How the Income Tax Elimination Bill Would Work

The income tax elimination bill currently before Congress is the FairTax Act of 2025, filed as H.R. 25 by Representative Buddy Carter of Georgia on January 3, 2025. It would repeal the federal personal and corporate income taxes, payroll taxes, and the estate and gift taxes, and replace them all with a single national retail sales tax of 23 percent on new goods and services. The bill sits in the House Committee on Ways and Means and has not received a vote.¹

What the Bill Would Get Rid Of

Five federal taxes disappear under the bill. Personal income tax. Corporate income tax. The payroll taxes that fund Social Security and Medicare. The estate tax. The gift tax.² Together those account for nearly everything the federal government collects, so the change is not a tweak. It is a full replacement of how Washington funds itself.

The Internal Revenue Service goes too. A new Sales Tax Bureau and Excise Tax Bureau inside the Treasury Department would handle the narrower job of overseeing sales tax collection.¹ The IRS would keep operating long enough to process returns from earlier tax years, then wind down. Employers would stop withholding federal tax from paychecks. There would be no April filing deadline for individuals.

The National Sales Tax That Replaces It

In place of all of that, the bill creates one national sales tax on new goods and services bought for personal consumption. The rate is 23 percent on a tax-inclusive basis, which is the source of the most persistent confusion around this proposal. Tax-inclusive means that out of every dollar changing hands, 23 cents goes to the government and 77 cents goes to the seller. State sales taxes are quoted the opposite way, as a markup on the sticker price, and expressed in those terms the FairTax rate is about 30 percent. A $100 item would ring up at $130.³

Both numbers describe the same amount of money. Supporters prefer the 23 percent figure because income tax brackets are also quoted tax-inclusive, so it makes for a cleaner comparison. Critics prefer the 30 percent figure because that is what a shopper would actually see added at the register.

What Gets Taxed and What Doesn’t

The tax base has some sharp edges, and a few of them carry real financial weight.

Used Goods Are Exempt

The bill defines “used property” as outside the tax base.³ A pre-owned car, a secondhand couch, or an existing home carries no federal sales tax. The reasoning is that the item was already taxed the first time it was sold new. For housing the difference is dramatic. A newly built home would carry the full 30 percent markup at closing. The existing home next door would not.²

Business Purchases Are Exempt

Purchases made for business rather than personal use are not taxed. Only the final retail sale to a consumer triggers the tax, which prevents a cascade at each stage of production. Intangible property is also outside the base.³

Government Purchases Are Taxed

Unlike most state sales taxes, the FairTax applies to purchases by federal, state, and local governments. Agencies would pay the 30 percent markup on their own buying.³ That broadens the tax base considerably. It also means state and local budgets would need to absorb that cost.

Education, Healthcare, and Everything Else

Education and training services, private or public, are exempt. The bill treats them as investment in human capital rather than consumption.² Healthcare does not get a blanket exemption in the bill text, so medical bills would generally fall inside the tax base. A 30 percent markup on medical care is one of the more contested design choices in the proposal, especially for households managing chronic conditions.

The Monthly Prebate Check

A flat consumption tax hits lower-income households harder as a share of their income, because they spend more of what they earn. The bill responds with a monthly payment called the Family Consumption Allowance, usually called the prebate.

Every registered household receives a check each month equal to the tax rate multiplied by one-twelfth of the annual poverty level for a household of that size. The poverty numbers come from Department of Health and Human Services guidelines. Married couples get an extra adjustment so the poverty guideline’s built-in marriage penalty does not carry over.³

The practical effect is that every household is reimbursed in advance for the sales tax on a basic subsistence budget. Anyone with a valid Social Security number qualifies. There is no income test, no phase-out, and the payment does not depend on whether you work. The prebate is the sole replacement for the earned income tax credit, the child tax credit, the standard deduction, and the entire structure of deductions and credits currently in the tax code.

What Would Happen to Savings and Retirement Accounts

Eliminating taxes on income, capital gains, dividends, and interest changes the arithmetic of saving. Money sitting in a traditional 401(k) or IRA is taxed today when you take it out. Under the FairTax those withdrawals would face no income tax. You would only pay federal tax when you actually spent the money on new goods or services.

The effect on people who have already built up retirement balances is a windfall. The income tax they expected to owe on distributions goes away, and only spending gets taxed. Workers who spend most of what they earn as they earn it would see less of that benefit. With the estate and gift taxes also gone, wealth would pass between generations without a federal tax event.

The Seven-Year Sunset Tied to the 16th Amendment

One provision of the bill deserves close attention. The entire FairTax Act expires if the 16th Amendment is not repealed within seven years of enactment. The 16th Amendment, ratified in 1913, is the constitutional grant that lets Congress levy an income tax. If it stays in the Constitution when the seven-year window closes, every provision of the FairTax Act falls away.³

Repealing a constitutional amendment takes two-thirds of both chambers of Congress and ratification by three-fourths of state legislatures. No amendment has been repealed since Prohibition ended with the 21st Amendment in 1933. If that bar is not cleared, the country would face a policy cliff at year seven with the FairTax structure gone and the prior system needing to be reinstated.

Would the Numbers Actually Work

The central question about any income tax replacement is whether the new tax raises enough money to cover what the old ones brought in. On the FairTax rate, the Tax Policy Center concludes it does not. Its analysis estimates the proposed rate would add close to $10 trillion to federal deficits over a decade.⁴

To break even with current revenue at zero evasion, the tax-inclusive rate would need to be around 28 percent, a 39 percent markup at the register. Assuming evasion rates comparable to what the income tax already sees, the rate rises to about 34 percent tax-inclusive, or a 52 percent markup. Exempting state and local government purchases would push the required rate higher still.⁴

Evasion is the piece often left out of the conversation. Under the current income tax, evasion is around 1 percent on wages, because employers report earnings and withhold. It exceeds 50 percent in categories without third-party reporting, like sole proprietorships and small farms. A national retail sales tax has no third-party reporting. Every transaction between a seller and a buyer is a potential evasion point, and the higher the rate, the stronger the incentive to skip it.⁴

Supporters argue that removing income taxes would spur enough economic growth, and pull enough of the underground economy into the tax base, to close the gap. They also argue that embedded taxes currently baked into prices would fall out, so pre-tax prices would drop and partly offset the new tax for consumers. Whether those effects would arrive at the scale needed to make the revenue work is heavily disputed among economists.

How Collection Would Work

Rather than building a new federal collection system, the bill leans on state tax agencies to collect the federal sales tax alongside their own. If a state declines to participate, Treasury would administer the tax there directly. States and retailers receive fees for handling collection.² Revenue collected under the sales tax gets allocated to the same trust funds payroll taxes fund today, including Social Security and Medicare, so those programs keep a dedicated revenue stream.³

Where the Bill Stands Now

The FairTax Act of 2025 was introduced on the first day of the 119th Congress and referred to the House Committee on Ways and Means.¹ That committee decides whether it advances. Some version of the bill has been introduced in nearly every Congress for over two decades. It has never received a committee vote or reached the House floor. If enacted, its provisions would take effect on January 1, 2027.³ No hearing or markup has been scheduled.

1
Congress.gov. FairTax Act of 2025 – HR 25
2
Tax Policy Center. What is the Fair Tax?
3
Congress.gov. FairTax Act of 2025 – HR 25 – Text
4
Tax Policy Center. Proposed FairTax Rate Would Add Trillions to Deficits Over Ten Years