HR-25 (FairTax Act of 2019) Would Abolish The IRS, Replace With A National Sales Tax

fairtax

On January 3rd, Rep. Woodall of Georgia introduced HR-25 which is legislation that would abolish the Internal Revenue Service and get rid of federal income tax (and other federal taxes) altogether. Woodall and over two dozen other representatives who have already co-sponsored the legislation say that it will promote economic opportunity, fairness, freedom and privacy.

To be clear, this is not a new idea. It’s re-introduced habitually and sits endlessly in the Ways and Means committee. The bill, called the “FairTax Act of 2019,” has been referred to the Ways and Means committee again.

In order to replace the revenue brought in by income and other taxes, the lawmakers would replace it with a federal sales tax. That way, the less you buy, the less you pay in sales tax.

Not everything you buy would be taxed though, only new items and services not purchased for investment purposes would be taxed. Used items would not be non-taxable at the register.

What Exactly Is The FairTax Plan?

This legislation is being presented as nonpartisan legislation. It abolishes the following taxes and the Internal Revenue Service:

  • Federal Personal Income Taxes
  • Federal Corporate Income Taxes
  • Gift Taxes
  • Estate Taxes
  • Capital Gains Taxes
  • Alternative Minimum Taxes
  • Social Security Payroll Taxes
  • Medicare Payroll Taxes
  • Self Employment Taxes

In order to bring in revenue that would be lost by eliminating all of the taxes above, the FairTax plan would replace them with one federal retail sales tax. The rate of the sales tax in 2021 would be 23 percent on all taxable goods or services. The rate of 23 percent was decided on because that would allow the federal government to take in exactly what its bringing in now in all of the other taxes.

What About People Living In Poverty?

In order to address the fact that people living in poverty already can’t afford the goods and services without adding 23 percent on top of it, they developed the idea of a prebate check. This helps people who can’t afford to pay the extra tax by covering the cost of their tax for them.

Also, if you purchase used goods, you would not pay taxes on those purchases, because with the FairTax plan, any given item can only be taxed once. So, if you buy second hand shoes or a used car, it would be exempt from the federal sales tax.

In order to qualify for these prebates, the household would register annually, though registration isn’t required. It’s only required if you want to get a prebate check each month.

Who Can Get The Prebates (Also Called ‘Monthly Family Consumption Allowance’)

Actually, all families who register qualify, provided they have been issues a social security number; however, the amount of the allowance a family gets is determined by the family’s percentage of the monthly poverty level multiplied by the the rate of tax imposed by section 101 of bill.

Because of this allowance, many say that it sounds like a Progressive universal wage payment, an entitlement check or some kind of welfare, but the allowances are meant to offset the 23 percent federal sales tax, not ensure basic needs are met.

How Would This Legislation Affect You? (Check To See If You’d Get A Prebate Check)

There is an online calculator that you can use to determine the prebate check you would get. Out of curiosity, I put my own financial information into the calculator. I am not a savvy financial planner, so when I fill out employer withholding forms, my goal is usually just to avoid having to come up with a bunch of money at tax time.

When I multiplied the monthly prebate checks I’d receive (based on my family size, income and loan payments) by 12, the total is just a little more than the income tax return check I would get this year. Yet, I’d have to pay 23 percent sales tax on all goods I purchased, including groceries. In all, it would hardly affect my financial situation from an accountant’s perspective. Still, the prebate money would more than cover how much I actually spend on goods, and I’d get a substantially noticeable source of monthly income instead of one lump sum in the Spring.

How Would Normal People Afford To Buy A House?

In contrast to what many people have stated fearing the legislation, FairTax.org claims that you would avoid the federal sales tax if you bought a used home. The federal sales tax could only ever be charged once, right when you purchase the item, and only on new items.

What Would Happen To Social Security And Medicaid?

No one would lose these benefits. The only difference is where the revenue that funds these programs comes from.

Declared Congressional Findings On Federal Income Tax

The text of the bill says that according to congressional findings, the federal income tax has reduced the standard of living and slowed economic growth, impedes the country’s international competitiveness and reduces people’s savings and investments. The bill also claims that that the federal income tax imposes “unacceptable and unnecessary administrative and compliance costs on individual and business taxpayers.” They also say that given the amount of disclosure involved in filing income taxes means that people’s privacy and civil rights are violated annually.

The text of the bill further claims that since people cheat and try to find loopholes in their federal income tax filings, the tax burden for law-abiding citizens is higher. Plus, under this plan, everyone who buys new items or services gets taxed at the time of the sale whether they are getting paid under the table or legally. Even international tourists would be paying this sales tax, though they would not get a prebate check.

What Do Opponents Say?

In the past, opponents have said that the prebate program would be the largest entitlement program in American history. They say it’d be little more than a welfare program that only requires registration. This is an interesting view, given that the co-sponsors seem to always be exclusively Republican.

Others say that it’s not a progressive tax, because when looking at percentage of income verses spending, it favors the wealthy. See, a poor person may need to spend virtually 100 percent of their earnings on goods and services. A billionaire will find it incredibly difficult to spend 100 percent of their income each year. That essentially means that the wealthy are taxed at a lower rate.

Some economists argue that people will just buy less new stuff in order to avoid paying money in federal taxes. Though environmentalists like the idea of reusing goods, if no one purchased new stuff, capitalism could suffer, they argue. In essence, how would Ford fare if everyone except the very wealthy only purchased used vehicles? If people just buy less stuff, revenue would decrease, opponents say. If that happened, opponents question how would programs like Social Security and infrastructure would get funded at all.

Still others argue that taxing goods and services is an anti-immigrant tactic that would cause undocumented immigrants to see their cost-of-living rates increase by nearly 25 percent.

Have An Opinion On The FairTax Bill?

If you have an opinion on HR-25 that you would like to share with your U.S. Representative in Congress, you can search the House of Representatives online contact information database to find your legislator, their phone number or their email.

 

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