The future of the IRS may be in jeopardy due to the Republican-controlled U.S. House of Representatives and Senate.
A group of twelve Republican lawmakers have recently put forth the Fair Tax Act of 2025, just a week ahead of Inauguration Day. The objective of this bill is to completely eliminate the Internal Revenue Service (IRS) and revoke all forms of personal and corporate income taxes, including the death tax, gift tax, and payroll tax.
The current federal tax code would be dismantled and replaced with a single national sales tax under a proposal led by Rep. Earl L. “Buddy” Carter (R-GA). This “consumption tax” would be applicable to all individuals in the country, including illegal immigrants.
Fair Tax Act 2025
The Fair Tax Act of 2025 proposes a replacement of major federal government revenue sources with a national sales tax and rebate. This would entail the elimination of personal and corporate income tax, death tax, gift tax, and payroll tax.
Advocates argue that the consumption tax would eliminate the necessity of the IRS.
If the national consumption tax rate is implemented, it would be a tax-inclusive rate of 23% starting from the 2027 tax year. However, economists predict that this rate could realistically increase to around 30%. As stated by the Tax Foundation, taxpayers would be required to pay approximately 30 cents in sales taxes to the federal government for every dollar spent.
Out of the total revenue share, a significant portion of 64.83% would be directed towards general revenue. Moreover, 27.43% would be allocated to the old-age and survivors insurance and disability trust funds, while 7.74% would be directed towards the hospital insurance and federal supplementary medical insurance trust funds.
Starting from 2027, the consumption tax rate will be subject to fluctuations based on government expenditure. The calculation of the overall federal tax rate will be carried out in the following manner:
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- A 14.91% sales tax to cover general fund spending, plus,
- Two variable sales tax rates to cover trust fund spending as determined by the Social Security Administration
In the past, economists have claimed that the Fair Tax proposal was “essentially unworkable.” According to the Brookings Institution, they argue that the proposed rates would not be enough to replace income, payroll, estate, and gift taxes, among others.
What is a consumption tax?
A consumption tax would change the way taxes are collected, shifting the focus from earnings to spending. Currently, the U.S. government collects revenue through various taxes, including individual income tax and capital gains tax.
In addition to sales taxes and excise taxes, certain states also impose a consumption tax.
According to the Tax Foundation, a consumption tax has the potential to encourage savings and investment for certain individuals. However, it is important to note that this type of tax is considered “regressive” because lower-income households tend to spend a larger portion of their income compared to what they are able to save.
Regressive tax refers to a type of tax that tends to take a larger percentage of income from lower-income households.
The Center for American Progress had previously labeled the proposal as “radical,” cautioning that it would further widen the already significant wealth gap in the country.
The Fair Tax is not a new proposal
The Fair Tax proposal has had a long history, dating back to the mid-1990s when it was first introduced by Americans for Fair Taxation, a Houston-based group. Former Representative John Linder (R-GA) brought the idea to Congress in 1999, and it has been reintroduced in each new administration since then.
The support for the legislation has waned in recent years. In 2019, the bill had the backing of 26 co-sponsors, but by 2025, that number has dwindled to a mere 11.
What can the IRS expect in 2025?
The U.S. presidency changing hands will likely lead to a shakeup for the IRS and federal tax code.
President-elect Donald Trump has a busy tax agenda this year, which includes addressing the impending tax cliff associated with the Tax Cut and Jobs Act (TCJA). Additionally, he has put forward proposals to eliminate taxes on tipped workers and abolish income tax on Social Security benefits.
The government plans to implement significant trade tariffs on all imported goods and services, stating that it will generate revenue for essential services like childcare.
Former Missouri Congressman Billy Long has been appointed by Trump to lead the IRS, a decision that would result in the premature removal of IRS Commissioner Danny Werfel. This move, if confirmed, would mark the first time in over 80 years that a politician has been selected for this position, according to Kiplinger.
In addition to the reintroduced Fair Tax Act, the IRS is encountering various challenges that pose a threat to its stability. These challenges include:
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- GOP lawmakers aiming to block IRS Direct File
- Elon Musk pointing to an IRS workforce restructure
- Recently losing another $20 billion in crucial enforcement funding
The impending changes that are set to impact the IRS have the potential to affect you as a taxpayer. These changes could range from minor inconveniences like a delay in tax return processing to more significant implications such as alterations to free tax filing services. It is crucial to stay well-informed about how the new presidential administration will prioritize and shape your tax experience.
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