What Is The Fair Tax And How Could It Affect Businesses?

As part of the dealmaking that secured him enough votes to become speaker of the U.S. House of Representatives, Rep. Kevin McCarthy (R-Calif.) committed to holding a vote on the House floor on the Fair Tax plan, which has been reintroduced this Congress by Rep. Earl Carter (R-Ga.).

Though Fair Tax legislation was originally introduced more than two decades ago, it never has received a vote on the House floor.

What would this bill do? As the nonpartisan, nonprofit Tax Foundation has explained, the Fair Tax proposes replacing all major sources of federal government revenue — the individual income tax, corporate income tax, estate and gift taxes, and payroll tax — with a national sales tax and rebate. It also proposes to abolish the Internal Revenue Service (IRS). The bill would result in a tax-exclusive sales tax rate of about 30 percent (29.8 percent), meaning for every $1 spent, taxpayers would pay about 30 cents in sales taxes to the federal government. That rate would apply to all goods and services — everything from grocery store items to automobiles.

Because there would be no IRS, the bill would outsource the administration of the national sales tax to the governments of the 50 states and the District of Columbia. Currently, 45 states and the nation’s capital collect statewide sales taxes. In states without a sales tax, the Secretary of the Treasury (or another state) would administer the national sales tax.

Even if this legislation receives a vote on the House floor, it is not clear there are enough votes to pass it. And even if House lawmakers agreed to the bill, the majority of the Senate would likely vote against it. President Joe Biden also strongly opposes the legislation since it would be likely to make the U.S. tax code more regressive.