By Kate Scanlon | OSV News
WASHINGTON (OSV News) — A proposal to implement a national sales tax and abolish federal income taxes by a House Republican lawmaker became political fodder for Democrats in January, although the proposal is unlikely to pass Congress.
If implemented, it could have a wide-ranging impact on tax policy and the U.S. economy, and could result in lower-income families paying more in federal taxes than the current rates.
The Fair Tax Act, sponsored by Rep. Earl “Buddy” Carter, R-Ga., would end federal income, payroll and estate taxes and instead implement a 23% tax on “gross payments for the taxable property or service.” However, the 23% rate would be tax inclusive, which makes it effectively a 30% rate on goods and services; for example, a consumer purchasing a $10 item would pay a $3 national sales tax. Proponents argue that $3 is 23% of the $13 total cost, making the sales tax actually a 23% tax. But opponents say that the tax is truly 30% of the original item cost.
If the proposal were implemented, Americans would receive a monthly rebate check determined by the federal poverty level and the size of their family, which proponents argue would offset costs for low-income families. The proposal also would end funding for the Internal Revenue Service, leaving state governments with tax collection authority.
Democrats have argued the proposal would increase costs of basic necessities like groceries.
“House Republicans are pushing for a 30% national sales tax,” President Joe Biden wrote on Twitter Jan. 26. “Taxing the middle-class on thousands of everyday items from groceries to gas. And in the process — cutting taxes for the wealthiest. What in God’s name is that all about?”
The same proposal has been suggested by Republicans in previous years. An analysis by the Tax Policy Center of comparable proposals in 2005 and 2012, found that if the policy were implemented, middle-class households would likely see their net taxes increase, while wealthier households would see them decrease. The Tax Policy Center said on its blog that the 2023 proposal would yield similar results.
The proposal sparked controversy, leading Carter to post a “Myth v. Fact” section on the blog of his congressional website in defense of his proposal.
House Speaker Kevin McCarthy indicated in January to reporters that he does not support the proposal, but he reportedly pledged to some of his detractors during his messy battle to become speaker that he would grant the bill a hearing in committee.
Even if the bill was brought up for a vote in a Republican-controlled House, it likely would not garner enough GOP support to pass without McCarthy’s support. If passed by the House, the bill would not be taken up by a Democratic-controlled Senate, where Majority Leader Chuck Schumer, D-N.Y., has called the national sales tax “one of the worst policy proposals in existence.”
In remarks on the Senate floor on Jan. 26, Schumer said, “House Republicans call it the ‘Fair Tax Act,’ but let’s call it what it really is: a disaster for middle class families.”
“There is nothing ‘fair’ about a tax that punishes average families for buying essential goods while giving the rich another chance to lower their tax burden,” Schumer said.
Tom Gresik, a professor of economics at the University of Notre Dame, told OSV News that proponents of the policy argue that it is easier to implement than the current federal income tax system, and eliminates disincentives on investing. But Gresik added that opponents argue that the proposal takes certain economic factors like consumer spending and assumes they would hold under the implementation of the Fair Tax, while it would likely change consumer habits.
Under the current proposal, Gresik said, taxpayers would see their take-home pay go up, assuming their compensation didn’t change, “which is a big assumption” — but they would also see higher prices.
“It would be consumption-based instead of income-based,” he said. “So that would encourage people to save, but would also reduce demand.”
In their 1986 pastoral letter Economic Justice for All, the U.S. bishops wrote that “The tax system should be continually evaluated in terms of its impact on the poor.” That document says a government should seek to provide for the basic needs of the poor, and that a tax system should embrace a principle of progressivity, in which those with higher incomes take on a greater share of the tax burden than those with lower incomes.
Lyman Stone, director of research for the consulting firm Demographic Intelligence, told OSV News that “the devil’s in the details” of the proposal as to whether lower-income families would see their taxes go up.
“The base matters a lot,” Stone said. “If you’re including grocery items in the sales tax, that has a much bigger hit on poor people, but if you exclude them — if you apply the sales tax to home purchases, to buying a house — they’re not going to make a lot more money from rich people and less from poor people. So it really is these kinds of decisions of what you include or what you don’t that are really, really important.”
Gresik noted the proposal has some similarities to value-added taxes implemented in some European countries, where taxes are included in the price of goods rather than as a separate line item, leaving consumers sometimes blaming merchants for rising costs rather than legislative bodies when taxes increase.
Robert Kennedy, a professor of Catholic studies at the University of St. Thomas in Minnesota, told OSV News that Catholic tradition has an understanding of the “duty to pay taxes and the limits to that duty.
“The typical position is that citizens and residents in a society have a general duty to support legitimate governments at a level appropriate to permit them to perform their normal functions,” he said, noting that the duty can be limited by factors like implementing unjust costs.
Kennedy said that Catholic tradition rejects arguments from political extremes on taxes, such as “claims that taxation is theft” or that “government may oblige taxpayers to fund any activity it chooses to pursue.”
Fairness in tax policy from a Catholic perspective, he said, is perhaps best understood as a range, “not a precise target.”
“Modern democracies levy rates of taxation that would have prompted armed revolt if any ancient or medieval monarch had attempted to collect as much,” he said. “And we accept these demands peacefully.”
Stone noted the proposal is “dead on arrival” even within the House GOP.
“You’ve got to do some theater for a while when you’ve in fact accomplished nothing to help anyone,” he said.