The Fair Tax is not a new proposal; it was originally developed and pushed by Americans for Fair Taxation, a group established in Houston in the mid-1990s. The Fair Tax was first introduced in Congress by then-Rep. John Linder in 1999, and it has been reintroduced in each subsequent Congress. Initially, the bill drew between 51 and 83 cosponsors. Recently it has dwindled in popularity, attracting closer to 24 cosponsors.

The Fair Tax Act of 2023 (HR 25) would replace the federal individual income tax, corporate income tax, payroll taxes, and the estate and gift tax with a national retail sales tax.

In the first year of enactment (2025), the tax rate would be 23 percent (tax inclusive), and 64.83 percent of total revenue would be allocated to general revenue, 27.43 percent to the Old-Age and Survivors Insurance and disability trust funds, and 7.74 percent to the hospital insurance and federal supplementary medical insurance trust funds. After that, the tax rate would vary based on government spending. It would be the sum of three components: a 14.91 percent sales tax to cover general fund spending, plus two variable rate sales taxes to cover trust fund spending as determined by the Social Security Administration.

The base of the sales tax would be broad, including most domestic private consumption in the United States and investment and consumption expenditures by federal, state, and local governments (including wage payments to workers).

The Fair Tax would apply to some sectors that are typically exempt from sales taxes at the state level, such as housing. Rent payments by consumers would be subject to tax, while the imputed rent homeowners pay themselves would be exempt. New home sales and improvements would be taxed, but sales of existing homes would not.

The base would also include financial service fees. All fees paid directly for services, as well as implicit fees built into interest payments, would be taxed, with the sales tax applied to interest payments exceeding a basic interest rate determined by Treasury rates. This would apply to all interest payments, including on credit card and mortgage debt.

The base of the sales tax would exclude some goods and services. Both private and state and locally provided education and training services would be exempt, under the theory that they represent investments in human capital. In addition, food produced and consumed on farms would be exempt for administrative reasons. Lastly, the Fair Tax would not apply to state and local sales taxes, but it would apply to state and local government consumption and investment spending.

The sales tax would be destination-based. As such, it would be border-adjusted and apply to all imports and exempt exports.

The Fair Tax would also enact a family consumption allowance. That allowance would be a monthly, universal, unconditional transfer payment similar to a universal basic income. The family consumption allowance is meant to cover a household’s annual consumption up to the federal poverty level and introduces a level of progressivity to the proposal. A household receives a monthly payment roughly based on the federal poverty level for that household times the tax-inclusive sales tax rate.

The proposal would eliminate the IRS and have states administer the tax. States could keep 0.25 percent of total sales tax collections to offset the cost of administration. If a state chose not to administer the Fair Tax, Treasury would administer that state’s tax. The Fair Tax would also allow businesses to keep 0.25 percent of Fair Tax collections to offset the burden of complying with the sales tax.

Finally, the bill has a trigger that would terminate the sales tax if the 16th Amendment of the Constitution is not repealed after seven years.

The above cited 23 percent rate corresponds to a 30 percent tax-exclusive rate, which would be the actual markup at the cash register. These rates, however, would be insufficient to replace income, payroll, and estate and gift tax revenue under current law.

Updated January 2024