Fair Tax Act Would Replace Income Tax With 30% Sales Tax

What happened

New Speaker of the House Kevin McCarthy has reportedly proposed a vote on the Fair Tax Act, according to the National Review. The bill would abolish the current income taxes, payroll taxes, and estate and gift taxes. In their place, it would impose a 30% national sales tax. Rep. Earl L. "Buddy" Carter, who introduced the bill, said that it 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" in a press release.

The bill refers to the sales tax as a 23% tax, because it would make up 23% of the final cost. Most people would likely consider it a 30% tax, because it would add 30% to the pre-tax price. For example, a $100 product would cost $130 with the national sales tax.

It's unlikely that the Fair Tax Act will be approved. Even if it passes the House and the Senate, the Biden administration has already released a statement that "if the President were presented with H.R. 23 -- or any other bill that enables the wealthiest Americans and largest corporations to cheat on their taxes, while honest and hard-working Americans are left to pay the tab -- he would veto it."

So what

Proponents of the Fair Tax Act argue that it would simplify the U.S. tax system. Americans would no longer need to spend time or money on tax preparation and could focus on other personal finance concerns. The elimination of the IRS could also reduce government spending.

Critics, on the other hand, argue that the proposed tax is regressive, because it disproportionality affects those with lower incomes. A study by William G. Gale of the Brookings Institution claims that the Fair Tax Act would cause taxes to rise for 90% of households. Only households with incomes in the top 10% would get a tax cut, and the top 1% would save over $75,000, on average.

Now what

Since the odds of the Fair Tax Act passing are low, the current tax system probably isn't going anywhere. And while tax filing can be laborious, it's important to know how to do it and how to reduce your tax burden. Here are a few tips to help:

• Pick a quality tax software. Make sure to find one you're comfortable with, because doing your taxes is easier if you use the same software every year. If you want to keep costs down, there's some good free tax software for filers with simple tax returns.
• Maximize your tax deductions. Contribute to a 401(k), individual retirement account (IRA), or both, as these allow you to reduce your taxable income.
• Get tax help if you need it. For example, if you have a complex tax return, or you just want to save time, you could outsource taxes to an accountant.