The House of Representatives will be holding a vote on a plan that would abolish the IRS!
According to a Fox News story by Houston Keene, holding the vote is part of the deal that got the Freedom Caucus to agree to Kevin McCarthy becoming speaker. Representative Earl (Buddy) Carter introduced the Fair Tax Act is leading with the IRS abolition aspect:
Cosponsoring this Georgia-made legislation was my first act as a Member of Congress and is, fittingly, the first bill I am introducing in the 118th Congress. 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. Armed, unelected bureaucrats should not have more power over your paycheck than you do.
Some Thoughts
I find the lead somewhat disingenuous since under the act the IRS will be replaced by the Excise Tax Bureau. the Sales Tax Bureau and bureaus or offices or departments or whatever in as many of the fifty states as want to join in the fun of collecting on behalf of the federal government a 29.8 % sales tax on pretty much everything that people consume except for used property.
If you want to form an opinion on this proposal I really encourage you to read the bill. It is only 132 pages which is pretty tight given what it seeks to accomplish. There is a great simplicity to the plan compared to the income tax system we currently have. Arguably though it is not an entirely fair comparison. Collectively we have chosen to use the income tax not only as a way to raise revenue, but also as a kind of Swiss utility knife to encourage and discourage all sorts of different things.
The Tax Reform Act of 1986 cut rates and did a good bit of simplifying, but it did not take long for complexity to be layered on. Where will the political will come from to not complicate the FAIR Tax? States with sales taxes have all sorts of exemptions and a tendency to sometimes declare sales tax holidays. I find it inconceivable that industries and interests favored under the income tax will not seek special treatment under the sales tax.
The Rate
You will see the rate stated sometimes as 23% and sometimes as 30%. The proposed statute states the rate as being the “23 percent of the gross payments for the taxable property or service”. Gross payment is defined to include the tax. So if something costs $77 the tax is $23. I understand the idea is to make it an apples to apples comparison to income tax. If you make $100 and pay 23% income tax, you have $77 to spend.
But sales tax is usually stated as a percentage of the price of the item. So you have commentators calling it a 30% sales tax. Then I do the math and come up with 29.8%. I have not found the source of the 0.2% discrepancy. Anyway referring to it as a 23% sales tax is a bit disingenuous, since that is not how sales tax usually works.
The Bureaucracy
Visceral hatred of the IRS seems to be a major selling point for the FAIR tax, which has been kicking around as a proposal in some form or other for decades. In 2014 I covered a documentary called UnFair: Exposing the IRS which turned out to be a sort of infomercial for the FAIR tax.
This was at the height of the “IRS Scandal”. Remember Lois Lerner. That was a lot of the focus of the documentary. The scandal was about IRS treatment of applications for exempt status. Ironically the legislation would not eliminate the fundamental problem that gave rise to the scandal. There is special treatment of not-for-profit organizations which apply for a “qualification certificate”.
The bill repeals payroll taxes, income taxes and estate and gift taxes. That actually leaves quite a few odd ball federal taxes that few people think about all that much. Take a look at Form 720 if you want to learn about them. The IRS collects and enforces those taxes. That part of the IRS is not abolished. It gets renamed.
There is an implication in some of the FAIR tax arguments that the national sales tax will be easier to collect than the income, payroll and estate taxes, but when you study the material it is clear that they admit that getting the economy to hand over more than $4 trillion is a big job. The IRS abolition comes from handing the job to the states in exchange for an administration fee. One of the findings in the introductory portion of the act is – “it is sound tax administration policy to foster administration and collection of the Federal sales tax at the State level in return for a reasonable administration fee to the States“.
A state can contract with another state to handle the administration. If a state does not choose state administration or it screws it up badly enough the federal government will collect from that state. This strikes me as being much more complicated and prone to abuse than just having a single agency collect the tax. It seems like there will be a lot more opportunity to slip between the cracks and significant inconsistency in administration.
In my forty plus years of experience in the tax business on net I have found the IRS easier to deal with than states but the IRS has been clearly deteriorating. I did one of my unscientific polls of my professional brethren and here is the result.
#TaxTwitter Over your whole career do you think it is harder to deal with IRS or state tax agencies?
— Peter Reilly (@peterreillycpa) January 12, 2023
So maybe the FAIR tax people are on to something, but I still think having multiple agencies collecting the same tax is a recipe for chaos.
Exemptions And Shenanigans
The tax is very broad. A taxable property or service is any property except intangible property or used property and any service. Service includes wages. So over at Downton Abbey they have to pay the tax on all that money they are paying the butler, cooks and maids. There are two big exceptions in the definition – intangible property and used property. Then there are the exemptions.
The exemptions are property or services purchased for:
- Business purposes or use in a trade or business. In the definitions it indicates that education and training shall be treated as services used to produce, provide, render, of sell taxable property or services.
- An investment purpose
- State government functions that do not constitute final consumption
The third exemption raises an interesting constitutional issue. It seems that the tax does apply to state government function that do constitute final consumption,
The exemptions for business purpose, investment purpose and the exclusion of used property send my inner villain on something of a rampage. On fairtax.org you can find research that indicates the tax gap for the sales tax will be lower than that for the existing system, Some of it is pretty persuasive such as this observation by Jade Walle.
A staggering 1.3 percent of all U.S. retail businesses make up 75 percent of gross receipts, which is a miniscule 13,019 retail businesses. The vast majority of U.S. retail receipts and current state sales taxes would be collected by an infinitesimally small number of retail businesses, such as Sam’s, Walmart, Amazon, Home Depot, and Chick-fil-A, which are significantly dissuaded from either not collecting required sales taxes or not remitting collected sales taxes to the state, given reputational risk, risk of sales tax license revocation, etc.
A Dash Of Progressivity – The Prebate
The progressivity in the system comes from the family consumption allowance. This will be a monthly check going to every family in the amount of poverty level income times the tax rate. There are some complications in the definition and we will still have people fighting over who is entitled to the kids.
—If a child’s parents are divorced or legally separated, a child for purposes of this chapter shall be treated as part of the qualified family of the custodial parent. In cases of joint custody, the custodial parent for purposes of this chapter shall be the parent that has custody of the child for more than one-half of the time during a given calendar year.
The Social Security Oddity
Wages will still be reported to the Social Security Administration even though there is no more payroll tax, Benefits will still be computed based on earnings. After the first year income will be allocated between Social Security and General Revenue. Severing the connection between what you pay in social security taxes and your ultimate benefit disturbs me.
Fueling Inequality ?
This really does seem like something that will fuel inequality. The wealthier you are the lower the percentage of your income that you consume. Add to that that at higher levels it is easier to disguise consumption as investment or business related. And there will be no sales tax on amounts that you earn in the United States, but consume elsewhere. That seems to favor the rich.
The one bright spot I see at the low end is the exclusion on used property. I suspect though that that may make used property more valuable. Given the 30% surcharge, I don’t think I would ever want to buy a new house, a new car, new clothes, new furniture, pretty much new anything.
A Plea
Try to avoid discussion of this proposal that is not grounded in looking at the actual legislation. If you think I have the proposal wrong please point out where in the proposed statute I have gone off. I have of course glossed over the administrative details.
Originally published on Forbes.com.
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