When Kevin McCarthy negotiated to the House Freedom Caucus for the speakership, one of the things he promised was a vote on Fair Tax. Dubbed the "Fair Tax Act," the bill was first introduced in 1999. Why has it not passed in 24 years? Because it's a terrible idea.
The House GOP’s new tax plan is regressive nonsense designed explicitly to shift the tax burden on the lower- and middle-income people and give the rich a massive tax break.
The bill is fairly simple. It would eliminate the Internal Revenue Service and federal income tax, instead replacing them with a 30 percent flat sales tax on all items. So, if you wanted to go buy a $10 shirt, you’d pay the $10, $.75 from Orange Counties 7.5 percent sales tax and an additional $3 to the federal government. For a total of $13.75. There's also evidence that suggests the actual tax rate would be as high as 45 percent on everything you buy.
One, for a second, might hear this and think that it balances out due to the elimination of federal income taxes. But they’d be wrong.
The median income in the U.S. is about $54,000 annually, which places an individual earning this much in the 22 percent tax bracket. But you don’t pay 22 percent on the full $54,000 – that rate only applies for about $13,000 of it. The White House estimates that the average American pays an effective tax rate of 8.2 percent. Which is why studies estimate that Fair Tax would raise taxes on 90 percent of Americans.
The major problem is pretty obvious. While the top 25 percent of income earners currently pay roughly 88.5 percent of the total income tax revenue collected by the federal government (don’t feel bad for them – they make 70.7 percent of the total income), the top 20 percent only account for 40 percent of total consumer spending. Fair Tax is thus a massive redistribution of the tax burden downwards onto low income Americans.
Also, because the bill gets rid of the IRS, every state now has to build and fund its own mini IRS to collect this tax and give it to the federal government. They would also no longer have access to federal payroll information because, again, no IRS.
Proponents counter that the bill helps mediate the additional cost to taxpayers through a “prebate” where essentially everyone would get a check mailed to them every month, à la COVID-19 stimuluses.
Fair Tax is a bad idea put forth by a bunch of far-right nuts without a prayer of passing. This is also a prime example of the GOP shooting themselves in the foot, and Democrats need to take advantage of it.
