Republicans want to replace federal taxes with a flat sales tax. It'll either add trillions to the national deficit or you'll have to pay a lot more for everything.
- Some Republicans want to abolish the IRS and replace most federal taxes with a flat sales tax.
- However, a report from Brookings finds that the sales tax at the currently proposed rate would add to the deficit.
Republicans want to slash taxes and government spending, and their big plan to do just that hinges on abolishing the IRS and replacing most federal taxes with a flat 23% national sales tax.
There's just one problem, according to a new report out of the Brookings Institute: That "FairTax" proposal, which would amount to a 30% markup on just about everything's sticker price, making the tax 23% of an item's total price including the tax, would actually add nearly $10 trillion to the deficit over the next 10 years — running counter to Republicans' insistence that the deficit should be reduced.
William G. Gale and Kyle Pomerleau argue in their Brookings article that the FairTax's proponents don't deal with how prices would change for consumers and businesses in a consistent way; adjusting for that inconsistency would lead to a much higher tax rate needed to match current tax revenues, even under favorable assumptions like a lack of tax evasion and no changes in government spending. That adds nearly $10 trillion to the deficit over 10 years, according to Gale and Pomerleau.
In an email, Pomerleau said that the simplest way to understand the mismatch was in terms of inflation.
"If the price level suddenly increased by 10% tomorrow, everything denominated in dollars would rise in price by 10 percent (goods and services, wages, profits, etc). However, the real value of everything would remain the same. At the same time, government spending would have to rise with the 10% inflation to keep up, otherwise real spending falls," Pomerleau said.
"This is roughly the problem with the proponents' original estimates. They assumed that when the tax is levied, it is added to the price of goods and services (prices go up). But they assumed that government spending doesn't rise at the same time, which means a real reduction in spending."
Instead, if the FairTax wanted to break even, it would have to be 39% on the sticker price of goods and services in a world without tax evasion. When factoring in a 17% tax evasion and avoidance rate — the current evasion rate on income tax — the rate would have to be nearly 52% to keep revenue at the same levels. And, as the authors note, it's optimistic to assume even that low level of evasion, if there's no IRS to crack down on people getting out of paying.
In short, if FairTax wanted to maintain current levels of government revenue and spending, you'd have to pay over 50% more on things like food, electronics, and pretty much anything else you need to buy. That rate could get even higher if there were exemptions for necessities and state and local government taxes, according to Brookings, meaning it'd have to reach 85.5%.
"Our country doesn't have a revenue problem, it has a spending problem. Under President Biden, the federal government has seen record revenue and is still projected to sustain trillion dollar deficits," Rep. Buddy Carter, who introduced the legislation, said in a statement to Insider. "We need to cut the spending, put money back into Americans' pockets, and simplify our tax code so it works for - not against - hardworking taxpayers. The FAIRTax won't make the government richer, but that's the point."
It's not the first GOP tax legislation that would tack billions onto the deficit. The House GOP's proposal to roll back $80 billion in funding for the IRS would actually add a net $114 billion to the deficit, according to the nonpartisan Congressional Budget Office.
But don't expect a FairTax emerging or the IRS disappearing anytime soon. The White House has been adamantly opposed to the FairTax legislation, and President Joe Biden has said he'd veto any bills like it if they came to him.
The Biden administration also continued to express its disapproval of the plan. White House spokesperson Michael Kikukawa told Insider, "only House Republicans could come up with a policy that cuts taxes for the wealthy, increases taxes for working people, and adds $10 trillion to the debt—all at the same time. This is on top of the $3 trillion that Republicans want to add to the debt with tax giveaways to wealthy tax cheats, Big Pharma, big corporations, and other special interests. Given Congressional Republicans' claims that they care about the debt while proposing increasing it by trillions of dollars, the American people deserve to know what they plan to cut. Is it Social Security, Medicare, Medicaid and the Affordable Care Act, as they have repeatedly proposed?"