The IRS is a constant target of politicians. Within the first week of the new Republican-controlled Congress taking office, a dozen representatives introduced a new bill to abolish the IRS and replace income taxes with a national sales tax. The House also voted to rescind the $80 billion in additional funding the Democratic-controlled Congress approved just last year. Over the last decade, the budget for the IRS has decreased by 15%, leading to tax backlogs and customer service challenges. As of September 2022, the IRS had a backlog of 12.4 million tax returns.
The split in power between the Republican-controlled House and the Democratic-controlled Senate means that the IRS probably won’t go away soon. But how does this proposed national sales tax, the “Fair Tax Act of 2023,” work?
The Fair Tax Act
The Fair Tax Plan is a proposal to replace all federal income and payroll taxes, including the gift tax, estate tax, capital gains taxes, self-employment, corporate, alternative minimum taxes, and Social Security and Medicare taxes, with the “fair tax.” While many laud the Fair Tax Act as a “consumption” tax plan, it’s a bit more complicated than that. The proposed legislation takes an integrated approach, incorporating the following:
- A progressive national sales tax,
- Dollar-for-dollar revenue replacement,
- A rebate to ensure taxpayers up to the poverty level don’t pay taxes, and
- A monthly rebate to every household to cover consumption tax paid on necessities up to the poverty level.
The Fair Tax Act would also repeal the 16th Amendment to the U.S. Constitution, which allows Congress to levy an income tax not apportioned to the states based on population.
House and Senate Republicans introduced the Fair Tax Act in January 2023, but this isn’t a new proposal. Congressional representatives have introduced a similar fair tax proposal every year since 2005. Income tax is about 50% of our country’s tax base, while payroll taxes make up about 35%.
Hire an Experienced Tax Professional
If you’re struggling with complex tax issues, you don’t need to figure out this alone. You need the advice and guidance of an experienced tax professional. Find out how Highland Tax Group can help you. Contact us today to schedule your consultation.