What Is the 30% Flat Tax and How Would It Work?

The “30 percent flat tax” is shorthand for the FairTax Act, a proposal reintroduced in the current Congress as H.R. 25 that would abolish federal income, payroll, estate, and gift taxes and replace them with a single national retail sales tax.¹ The bill has been introduced but has not passed either chamber. If it became law, it would take effect on January 1, 2027, and every purchase of a new good or service would carry a federal tax that works out to roughly 30 percent on top of the sticker price. The 30 percent figure and the 23 percent figure the bill itself uses describe the same tax measured two different ways.

Why the Same Tax Is Called Both 23 Percent and 30 Percent

The bill sets the rate at 23 percent of the total amount a consumer pays, a calculation called the tax-inclusive rate.² Spend $100 at the register and $77 goes to the retailer while $23 is federal tax. That mirrors how income tax is described: earn $100, owe $23, call it a 23 percent rate.

Most consumers think about sales tax the other way. The tag says one price and tax gets added on top. Looked at from that angle, $23 of tax on a $77 item is a markup of about 30 percent.³ Both numbers refer to the exact same dollars on the exact same purchase. The only difference is whether you divide the tax into the total payment or into the pre-tax price.

Retailers would collect the tax at the point of sale, the way state sales taxes are collected today, and remit it to the appropriate authorities. Every final retail transaction nationwide would be covered, and because the rate is flat, every consumer pays the same percentage on taxable spending.

What Federal Taxes It Would Replace

The bill repeals three entire subtitles of the Internal Revenue Code. Individual and corporate income taxes and self-employment taxes are gone. Payroll taxes and income tax withholding are gone. Estate and gift taxes are gone.² In practical terms: no W-2 withholding, no annual income tax return for individuals, no corporate income tax filing, no federal tax triggered by inheriting money or receiving a large gift.⁴

Social Security and Medicare would keep getting funded, but through the national sales tax rather than through dedicated payroll taxes. The IRS itself would wind down. The bill cuts off its appropriations after fiscal year 2029, requires federal tax records to be destroyed by the end of that fiscal year, and removes statutory references to the agency effective January 1, 2029.² State agencies would handle most of the collection, using the sales tax infrastructure they already run.

The Monthly Prebate

The bill’s most distinctive feature is the Family Consumption Allowance, usually called the prebate. Every registered legal-resident household would get a monthly payment sized to cover the sales tax on spending up to the federal poverty level. The Social Security Administration would administer registration and send the payments.²

The monthly amount equals one-twelfth of the household’s annual poverty threshold, as set by the Department of Health and Human Services, multiplied by the sales tax rate. Married couples get an additional “marriage penalty elimination amount” built into their threshold.² A rough example: a family with a $32,000 poverty threshold would receive about 23 percent of that amount spread across twelve months, or roughly $613 per month.

Everyone gets the prebate regardless of income, which is what makes it universal rather than means-tested. The effect in percentage terms is still progressive. A family spending exactly at the poverty level effectively owes no net federal tax; a family spending $500,000 a year receives the same rebate but pays tax on everything above the threshold.⁵ Households would register annually and receive payments by direct deposit or prepaid debit card.

What Gets Taxed and What Doesn’t

The tax applies to new retail goods and services sold to consumers. Used items are exempt. A pre-owned car, a previously lived-in home, or secondhand furniture carries no federal tax because the levy was collected on the original sale.⁵ New home construction and home improvements are taxed. Services, from a haircut to a legal consultation, are taxed at the same rate as physical goods.

Business-to-business purchases are excluded so the same value isn’t taxed at every stage of the supply chain. A manufacturer buying raw materials pays nothing; the tax is collected only when the finished product reaches a retail consumer. Investments such as stocks, bonds, and mutual funds are not treated as consumption and are also exempt.

Education is carved out on the theory that it represents investment in human capital, so K-12 schooling and higher education tuition are both exempt.⁵ The bill is border-adjusted: imports are taxed and exports are exempt.

What You’d Pay at the Register

The FairTax would not replace state or local sales taxes. It would sit on top of them.⁵ A shopper in a jurisdiction with a combined state and local rate of 8 percent would pay that 8 percent plus the roughly 30 percent federal markup on every taxable purchase. Total tax-exclusive rates on new goods and services would reach the mid-to-upper 30s in most places and above 40 percent in the highest-tax jurisdictions.

State sales taxes typically exempt groceries, prescription drugs, and other necessities. The FairTax has no equivalent product-level exemptions. It relies entirely on the prebate to offset the burden on essentials, so a household that currently pays no state tax on groceries would start seeing the federal levy on every trip to the store, with the monthly prebate offsetting some of it.

Government purchases would also be taxable, unlike under most state sales taxes.² For state and local governments, that would function as a new federal cost applied to every city, county, and state budget.

The Seven-Year Sunset Tied to the 16th Amendment

The bill contains a built-in expiration mechanism. If the 16th Amendment, which authorizes the federal income tax, is not repealed within seven years of enactment, the entire FairTax Act automatically expires.² Repealing a constitutional amendment requires a new amendment approved by two-thirds of each chamber and ratified by three-fourths of state legislatures. That has happened exactly once, when Prohibition was repealed.

The clause is designed to keep Congress from eventually reimposing an income tax on top of the sales tax. It also means the new system would run under a countdown while states, businesses, and households adapt to it.

Would 23 Percent Actually Raise Enough Money

The main line of criticism is whether the rate in the bill would actually replace the revenue from the taxes it eliminates. Analysis from the Tax Policy Center found the proposed rate would grow federal deficits by nearly $10 trillion over a decade.⁶ The study projected that a revenue-neutral rate, assuming zero evasion, would need to be about 28 percent inclusive, which corresponds to a 39 percent markup at the register.

Factoring in evasion at the same 17 percent rate seen under the current income tax pushes the required rate to 34.1 percent inclusive, or a 51.7 percent tax-exclusive markup. If the base is narrowed by exempting state and local government purchases and a modest set of necessities, as most state sales taxes do, the revenue-neutral rate reaches 46.1 percent inclusive, or an 85.5 percent markup on the pre-tax price.⁶

Supporters dispute those projections. They argue that a broader base, the elimination of embedded corporate taxes, and stronger economic growth would produce more revenue than static models predict, and they note that the current system carries its own compliance costs and evasion. The two sides are essentially modeling different economies.

Where the Bill Stands

H.R. 25 was introduced on January 3, 2025, and referred to the House Committee on Ways and Means.¹ It has not received a committee vote, a floor vote, or Senate consideration. Some version of this bill has been introduced in nearly every Congress for more than two decades without advancing past committee. The 30 percent flat tax is a legislative proposal, not current law, and no part of it is in effect today.

1
Congress.gov. H.R.25 – FairTax Act of 2025
2
Congress.gov. Text – H.R.25 – FairTax Act of 2025
3
U.S. Representative Buddy Carter. Myth v. Fact – The FairTax Act
4
U.S. Representative Buddy Carter. Carter Introduces Bill Abolishing IRS, Tax Code
5
Tax Policy Center. What is the Fair Tax?
6
Tax Policy Center. Proposed FairTax Rate Would Add Trillions to Deficits Over Ten Years