and enforce violations.
• Taxes only apply to new products or services—not used ones. Buying used products allows you to buy products without any taxes. When items are purchased just for business use, there are no taxes.
• Tax audits for most individuals would be a thing of the past. The IRS will be defunded (after 2027) and no longer exist.

Disadvantages of the Plan

A plan such as this is also going to have some disadvantages, including:

• The proposed tax would be unfair to seniors who do not have any earned income, says TheBalance. They would have to pay taxes on things purchased even though they had already paid income taxes.
• There still is a huge potential for evading much of the proposed tax. Business owners just have to say they are purchasing items for their business. It gives the rich—and not-so-rich—the opportunity to create shell companies to evade taxes. They would merely have to say that their purchase is for business.
• Although the plan claims that taxes would only be 23 percent, the actual percentage of taxes would be higher. State and local taxes would have to be added to the cost, which could raise it to more than 30 percent. These additional taxes would likely need to be increased because states would have no way to know what people earn and would have to expand their tax-collecting capabilities.
• The plan favors the rich because they would not be paying any more taxes than anyone else—except for the number of purchases they make. There will be no more income tax or inheritance tax. Other taxes that would normally apply to them would no longer exist.

On the surface, it seems the Fair Tax Act might be a good deal. People living near or below the poverty level would probably be paying very little in taxes; but after looking at it more in-depth, it appears to be designed to benefit the rich.

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