There’s nothing fair about Republicans’ FairTax proposal
Republicans are talking tough on the deficit. House Speaker Kevin McCarthy has threatened default unless Democrats come to the negotiating table, proclaiming, “We must return Washington to a basic truth: Debt matters.”
But it’s hard to take Republicans seriously when weeks into the 118th Con- gress, they’ve already pro- posed tax policies that would add trillions to the deficit.
Their first bill out of the gate sought to defund the IRS, decreasing the agency’s ability to pursue tax evasion by the wealthy, and is estimated by the nonpartisan Congressional Budget Office to increase the deficit.
For some Republicans, defunding the tax police doesn’t go far enough. Their next proposal, the so-called FairTax, would replace our current tax system with a single, 30 percent sales tax — and eliminate the IRS altogether.
FairTax would add trillions more to the deficit if ever enacted. Although official scorekeepers have not assessed its revenue effects, economist Bill Gale in 2005 estimated a 10-year revenue loss of at least $7 trillion — easily more than $1 trillion per year today.
What explains the constant drumbeat for policies that grow — rather than shrink — the deficit?
For House Republicans, tax policy appears to be less about raising revenue and more about satisfying wealthy donors.
Let’s start with the IRS. The logic is easy to follow: For most Americans earning a paycheck, most of their tax liability is automatically withheld. But wealthy evaders don’t earn their incomes this way and therefore benefit from a system in which the IRS doesn’t have the wherewithal to pursue them. While at the Treasury Department, I worked on the IRS funding provision included in the Inflation Reduction Act. Since it became law, millions of dollars have been poured into anti-IRS campaigns to rescind that funding — and preserve tax cheats’ evasion advantage. That’s why, even though doing so would ultimately expand the deficit, gutting the agency is high on the list of proposed Republican negotiations around the debt ceiling.
FairTax, too, is rooted in the interests of the most privileged. In fact, it is the brainchild of three Houston entrepreneurs — Leo Linbeck Jr., Jack Trotter and Bob McNair, the former owner of the National Football League’s Houston Texans. The trio, who have all now passed away, raised millions in the late 1990s — much of it their own seed funding — to build a grass-roots movement for their policy.
FairTax proponents say it would simplify the system by eliminating income taxes and allowing Americans to keep everything in their paychecks. In reality, replacing the income tax system with a national sales tax shifts the tax burden to lower-income households and benefits higher-income ones.
The economics are simple: Wealthier households spend a smaller share of their income than poorer households do, which means lower- and middle-income taxpayers would take on more of the overall tax burden. If Treasury Department estimates from 2005 — old, but directionally still accurate — reflected the distribution of taxes today, the bottom 50 percent of taxpayers would pay more than twice as much tax this year — roughly an extra $220 billion — under FairTax. The top 1 percent would pay about $320 billion less.
FairTax won’t die, despite its legion of detractors. Since 1999, it has been introduced in every Congress. And although most mainstream Republicans have moved away from public support of FairTax in recent years, it actually has some renewed momentum: It is on track for its firstever floor vote, has spent weeks atop the list of most viewed bills this Congress, and could well be a campaign issue for Republicans in the 2024 cycle, given that many potential presidential nominees — including Ron DeSantis, Nikki Haley and Mike Pence — are past champions.
These proposals illustrate the hypocrisy of House Republicans’ dangerous debt limit tactics.
Reasonable people can disagree with Democrats’ approach to tax policy. But last week, President Biden called for raising hundreds of billions of dollars in new taxes from high-earners and corporations. He has promised a budget that will raise enough to cut the deficit by $2 trillion.
If Republicans truly cared about budget deficits, perhaps they could take a page out of his book: by proposing tax changes that would raise, rather than lose, money.