Considering this will never pass, and they know that, I don’t get the Republicans’ thought process here. The ads write themselves: “You know how your groceries have gotten more expensive? Rep so-and-so just voted to add another 23% on top of that!”
“I voted to eliminate all income taxes, eliminate the IRS and close all the loopholes so the rich elites pay their fair share.”
I agree, there doesn’t seem to be anything unconstitutional about this year’s Fair Tax Act (H.R.25, 118th Cong.).
Worth noting that the exact same bill was put forward last year, and it only garnered 30 cosponsors out of the 211 Republican members in the House. And this year’s has even fewer. It’s been proposed one way or another since 2005. It’s not going anywhere, it will die in Ways & Means.
One interesting thing about this bill is that the Treasury offers individual states a contract to collect federal taxes for a flat 0.25% fee.
But I suspect the biggest reason Republicans aren’t jumping on this plan is that it requires average Joe and average small business to track all spending and file taxes every month.
~Max
I see that you’ve been busy putting money away in a Roth IRA. Even been converting some traditional IRA to Roth. That’s nice. Oh, by the way, I have a bit of bad news…
It does not. Only businesses would have to report and file taxes, and any business operating in a state with sales tax is already doing it.
Individuals would no longer have to file taxes at all.
Maybe.
23%, on purchases only, with a lot of purchases exempted, is to fund all of those plus everything else the federal government spends money on? Well, maybe. Notice you’d lose the specific social security and medicare funds – they’d all have to be authorized, and re-authorized, out of the general fund.
Looks pretty likely to me, if this is intended to accomplish what I suspect it would be intended to accomplish, if it had any chance of passing.
As it doesn’t, I strongly suspect it’s just noise, intended to be able to tell people ‘I voted to get rid of income tax!’
Except for everybody self-employed or with a side gig who sells anything, presumably.
Yes, of course. Which they already do in most states.
Not monthly, if they’re small scale enough. Is this law set up to allow quarterly or annual reporting below certain sales levels?
And farmers, currently not at all, at least in New York State, if selling only food products (other than ready-to-eat, which is taxed here.)
Unless you want your rebate, in which case yes, you need to file every month. And everybody needs to keep all receipts of all spending for 6-7 years in case of an audit.
~Max
This is inaccurate. The 23% is only fixed until 2025, after which the law sets the sales tax percentage at the sum of 14.91%, a social security rate, and a hospital insurance rate.
The social security and hospital insurance rates are to be set by SSA to raise revenue equivalent to a 12.4% social security payroll tax and a 2.9% Medicare payroll tax, respectively. This revenue is then deposited in equivalent trust funds. See section 904 of the bill.
~Max
Ah. Somewhat better. I note that they keep telling us this current rate is insufficient, though. Does the bill do the equivalent of raising the amount at which it’s no longer taken, however? And how are they going to keep track of total wages, in order to figure the amount of payroll?
Until 2025 the allocation of revenue is given as
64.83% to general revenue
27.43% to social security
7.74% to hospital insurance
After 2025, SSA is charged with determining the rates which will raise “the same amount of revenue that would have been raised by imposing a [12.4/2.9] percent tax on the [Social Security/Medicare] wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act”.
My interpretation is that SSA will find out how much money was raised in the last year before the law took effect (i.e. 2023), and predict the rates necessary to raise the same amount for each year going forward. As total taxable sales go up, the revenue goal is fixed by statute to the same number of 2023 dollars not adjusted for inflation. Meaning so long as the economy grows, tax rates go down over time, regardless of strain on the trust funds.
~Max
So I build a 3-deck 40 meter yacht. I rent it out for a week or two. Now it is “used”, so you can buy it from me for a couple hundred million and pay no tax on it.
Also, that bit about intangibles is an obvious appeasement to the wealthy. AIUI, the government balanced the budget in the 1930s with a 0.5% tax on financial instrument trading, which also helped calm the markets. Any “fair tax” on sales that ignores that is BS on the face of it.
It’s all those years of experience working in prisons.
Rich people do not spend 100% of their income. The middle class does spend close to 100% of their income. Let’s compare a realistic scenario.
Jim makes $120k to support his family. Currently, his federal tax rate works out to about 15% after deductions and averaging out the tax brackets.
Richard makes $1.5 million per year, mostly in investment income. He manages to avoid taxation on some of his money by shuffling it into tax shelters and such, and all of his dividend income is untaxed, and his capital gains are only taxed at 15%. Still there is quite a bit of income taxed at the highest tax bracket, 39%, so his total taxes are currently 23%.
Under the fair tax, Jim spends 95% of his income supporting his whole family, and saves 5%. His new tax rate works out to 22%, an increase of 7%. (his taxes have increased by about 50%)
Richard only spends 20% of his income, and still lives quite comfortably on the $300k per year. The rest of his money goes into investments, property, and corporate shells. He pays the 23% on his $300k and his total tax rate becomes 4.6%. He has decreased his tax rate by a whopping 18.4%. (or an 80% decrease from the old system)
This tax is bigly regressive.
I find this highly unlikely.
The tax code has always been more than a way of raising revenue – it’s also been a vehicle for social engineering. Congress will not want to give that up.
Realistically, how long would it be before some Senator or Rep says that some industry (which of course his state is a large part of) is suffering from unfair competition, and the way to resolve it is to reduce the tax on the products of that industry? Of course, many (most? all?) other lawmakers realize how nice it would be to cut taxes on the fruits of their own predominate industry…
It reads to me as if they’d find out how much money would have been raised in 2025 (or maybe 2026), using the same techniques that would have been used in 2023, including the same wage base – Social Security is currently taken out of wages only up to $160,200; so it’s a regressive tax, as all money earned by those who make less than that is taxed, but only some of the money earned by those who make more. One of the ways that’s often suggested for making up deficits is to raise or remove that ceiling; that language reads to me as forbidding any such change.
And, of course, you’re entirely right: if it’s not inflation-indexed it’s going to almost certainly be short even in 2025, and increasingly more so over time. Current payments are inflation-indexed, though there are often grumbles about how that’s calculated.
Yes well, that would be difficult to do in 2026 without everybody reporting annual income in 2025.
~Max
Speaking as a Canadian who frequently visits the US and probably spends 15-25 nights in the US each year, this would DESTROY tourism. 3% of GDP, 9 million jobs, $250B.
On their purchases, not their income. These un-“fair taxes” are taxes on the middle class. The poor would pay more than they do now, the middle class a lot more and the rich less. Remember, I was a Treasury Agent for 20 years.
Sure, a rich person can pay zero tax due to dodges, losses, etc, but it’s not as common as you think. And really rich people would just buy stuff from places with no such tax, or used, or as investments, or …
Exactly.
And remember who wants this tax- the people who cut the taxes on the rich and just passed a bill to cut the IRS budget by a huge amount. The GOP knows this tax will benefit the rich.
Yeah, you really can’t have a Progressive sales tax. I mean it is possible.
And 25% wont cover both SSI and Incomes taxes, that is a “pie in the sky figure”. Last time I checked, it would have to be around 30%. And several states have a 10% sales tax.
Which mean the middle class would be paying 40% tax.
Right, Easy peasy.
Yeah, the rich would claim everything but groceries is either for business or for an investment.
We buy furniture from Ikea, rich buy it from an antique gallery or bespoke- which are “investments”.
The rate is not so bad, SocSec can be solved by just getting rid of the ceiling.
Good point.