Should Income and Payroll Taxes be Eliminated and Replaced by a National Sales Tax? (S. 18)

What is S. 18?

(Updated August 26, 2021)

This bill — known as the Fair Tax Act — would reform the tax code by eliminating the income tax on individuals and corporations, employment taxes, plus estate and gift taxes and replacing them with a 23 percent national sales tax starting in 2019. The sales tax rate would be adjusted in subsequent years and some exemptions would exist, such as the for the purchase of used or intangible property, or services purchased for business, export, or investment, and for state government purposes. A rebate from the sales tax called the Family Consumption Allowance would be available for U.S. residents and family members based on family size and poverty guidelines.

States would be responsible for administering, collecting, and remitting the sales tax to the Treasury Dept., as the Internal Revenue Service (IRS) would no longer receive funding for its operations after fiscal year 2021. Tax revenues would go to the following:

• General revenue;

• Old-age and survivors insurance trust fund;

• Disability insurance trust fund;

• Hospital insurance trust fund;

• Federal supplementary medical insurance trust fund.

This national sales tax would be terminated if the Sixteenth Amendment to the Constitution (which authorizes an income tax) isn’t repealed within seven years of this bill’s enactment.

Argument in favor

Our current tax system is overly complex between income, payroll, and other taxes. Eliminating those and replacing them with a national sales tax would be much simpler and fairer.

Argument opposed

Eliminating the income tax would make it harder to compel the wealthiest Americans to pay their fair share. Working families may need a larger sales tax rebate than this bill offers.

Impact

The American public; states; the Treasury Dept.; and the federal government.

Cost of S. 18

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Sen. Jerry Moran (R-KS) is leading proponent of the so-called FairTax, and said the following when he introduced this bill’s predecessor in the last Congress:

“Overhauling the American tax system is not an easy undertaking, but the economic need for a leaner and fairer tax code has never been greater. Reducing costly inefficiencies and the burden of filing taxes should be a priority in this Congress. The FairTax would place all taxpayers on equal footing, protect Americans from government intrusion by the IRS, boost business growth, and incentivize savings and investment – all while collecting revenue at levels similar to those of our current mess of a tax code."

Critics of the Fair Tax say that it would be regressive and cause people with lower incomes to pay a disproportionately high amount of tax compared the proportion paid by those with higher incomes. They add that economists say the incentive to buy things "off the books" rises when sales taxes are set at as high a level they would be under the Fair Tax, which causes taxes to be hiked further to compensate for tax evaders.

This legislation has the support of four cosponsors in the Senate, all of whom are Republicans.

Media:

• Sponsoring Sen. Jerry Moran (R-KS) Press Release (Previous Version)
  
• USA Today - Sen. Moran Op-Ed (Previous Version)