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S. 155 (114th): Fair Tax Act of 2015

On Tax Day earlier this month, Jimmy Fallon quipped, “It’s that one day of the year when even Democrats turn into Republicans.” But, aside from the remaining GOP presidential candidates, what exactly is the congressional Republicans’ tax plan?

Although there are several competing proposals, among the most popular — with 73 cosponsors in the House — is H.R. 25 and S. 155, the Fair Tax Act, introduced by Rep. Rob Woodall (R-GA7) and Sen. Jerry Moran (R-KS).

What is the “Fair Tax”?

The plan, nicknamed the FairTax, “would repeal all federal personal income taxes, corporate income taxes, payroll taxes, capital gains taxes and gift and estate taxes, and replace them with a revenue-neutral, personal consumption tax on all retail sales of new goods and services.” The federal sales tax on purchases would range from 0 t0 30 percent depending on how much you spend in a month (more on that below). The proposal is projected to make up exactly what the federal government would lose with the elimination of the other taxes.

The details

There are some important details of the proposal that one needs to also know (and which we skipped in the original version of this article — apologies):

  1. The plan includes a monthly ~$250-$500 rebate, known a a “prebate,” that everyone would get and is only dependent on family size. It is similar to the “standard deduction” in the current income tax. The rebate is intended to completely offset the federal sales taxes paid by Americans living at the poverty line. But because all Americans would get the same sized rebate (depending on family size), it also acts to make the Fair Tax a progressive tax (a $250 rebate reduces the overall tax a lot for low-spenders but does little to help the highest spenders). (Just to hammer it in, under this Republican proposal every American would receive a monthly check from the government — go figure.)
  2. You might see the Fair Tax tax rate reported as 23% elsewhere. It’s complicated, and both are right, but 30% is the correct number to use if if you’re wondering how much you’ll actually pay on the goods you’re buying: Add 30%. Whether that means you’ll pay more or less in federal taxes depends entirely on how much you earn and how much you spend.
  3. Corporations don’t pay taxes under the Fair Tax Act, only individuals making retail purchases.
  4. Most of the new taxes would be paid the same way state and local sales taxes are paid now: at the cash register.
  5. A dramatic shift in who pays taxes and when taxes are paid will have unpredictable effects on the costs of goods, salaries, interest rates, and international trade. All of that will affect whether you do better or worse off under the Fair Tax.
What supporters say

As Moran explained in a recent USA Today op-ed column shortly after IRS Commissioner John Koskinen requested a budget increase of $530 million for his agency, "Instead of spending millions in an attempt to fix the IRS, we should abolish the agency through comprehensive tax reform.” Moran justified the plan by noting that the payroll tax elimination would allow people to retain their entire paychecks, plus the simplified plan would curtail if not eliminate the “annual frustration and confusion” every April.

As the National Review put it, “By replacing a system that taxes an individual’s earnings with one that exclusively taxes that same individual’s spending, it would allow each citizen the freedom to determine his own tax burden.” Under the plan, the IRS would end in Fiscal Year 2019.

What opponents say

But there’s a reason that all 73 House cosponsors and all six Senate cosponsors are Republicans. Democrats argue that a sales tax is regressive, meaning that it hits the poor hardest, followed by the middle class, followed up the rich — exactly the opposite of the progressive taxation most Democrats desire.

Why does the sales tax have this effect? Imagine a rich person earning 50 times more year than a poor person. While the rich person may spend slightly more than the poor person on, for example, food — more fruits and vegetables, less McDonald’s — they won’t spend 50 times more. Realistically, that’s just impossible. So as a percentage of their incomes, the poor spend more on food than the rich. The same goes for most goods, not just food: clothes, transportation, etc.

So if the same sales tax level applies to everybody —30 percent, in this case — the poor would spend a higher percentage of their income on sales taxes. CityLab illustrated this in practice with a graph using data from the Institute for Tax and Economic Policy on state and local taxes. Whether the “prebate” will entirely solve the regressive nature of sales taxes can’t really be known ahead of time.

Will it pass?

The bills have been referred to the House Ways and Means Committee and Senate Finance Committee, whether neither have yet come up for a vote. It would surely be vetoed by President Obama, although that hasn’t stopped the Republican-controlled Congress from also passing plenty of other bills in the past year which they knew Obama would veto.

Yet even if doesn’t pass, it could still prove a net gain for Republicans, as the National Review outlined: “It could allow the GOP to seize the mantle of economic populism from the Democrats, and, in so doing, to ‘win’ tax reform in the eyes of voters. That’s important, because tax-reform legislation is one of the few big, ostensibly bipartisan efforts the new Congress is expected to undertake, and the scramble to take credit for it ahead of the 2016 presidential election will be fierce.”

Last updated Apr 27, 2016. View all GovTrack summaries.

The summary below was written by the Congressional Research Service, which is a nonpartisan division of the Library of Congress, and was published on Jan 13, 2015.

Fair Tax Act of 2015

This bill is a tax reform proposal that imposes a national sales tax on the use or consumption in the United States of taxable property or services in lieu of the current income and corporate income tax, employment and self-employment taxes, and estate and gift taxes. The rate of the sales tax will be 23% in 2017, with adjustments to the rate in subsequent years. There are exemptions from the tax for used and intangible property, for property or services purchased for business, export, or investment purposes, and for state government functions.

Under the bill, family members who are lawful U.S. residents receive a monthly sales tax rebate (Family Consumption Allowance) based upon criteria related to family size and poverty guidelines.

The states have the responsibility for administering, collecting, and remitting the sales tax to the Treasury.

Tax revenues are to be allocated among: (1) the general revenue, (2) the old-age and survivors insurance trust fund, (3) the disability insurance trust fund, (4) the hospital insurance trust fund, and (5) the federal supplementary medical insurance trust fund.

No funding is allowed for the operations of the Internal Revenue Service after FY2019.

Finally, the bill terminates the national sales tax if the Sixteenth Amendment to the Constitution (authorizing an income tax) is not repealed within seven years after the enactment of this Act.