The Fair Tax Act of 2017 is a proposal that was introduced in the Senate on January 3, 2017, although similar legislation has been regularly put forward since at least 1997. Its main feature is the introduction of a national sales tax to replace all current personal income, corporate income, self-employment, employment, gift, and estate taxes. Some goals of this proposal are to broaden the tax base, reduce the administrative costs of filing and processing tax returns, and stimulate the economy.
Details of the Fair Tax Act
Under the current proposed Fair Tax Act, the federal government would cease to collect any personal or corporate income tax, as well as employment taxes and several others. To replace this revenue, it would institute a 23% national sales tax to be administered and collected by the states. The Internal Revenue Service would be dissolved within three years of the implementation of the Fair Tax Act, and the tax would expire if the Sixteenth Amendment to the Constitution was not repealed within eight years of the bill’s passage.
The personal consumption tax included in the Fair Tax Act would apply to all new goods and services for personal consumption, including food, clothing, prescription drugs, medical services, legal services, financial services, and more. Excluded from taxation would be purchases for business purposes, purchases of used goods, and investments such as the purchase of stocks or educational tuition payments.
Inclusive vs. Exclusive Tax Rates
The tax rate imposed would initially be 23%, and it would be a tax-inclusive rate like the current income tax rates. However, sales tax rates are not typically expressed as tax-inclusive, and so this rate would translate to about a 30% tax-exclusive sales tax. That’s because a tax-inclusive rate specifies the tax as a percentage of the total purchase with the tax already added in.
A tax-exclusive rate, on the other hand, is applied separately to the total and does not figure into the amount taxed. This is how current state sales taxes work, as the shelf price of an item is its pre-tax price, and the applicable tax is added on to the total at the register.
Under the Fair Tax Act, the price listed for that product on the shelf would already have the tax included, but the amount of the tax would be 23% of that total shelf price, rather than 23% of the cost of the product before the tax was added on. Proponents of the bill argue that it’s better to express the tax rate in this way because it’s more easily comparable to the income taxes it would be replacing.
Tax Rebate and Effective Tax Rate
To offset the impact of the tax on purchases of necessities, each legal resident is eligible to register for a Family Consumption Allowance. The amount for each household would be determined by the number of people in that household, as well as the estimated tax that would be paid on taxable items up to the poverty level.
The rebate would be distributed each month, and everyone would have to register for it once a year. The inclusion of the rebate into calculations will reduce the effective tax rate, particularly for lower-income people, and its impact will diminish as the total spent on consumable goods and services increases.
Impact on Businesses
For businesses, the institution of the Fair Tax would eliminate the need to pay corporate income tax, as well as the obligation to collect employment and income tax from employees, thereby greatly reducing the filing and administrative burden of complying with the tax code.
Similarly, because goods purchased for business purposes, including for resale, would no longer be taxed, operational costs would be reduced. A business that does sell taxable goods or services would be required to include the cost of the tax in the purchase price of the product or service, and then file and remit payment to the state.
To cover the administrative costs associated with the calculation, collection, and remittance of the tax, the business would receive a refund of either $200 or 0.25% of the total tax collected, whichever was greater. Although no federal income tax would exist, states would still be free to impose their own income taxes if they chose.
Overall, the Fair Tax Act of 2017 would streamline the process of collecting and filing taxes for businesses. However, it would be important to be aware of any other tax liabilities that remain in effect, as well as filing deadlines and other requirements the new law would impose should it be adopted.
If you’re interested in learning more, check out the website FairTax.org, the site of the Americans For Fair Taxation® (AFFT) organization.