U.S. Moves Closer to Abolishing the IRS, Ending Paycheck Taxes

Imagine a world with no Internal Revenue Service. Now, imagine a bigger paycheck because taxes have been axed. This taxpayer utopia moved one step closer to reality this week.

House Republicans are set to consider eliminating one of the most loathed federal agencies and ending a slew of personal taxes, replacing them instead with a tax on consumption.

While we’re not likely to see these proposals enacted soon, we can be encouraged about what’s possible in the future.

What’s happening

Republican Representative Earl L. “Buddy” Carter of Georgia reintroduced the Fair Tax Act, to replace the current tax code with a national consumption tax known as the Fair Tax.

The bill would replace current income taxes, payroll taxes, and estate and gift taxes with a national consumption tax of 23% in 2023. A consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer.

Advocates believe that a national consumption tax would lead to a host of better economic outcomes for American households: spurs economic growth, encourages savings and investing, raises the standard of living, increases fairness, improves economic mobility, reduces the administrative burden for taxpayers, and more. 

The bill enjoys support from a number of conservatives, which will be needed given that it faces an uphill battle from a Democratically-controlled Senate and White House.

The left is 100% likely to oppose this bill. Their approach is to expand taxes not reduce them. Liberals have increased taxes on businesses, increased the number of regular taxpayers potentially subject to taxation, and increased IRS resources to go after taxpayers up and down the income scale. For example, last year’s misleadingly-named Inflation Reduction Act passed by the left boosts the IRS by hiring 87,000 new agents. It also raises taxes on businesses, which leads to fewer jobs and less pay for workers. 

In 2021, the liberals funded the inflationary American Rescue Plan by imposing new income reporting requirements to the IRS for casual online sellers and gig workers, regardless of whether any of that income is even taxable. It would have tied up millions of households with new red tape and buried the agency under an avalanche of paperwork. At the last minute, the IRS itself delayed this unnecessary new reporting requirement. 

Rep. Carter noted in a statement,

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.

Nonetheless, the bill will have its day in Congress. Fox News reports: “The vote on the bill was made as part of the deal between House Speaker Kevin McCarthy, R-Calif., and members of the House Freedom Caucus and was pushed forward in his quest for the gavel last week.”

Analysis

The prospect of eliminating income and payroll taxes is a gift. Imagine what you could do with 20%+ more of your pay. How much bigger would you’re savings account or investment portfolio be? How much more might be donated to charity? 

There are valid questions about how the consumption tax would work fiscally and how different taxpayers would be affected. Tax cuts, like stimulus checks, are stimulatory and would trigger another consumer spending spree. Production of goods and services hasn’t necessarily returned to pre-pandemic levels and another run on goods could push prices up, instead of down.

On the positive side, the prospect of keeping more of their pay and earning more than government benefits may lure sidelined workers back into the workforce. At the same time, there is no doubt that lower-income brackets would feel the consumption tax more than middle and upper-income households. In a 2005 Wall Street Journal op-ed by University of California, Berkeley economics professor Alan Auerbach explained that “Yes, the share of income consumed falls as income rises, so a tax on consumption would tend to have a greater impact on lower-income households than an income tax does.” However, depending on how the consumption tax is structured, for example exempting necessary items, some of the economic hardship could be mitigated. On another bright side, he argues that a consumption tax would significantly spur economic growth.

In addition, to quell concerns about funding social service programs, it’s important to understand how much revenue the consumption tax would raise and whether it would fully replace (even outpace) the over 40% of revenue raised by individual taxes.

Bottom Line

We’ve seen fringe ideas like universal basic income become mainstream and now pilot programs in dozens of cities. Finally, the idea of a simple tax code with a fair tax rate for everyone is one step closer to reality too.