National sales tax plan draws attention in House GOP

National sales tax plan draws attention in House GOP

WASHINGTON — A decades-old proposal to replace federal income, estate and payroll taxes with a national sales tax has won the support and attention of the new House GOP majority, but the House Speaker Kevin McCarthy said he was not in favor of the policy.

The so-called FairTax, if passed, would be the biggest structural change to US taxation in 110 years. Salaries, capital gains and corporate profits would become tax exempt. The new levy would rather affect consumption. The national sales tax would apply to a broad base including food, medical care and new homes.

Mr. McCarthy (R., Calif.) told reporters on Tuesday evening that he did not support FairTax, distancing himself from an idea with the support of a vocal segment of his party but which began to cause heartache political head to Republicans.

The proposal gained prominence following negotiations Mr McCarthy held with his Republican critics to become Speaker of the House earlier this month. Rep. Lauren Boebert (R., Colo.) listed a FairTax vote among the pledges she said Mr. McCarthy had made to secure the job. The head of the House Tax Drafting Committee also said the committee should consider the proposal.

GOP lawmakers haven’t said what they will do and when. Even if the FairTax made it through the tightly divided House — a long shot without Mr. McCarthy’s backing — opposition from Senate Democrats and President Biden should keep it from becoming law.

Proponents of FairTax argue that a national sales tax would be easier to administer than income taxes. Some House Republicans, especially those facing major challenges, may also feel pressure to support legislation that would abolish the Internal Revenue Service.

Rep. Jason Smith (R., Mo.), the new chair of the Tax Drafting Ways and Means Committee, said the committee should consider the proposal.


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Rod Lamkey-Pool/Getty Images

At the same time, the FairTax is drawing sustained criticism from Democrats, who could use it to attack Republicans in rotating districts. Democrats say the plan would lower taxes for high-income earners, who spend a smaller share of their annual income than the middle class, while raising them for many people who pay little or no federal taxes.

“It gives Democrats such an easy talking point — because it’s factually correct — because it would raise taxes for tens of millions of seniors, working poor and dependents,” said Ryan Ellis, a Conservative tax campaigner who claims FairTax supporters have failed to adjust their plans in response to criticism. “That’s what happens when you have an idea written on the back of a Burger King placemat.”

Proponents say the plan has been well thought out and argue that a sales tax would not be a disincentive to investment the way income taxes are. Lead sponsor representative Buddy Carter (R., Ga.) said sales taxes also ensure that people in the country are illegally paying federal tax on purchases. He said many high-income people would pay more than they do now.

“The taxes on a yacht, on a 45ft yacht, are going to be higher than the taxes on a 6ft jon boat,” Carter said, referring to some sort of fishing boat. “I don’t know a lot of rich people, but the ones I know seem to spend a lot of money.”

Previous independent analyzes have found that the FairTax would raise taxes for middle-income households and lower them for those with higher incomes. Democrats are happy to point this out.

“I love their 30% sales tax,” Biden said at the White House on Tuesday, mocking the proposal. “We want to talk about it a lot.”

Rep. Jason Smith (R., Mo.) co-sponsored the FairTax during its first two terms. Now, as the new chairman of the Tax Drafting Ways and Means Committee, responsible for handling legislation and intraparty debate, he is taking a more neutral stance.

“The FairTax is an interesting idea,” Smith said in a statement highlighting Congress’ longstanding interest in commodity taxes and simplification. “It is important that the Ways and Means Committee not avoid, but rather engage in this debate about what this system would look like for American families, farmers, workers and small businesses.”

The plan starts sales tax at 23%. This includes tax, the way income taxes are calculated. Expressed as a traditional sales tax, with the tax added to the price, it would be 30%.

The change would have revenue, distribution, administrative and economic consequences. The Joint Congressional Committee on Taxation has not yet estimated any of these effects.

Rep. Buddy Carter (R., Ga.) is the lead sponsor of the national sales tax plan.


Photo:

Carolyn Kaster/Associated Press

Households would receive a monthly allowance called “prébate” to cover the tax on expenses up to the poverty line. To address conservative concerns about the reinstatement of the federal income tax by a future Congress, the sales tax would end after seven years if the country did not repeal the 16th Amendment, which authorized income tax. Income.

The FairTax rate would need to be higher than expected to replace existing revenue, said Bill Gale, senior fellow at the Brookings Institution, a left-leaning think tank. Higher rates create more opportunities and incentives for escape. The FairTax would also create challenges for states, which could help administer the plan and determine how it fits with existing sales and income taxes.

“The problem here is not the focus on consumption,” Gale said. “The major issue is the sheer manageability of it and the just fantastic elements of keeping the rate at 23% and abolishing the IRS.”

There are also transition challenges. For example, people who save in Roth-style accounts — funded with after-tax dollars and available for tax-free withdrawals in retirement — would now be subject to federal taxes on spending using savings that have already been taxed once. times.

GOP lawmakers have introduced the FairTax to Congress since 1999, and Republican leaders have repeatedly considered and rejected the idea. Grover Norquist, the anti-tax lawyer, opposes the plan, and conservative tax analysts at the American Enterprise Institute and the Manhattan Institute have also criticized it.

Mr Ellis, the Tory tax campaigner, said the best course was to plan a vote soon, as far away from the next election as possible.

“So move on,” he said. “Don’t ever talk about it again.”

Write to Richard Rubin at richard.rubin@wsj.com

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