House conservative have brought back an old idea to eliminate income taxes, payroll taxes and the IRS in favor off a gigantic sales tax that would become the source of almost all the governments revenue.
Different versions of the plan have been floated over the decades, but with the Republicans back in charge of the house, the proposal is surfacing once again.
The Fair Tax Act introduced by Rep. Buddy Carter (R-GA) and supported by 30 other Republicans would put a 30% sales tax on all purchases, in place of income, Social Security and Medicare taxes.
With this plan, employees would take home 100% of their paycheck. But in exchange all off your purchases, from groceries to automobiles would become awfully expensive.
While it would simplify paying taxes in America, critics say it’s a plan that unfairly benefits the rich.
Here are a few important things to weight when looking at this GOP proposal:
Middle Class Would be Hurt
The plan would increase the tax burden on the middle class and lighten the tax burden on the rich. That’s because those with lower income spend more of what they make while richer people tend to save more of their income.
So if you’re a family that needs $50,000 a year to live before you can save, but you only bring home $60,000 you’re paying a much higher percentage of your income on taxes compared to a family that makes $1 million but saves 50% of their income each year, so only 50% of their income is taxed as compared to you being taxed on 83% of your income.
The advantage to higher earners is so big that the legislation includes a “prebate,” a cash transfer program that gives taxpayers regular checks equal to the amount that people at the poverty level would owe in taxes. The result is a smaller tax burden for the highest and lowest earners and a bigger one for people in the middle.
A 2006 study by the House Small Business Committee on a similar proposal found that the tax burden for people making more than $200,000 and less than $15,000 a year would go down, while the burden for people making something in between would go up.
Moreover, the largest drop in overall tax liability would happen for the top 20 percent of earners, whose share of the federal tax burden would fall from 84.2% down to 65.1%. People in the middle of the earning spectrum would see their share rise from 3.8 % to 10.5%.
The IRS would cease to exist as is
The bill’s supporters are excited about the possibility of severly limiting the role of the IRS. Instead of send money to the IRS, the money would be collected by state governments as sales tax and forwarded to the federal government
Republicans aren’t known as fans of the IRS. They’ve ramped up their attacks with the passage of the Inflation Reduction act, that increased the agencies funding from $12 billion to $20 billion per year.
Most of the new money is going to additional enforcement measures, such as audits.
“This administration tried to hire 87,000 new IRS agents,” Carter, the bill’s lead sponsor, said in an interview with The Hill. “I think that brought attention to the fact that Democrats want control. They want to have control over you and your paycheck, and this takes that control away from them.”
It’s been rumored that new House Speaker Kevin McCarthy (R-CA) is going to bring the bill to the house floor for a vote as part of the compromise he made with conservatives to finally win the speakers position.
However, without the IRS to insure enforcement, the state’s will have to ramp up their enforcement efforts. John Buhl, an analyst with the Urban-Brookings Tax Policy Center in Washington, projects there might be some savings in costs with state-level enforcement, but not much.
Conservatives sending a message
The Fair Tax Act is one of many bills being considered by the Republicans with little change of becoming law. Even if they vote it out of the House, they’ll never get the bill through the Senate and Pres. Biden would never vote into law.
have little chance of getting President Biden’s signature but are designed to send a message to voters about Republican priorities.
They’re also concerned the bill’s prebate cash transfer program could lay the groundwork for a universal basic income.
“This creates a universal basic income, and luckily the left has not figured this out yet,” low-tax advocate Grover Norquist said in an interview. “Everybody gets a check, and so you’ve got the basis for the modern definition of European socialism, which is that everybody gets a basic income and work is an option.”
They also worry that the sticker shock of a 30% sales tax encountered by voters on a daily basis will overshadow the discussion of canceling an annually levied income tax.
He also criticized the bill on the grounds that it would sap the life savings of retirees, who would have had their incomes taxed as they accumulated savings only to find in retirement that their spending was now being heavily taxed.