(TheStreet) - While House Speaker Kevin McCarthy, R-Calif., was captivating a live audience with coverage of historically numerous votes for his new title, it was no secret he was making concessions to win votes from a small group of skeptical Republicans. This is what it would take to replace Rep. Nancy Pelosi, D-Calif., and McCarthy was up to the task.
The group of representatives, known as the House Freedom Caucus, are largely right-wing activists who are temperamentally opposed to compromise. They demanded promises from McCarthy, extracting deals that suited their agenda while forcing an astonishing 15 separate votes in the House before finally electing McCarthy speaker in the early morning hours of Jan. 7.
Among the concessions was support for the longtime conservative pet aspiration to implement a plan known as the Fair Tax Act.
The act, which is generally expected to be shot down by the Democratic Senate and White House was introduced in the House of Representatives on Jan. 10.
It's worth, however, taking a look at the provisions of the bill.
Most strikingly, the Fair Tax Act, introduced by Rep. Buddy Carter, R-Ga., would seek to abolish the Internal Revenue Service (IRS). In doing so, it would replace the federal income tax with a national consumption tax.
"Instead of adding 87,000 new agents to weaponize the IRS against small business owners and middle America, this bill will eliminate the need for the department entirely by simplifying the tax code with provisions that work for the American people and encourage growth and innovation," said Carter in a press release.
The Effects of the Legislation Are Ripe for Debate
A look into the details of the proposed legislation reveals stark divisions in perceptions of its potential effect on taxpayers.
The bill would get rid of all federal taxes and institute a 23 percent national retail sales tax. Supporters of the measure say that is similar to a 15 percent income tax plus the 7.65 percent payroll tax rate that employers pay.
Not so fast, say opponents. According to the Institute on Taxation and Economic Policy (ITEP), this calculation relies on some tricky math. If something costs $100, one would pay $30 in taxes, the institute calculates. To most people, that works out to be a 30% tax. But it's called a 23% tax, because $30 is 23% of the gross payment of $130.
"Proponents claim this method of calculation is more comparable to how we think about the income tax but its main result is widespread confusion," ITEP says.
Proponents argue that taxpayers would keep their entire paychecks while only paying taxes on what they spend. And since states already collect sales tax, it would simply be a matter of raising the rate.
"That shift would have major and immediate consequences," writes the libertarian publication Reason. "Annual tax returns and W-2s would cease to exist. People who make their money on the black market would be taxed at the same rate as anyone else. The enormous compliance costs currently associated with filing one's annual taxes would be cut significantly. With only one tax and no deductions, the entire process of funding the government would be more precise and transparent."
Tax Complexities Would Still Be In Plentiful Supply
Those opposed to the legislation are not convinced it's all that simple.
First, there are five states that do not impose a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
Second, all states exempt some purchases that a national sales tax would not. Often times, for example, groceries are not taxed while prepared food and alcoholic beverages are.
Third, a bit ironically, the bill would give the treasury department authority to institute the national sales tax in states that would not agree to administer it.
"This would suggest some sort of federal apparatus for tax collection is required, which, if you think too hard about it, sounds like it would involve something like the IRS," ITEP says.
The tax structure is obviously regressive, as flat tax rates on goods and services add up to a higher percentage of a less well-off family's income as it makes less money than a wealthy family.
As a response to this reality, the new tax program would provide for a "prebate," understood to act as a monthly stipend for those living under the federal poverty line. In order to administer such a policy, a new agency would need to be created -- again, something sounding an awful lot like the IRS, which, in theory, would have been abolished.
"While the Fair Tax does provide families with rebates that could equal several thousand dollars a year, this is not nearly enough to offset the financial hit most Americans would face from the new national sales tax," writes ITEP.
It's also likely that the proposed tax plan would have unintended consequences for the wealthy, a constituency its conservative supporters tend to coddle.
Namely, under the current income tax system, many affluent people find loopholes to avoid paying the amount of taxes, as a percentage of income, as others. A consumption tax on luxury items, for example, would be inescapable.
By Jeffrey Quiggle
January 12, 2023
