What Is the HR 25 FairTax Act of 2023?

The FairTax Act of 2023, H.R. 25, is a legislative proposal to reshape the United States federal tax system. Introduced on January 9, 2023, the bill seeks to replace existing federal taxes with a single national retail sales tax. This concept proposes a shift from a system that taxes income to one that taxes consumption. The objective is to repeal individual and corporate income taxes, payroll taxes, and transfer taxes, funding the government through a tax on the final consumption of new goods and services.

Federal Taxes Repealed by the Act

The FairTax Act proposes the complete elimination of a wide array of federal taxes. This change would mean that individuals would no longer have federal taxes withheld from their paychecks or be required to file annual income tax returns detailing their earnings. The legislation also calls for the repeal of all federal corporate income taxes. The act would eliminate the following taxes:

• Federal personal income taxes on wages, salaries, and other personal sources.
• All federal corporate income taxes on net profits.
• Payroll taxes, known as FICA taxes, which are mandated by the Federal Insurance Contributions Act and are split between employees and employers to fund Social Security and Medicare.
• Federal self-employment taxes paid by freelancers and independent contractors, which are equivalent to both the employee and employer portions of FICA taxes.
• Federal estate and gift taxes on the transfer of wealth.
• The separate taxation of capital gains on profits from the sale of assets like stocks and real estate.

The National Sales Tax Mechanism

The core of the FairTax Act is a single-rate, national sales tax on the final sale of new goods and services, collected by businesses at the point of sale. The bill specifies a 23% “tax-inclusive” rate for its first year. This means the tax is 23% of the total final price paid by the consumer. For example, on a $100 total purchase, $77 is the pre-tax cost and $23 is the federal sales tax.

This calculation differs from traditional state sales taxes. When expressed in more familiar “tax-exclusive” terms, the rate is equivalent to approximately 30% ($23 is about 30% of the $77 pre-tax price). The bill provides that the rate would be adjusted in subsequent years based on federal spending.

The tax base is broad, including all new property and services purchased for final consumption, such as groceries, housing, and healthcare. To prevent tax “cascading,” where a tax is levied multiple times on the same product, business-to-business transactions for producing other goods or services are not taxed.

For instance, a car manufacturer would not pay the tax on the steel it purchases to build a vehicle; the tax is only applied when a family buys the finished car. Similarly, the purchase of used goods is exempt because the tax was paid when the item was originally sold as new.

The Family Consumption Allowance

A prominent feature of the FairTax Act is the “Family Consumption Allowance,” a mechanism designed to mitigate the tax’s impact on lower-income households. This provision functions as a universal monthly rebate, often called a “prebate,” sent to all qualifying households. The purpose of the allowance is to prevent the sales tax from being regressive by effectively untaxing consumption on basic necessities up to the federally defined poverty level.

The calculation of the allowance is directly tied to the annual poverty guidelines published by the U.S. Department of Health and Human Services (HHS), which vary based on household size. The amount of the monthly rebate is determined by calculating the estimated tax that a household would pay on spending up to the poverty line. For example, if the HHS poverty guideline for a family of four was $30,000, the annual Family Consumption Allowance would be $6,900 (23% of $30,000).

This annual amount is then divided into equal monthly payments. The distribution is specified to be handled by the Social Security Administration. Every legally residing household in the United States would receive the payment automatically each month. The system is universal, meaning it is not means-tested; every household of the same size receives the same rebate amount, regardless of their actual income or spending levels.

Administrative and Structural Changes

The FairTax Act proposes a significant overhaul of federal tax administration, mandating the complete abolition of the Internal Revenue Service (IRS). The legislation sets a specific timeline for this, stating that no funding shall be authorized for the operations of the IRS after fiscal year 2027. The act also includes a provision that would terminate the national sales tax if the Sixteenth Amendment, which authorizes the income tax, is not repealed within seven years of the bill’s enactment.

In place of the IRS, the act delegates the primary responsibility for collecting the national sales tax to state governments. States that already have a state-level sales tax would be authorized to administer, collect, and remit the federal tax on behalf of the U.S. Treasury. To compensate them for these administrative duties, states would be permitted to retain 0.25% of the federal sales tax revenue they collect. If a state chooses not to participate, the Treasury Department would be responsible for administering the tax within that state.

While the IRS would be eliminated, the bill provides for the creation of new, smaller federal bodies to manage revenue. Two new bureaus would be established within the Department of the Treasury: a Sales Tax Bureau and an Excise Tax Bureau. These agencies would be responsible for overseeing the administration of the new tax system and handling any remaining federal excise taxes not repealed by the act.

The legislation also specifies how entitlement programs would be funded. A dedicated portion of the total national sales tax revenue collected would be directly allocated to specific trust funds. Specifically, the revenue would be divided between the general revenue fund and the trust funds for Social Security and Medicare. This allocation is designed to replace the revenue stream lost from the repeal of FICA payroll taxes.