What you need to know about the Republican Plan
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A group of Republicans in the House of Representatives is revising the Fair Tax Act, which would replace some federal fees with a national sales tax and decentralize the IRS.
While the plan may not get a popular vote or pass the Democratic-controlled Senate, policy experts say the plan will make the tax system more regressive, meaning the burden decreases as revenues rise.
Introduced in beginning of January, the proposal would eliminate income, payroll, inheritance and gift taxes, which would be replaced by a 23% national sales tax. The proposal also aims to decentralize the IRS by reducing the agency’s funding while relying on individual states to manage collection.
Although the plan was first introduced in 1999, it never passed a vote and was supported by only a small group of Republicans, explained Erica York, senior economist and research manager at the Tax Fund.
“It’s not a mainstream or popular idea for tax reform,” Yorke said, noting that the administrative side “doesn’t make much sense” because taxpayers would have to go to 51 government agencies rather than one tax office.
This is not the mainstream or popular idea of tax reform.
Senior Economist and Research Manager at the Tax Foundation
The Tax Fair Act comes amid increased scrutiny of $79.6 billion in IRS funding passed in August under the Inflation Reduction Act. The money has been earmarked for priorities such as law enforcement, taxpayer service, technology upgrades, and more.
After months of criticism, Republicans in the House of Representatives voted in January to remove the funding. But the plan was largely seen as a political signal, as neither Senate Democrats nor the White House supported the measure.
‘Quite a big’ tax hike for the middle class
While the Fair Tax Act is unlikely to win congressional support, experts say the plan will be a big change for middle-income and wealthiest Americans.
According to John Bull, senior communications manager at the Center for Tax Policy, if passed, middle-income people would see “a pretty big tax increase” and the richest Americans would see the biggest cuts.
He said the plan would make the tax system more regressive, despite the built-in monthly rebate for families below a certain income level, especially since the 23% rate is “tax-inclusive” and will actually cost consumers about 30%.
What’s more, both experts say the sales tax won’t be enough to make the plan “revenue-neutral,” which could be a problem as Republicans fight to tighten spending amid the debt ceiling battle.