What Is the Buddy Carter Fair Tax Act?

The Buddy Carter Fair Tax Act, designated as H.R. 25, is a legislative proposal aiming to fundamentally restructure the United States federal tax system. Its central idea involves replacing the majority of existing federal taxes with a single national sales tax levied on the consumption of new goods and services. The bill, introduced by Representative Buddy Carter, also proposes to cease funding for the Internal Revenue Service (IRS) after fiscal year 2027. While the IRS would be phased out, a new federal agency would be established to administer the national sales tax.

Repeal of Existing Federal Taxes

A primary target for repeal is the federal individual income tax, which is the tax most Americans pay on their wages, salaries, and other earnings. This change would mean individuals would no longer file an annual Form 1040 with the IRS to report their income and calculate tax liability. Another major tax slated for removal is the federal corporate income tax. By eliminating this tax, the Act would shift the focus of business taxation from earnings to sales.

The legislation also calls for the repeal of all federal payroll taxes, commonly known as FICA and SECA taxes, which fund Social Security and Medicare. Their elimination would mean an immediate increase in take-home pay for workers. Finally, the bill would abolish federal estate and gift taxes, which are levied on the transfer of a person’s assets. The legislation includes a provision that would terminate the national sales tax if the Sixteenth Amendment, which authorizes the federal income tax, is not repealed within seven years of the bill’s enactment.

The National Sales Tax Mechanism

The Fair Tax Act would establish a single national sales tax as the primary revenue source for the federal government. This tax would apply to the final consumption of all new goods and services purchased by individuals. For instance, when a consumer buys a new car, a television, or pays for a haircut, the price would include this new federal tax.

Certain transactions would be exempt from this national sales tax to avoid taxing the same item multiple times. Business-to-business transactions for inputs used to create a final product would not be taxed. The tax would apply to the sale of new homes but not previously owned homes, though rent payments would be taxed. Other exemptions include used goods and educational tuition, while financial service fees would be included in the tax base.

A defining feature of the proposal is its tax rate structure. The bill specifies a 23% “tax-inclusive” rate for the year 2025, which is different from how traditional state and local sales taxes are calculated. A tax-inclusive rate means the tax is part of the total price paid. For example, on a $100 total purchase, $23 of that amount is the federal tax, and $77 is the price of the good or service itself. This 23% tax-inclusive rate is mathematically equivalent to a 30% tax-exclusive rate, which is the kind of markup consumers are used to seeing at the register.

The Family Consumption Allowance

To address concerns that a national sales tax would disproportionately affect lower-income households, the Fair Tax Act includes a provision called the Family Consumption Allowance. This mechanism is designed to prevent any household from paying federal tax on spending up to the federally defined poverty level. The allowance would function as a monthly rebate payment sent in advance to all legally resident households.

The amount of this “prebate” would be determined by household size and tied directly to the annual poverty guidelines published by the Department of Health and Human Services. Administration of the Family Consumption Allowance would be managed by the Social Security Administration, and eligible households would receive these payments automatically each month. The intent is to provide families with the funds needed to cover the sales tax on their essential purchases before they make them. Unauthorized immigrants would not be eligible to receive this allowance.

Implications for Businesses

The Fair Tax Act would fundamentally alter the role of businesses in the federal tax system. Instead of being taxpayers responsible for corporate income tax, businesses would become tax collectors for the federal government. Their primary duty would be to collect the national sales tax on retail sales of new goods and services and remit those funds. To help offset their administrative costs, the bill proposes that businesses would be permitted to retain 0.25% of the federal sales tax they collect.

This change would eliminate significant compliance burdens for companies. The legislation also has specific implications for international trade. Goods and services exported from the United States would be sold tax-free. Conversely, imported goods and services would be subject to the national sales tax when sold to a U.S. consumer. This structure is intended to tax consumption within the U.S., regardless of where the product was made.

States would be given the responsibility for administering and collecting the tax. Businesses would remit the collected federal sales tax to their respective state tax authorities, who would then transfer the funds to the U.S. Treasury. If a state opts not to collect the tax, the Treasury Department would be responsible for its administration within that state.

Funding Social Security and Medicare

A component of the Fair Tax Act addresses how the Social Security and Medicare programs would be funded following the repeal of payroll taxes. The legislation explicitly dedicates a portion of the total national sales tax revenue to these programs.

The Act specifies the exact percentage of the sales tax revenue that must be transferred to the Social Security and Medicare trust funds. The revenue stream would shift from being tied to wages and self-employment income to being tied to national consumption. The financial health of these programs would become dependent on the overall level of taxable consumption in the economy rather than the level of employment and wages.