New Bill Would Replace Federal Taxes With Flat Sales Tax. Here's What It Could Mean for You

The act is part of a deal between Speaker McCarthy (R-CA) and far-right Republicans.

Taxes are one of the largest considerations in an American's personal finances. But the United States tax code is widely regarded as one of the most complicated in the world. An American today may be subject to up to 12 different types of taxes across three main categories: taxes on what you earn, what you buy, and what you own. A proposal by House Republicans would change all of that. Dubbed the FairTax Act of 2023, the bill would replace a variety of federal taxes with a flat sales tax.

The FairTax Act

The bill calls for the repeal specifically of income tax, payroll tax, and estate and gift tax. In their place, a 30% tax would effectively apply to non-exempt sales across the nation. Under the bill, Americans can expect to pay 30% more at the grocery store, at the pump, and on rent. Notable exceptions to the sales tax include the sale of used property, and business or investment purchases.

RELATED: Best Tax Software

To help Americans shoulder the new tax burden, the bill calls for a "prebate" in the form of a monthly Family Consumption Allowance. The allowance, equal to 23% of the poverty threshold, would equate to $575 per month for a family of four. The allowance would be available for all citizens and many legal residents, regardless of income.

Additionally, the bill would change the tax collection structure. Instead of the current system, where the IRS collects taxes on behalf of the federal government, each state would independently collect and transfer the proceeds to the Treasury. The proposal would then abolish the obsolete IRS by 2027.

Effects of the legislation

While the FairTax Act may appear to simplify the tax code, critics of the bill argue that, despite its name, the FairTax Act would shift tax burdens to lower-income taxpayers.

Economists generally agree that sales taxes are a regressive tax, meaning that they account for a larger percentage of a low earner's income than they would for a high-income earner. The idea is that a low-income earner covering their basic necessities spends a much larger portion of their income on those expenses than a high earner would. Proportionally, a 30% tax on those goods and services would strain the income of the low-income earner much more than it would the high-income earner.

The current tax code is more progressive, in the context of taxes, meaning that it more equitably splits tax burdens across a wide variety of earners. Tax brackets effectively charge low income earners a lower rate than high income earners. Meanwhile, a variety of credits, including the standard credit, the earned income tax credit, and the child tax credit, can further reduce the tax liabilities of low-income earners. The FairTax Act proposes to do away with such measures.

Will it pass?

The short answer is no, at least not during this political cycle. Although the idea has garnered support from many prominent Republicans, a slim majority in the House would require the support of nearly every House Republican, many of whom are lukewarm on the idea. Even if the bill gained enough support to pass the House, the Democratic majority in the Senate is highly unlikely to approve the proposal. If the bill somehow beat long odds in Congress, the buck would stop with President Biden, who has said he would veto the bill.

But the idea of a rigid sales tax replacing our current tax code is not a new one, and likely will not be going away soon. The proposal first appeared in the Fair Tax Act of 1999, and seems to be popular among many Republicans, as the 23 co-sponsors to the 2023 bill can attest.

The FairTax Act of 2023 proposes radical changes to the federal tax code, which some experts consider to be unfair to low-income Americans. The bill is very unlikely to be signed into law this year, but the measure has garnered Republican support for over 20 years.