In a world of rampant inflation, driven by what many economists believe was lax fiscal and monetary spending, something needs to be done. Accordingly, one rather intriguing proposal put forward by House Republicans is starting to raise eyebrows. The FairTax Act has been put forward for a vote in the House, in a bid to completely reshape the current U.S. taxation system.
This FairTax Act represents a complete overhaul of the country’s entire tax code. What’s being proposed is rather incredible, with all federal taxes being essentially replaced by a 23% retail sales tax. The bill would also, at least in its current form, “abolish” the Internal Revenue Service (IRS).
This 23% number is derived from the 15% income tax level most taxpayers currently pay, alongside a 7.65% payroll tax rate paid by employers. This bill would essentially result in a greatly increased tab for shopaholics, favoring savers who prefer to put a greater percentage of their paycheck away for a rainy day.
Discussion is already picking up around the potentially regressive nature of this tax (higher-income individuals may feel less pain from a massive tax hike on essential items like food). However, the built-in incentive to consume less and save more is something that’s appealing, given how fast inflation is rising.
Let’s dive into some of the details of this proposed Act, and when the vote is expected to take place.
What’s the Deal With the FairTax Act?
Currently, the timeline for a vote on the FairTax Act remains unclear. There are also a number of significant hurdles this tax would need to pass, including an amendment to the Constitution (which hasn’t happened since 1992). Additionally, the likelihood of this bill passing through both the House and Senate, and getting signed by President Biden remains slim, at best. Thus, it’s likely a bill that’s been put forward to generate discussion on the topic of taxation.
One of the key benefits of the FairTax Act is that every single consumer, whether they make money from a major corporation or on the black market, would be taxed equally. Small businesses and other corporations would save significant amounts of time and money filing W-2 forms and engaging in other administrative activities. And it gives consumers an inherent incentive to save, rather than spend, their paychecks. Indeed, given the current state of the economy, that could help get inflation under control in rather short order.
The issue is that with everything from groceries to consumer staples rising 23%, there’s a regressive component to this Act. The bill does provide for a monthly stipend, called a “prebate,” to offset some of these costs for essential purchases. Thus, it’s possible that this sales tax could be implemented with little regressive impact on lower-income individuals.
That said, it’s just an idea that’s being put on the table right now. While many may call this idea crazy, perhaps it’s so crazy it could work.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
