What Is the Fair Tax Act and How Would It Work?

The FairTax Act is a long-running proposal, most recently filed as H.R. 25 in the 119th Congress with a proposed start date of 2027, that would abolish nearly every federal tax and replace them with a single 23% national retail sales tax on new goods and services.¹ Every household would also receive a monthly “prebate” check meant to cover the tax on spending up to the federal poverty level. The bill has been introduced in every Congress for more than two decades and has never advanced beyond committee.

Federal Taxes the Bill Would Eliminate

The FairTax swaps a tax on earning money for a tax on spending it. The bill calls for repealing personal income taxes, corporate income taxes, payroll taxes (the Social Security and Medicare withholdings on your paycheck), capital gains taxes, the estate tax, and the gift tax.² That covers the vast majority of how the federal government currently collects money.

For workers, the most visible change would be the end of payroll withholding. Gross pay and take-home pay would be the same number. For businesses, the corporate income tax and the employer’s share of payroll taxes would vanish. Inherited assets and large financial gifts would carry no federal tax at the time of transfer. In place of all of that, the federal government would collect revenue only when someone buys something new at retail.

The 23% Rate, Explained Two Ways

The proposed rate is 23% on a tax-inclusive basis. Out of every $100 you spend at the register, $23 goes to the federal government and $77 to the seller. This mirrors how income tax rates are usually described: if you earn $100 and owe $23, your rate is 23%.³

The same tax expressed the way sales taxes are normally quoted works out to about 30%. That’s the markup you’d actually see added at the register: a $77 item plus $23 in tax totals $100. Neither number is wrong; they describe the same amount of tax from different angles. Supporters generally use 23% because it’s a direct comparison to current income tax rates. Critics generally use 30% because it reflects the sticker-shock experience of shopping.³

What Would Be Taxed

The tax applies to all new goods and services purchased for personal use inside the United States. Groceries, clothing, rent, home purchases, car purchases, haircuts, restaurant meals, legal fees, and financial services would all be taxable at the full rate. Healthcare and medical services are not explicitly exempted in the bill text, which means doctor visits, hospital stays, and health insurance premiums would likely be subject to the tax as well.³

Several categories get special treatment:

Used goods are exempt. A used car, a resale-shop coat, or a previously occupied home wouldn’t carry the tax, on the theory that the item was already taxed when first sold new.
Business-to-business purchases are exempt to prevent taxing the same good multiple times as it moves through the supply chain. Only the final retail sale is taxed.
Private and public education and training services are exempt, treated as investments in human capital rather than personal consumption.³
Exports are exempt. Only consumption inside the United States is taxed; imported goods sold to U.S. consumers face the same 23% rate as anything made domestically.

One detail that surprises people: government spending would also be taxed. Federal, state, and local governments would pay the national sales tax on their own purchases, including goods, services, and even the wages they pay to public employees.³

The Prebate: A Monthly Check to Every Household

The most distinctive feature of the FairTax is the prebate, a monthly payment sent to every registered household in advance. The prebate is designed to ensure that no one pays federal tax on spending up to the federal poverty level. The payment equals the annual poverty-level spending for your household size multiplied by the 23% rate, divided by twelve.¹

Using the 2026 federal poverty guidelines, the monthly prebate would work out roughly as follows:⁴

Single individual: $15,960 × 23% = about $306 per month
Couple, no children: $21,640 × 23% = about $415 per month
Family of four: $33,000 × 23% = about $633 per month

Every household receives the prebate regardless of income. A billionaire and a minimum-wage worker with the same household size get the same check. The progressive effect comes from proportion, because that fixed amount covers a much larger share of a low-income family’s total spending than a wealthy family’s. Payments arrive by direct deposit or mail at the start of the month, before the spending happens.

How Social Security and Medicare Would Still Get Funded

Eliminating payroll taxes raises an obvious question. The FairTax doesn’t touch the benefit programs; it redirects a fixed share of sales tax revenue into the same trust funds payroll taxes currently feed. In the first year, 27.43% of collections would go to the Old-Age, Survivors, and Disability Insurance trust funds, and 7.74% would go to Medicare’s hospital insurance and supplementary medical insurance trust funds. The remaining 64.83% would flow to general federal revenue.³

This is a structural change worth noting. Trust fund revenue would depend entirely on consumer spending rather than wages. If spending falls in a downturn, so does the money flowing to Social Security and Medicare, even if employment holds steady.

Collection Without the IRS

The FairTax eliminates the Internal Revenue Service entirely.² State governments would collect the national sales tax alongside their own state sales taxes and remit the federal share to the Treasury. Smaller bureaus within the Treasury Department would oversee the system and audit compliance.

Both states and retailers would receive a fee of 0.25% of the revenue they handle to offset collection costs.⁵ Businesses would register as authorized sellers, similar to how state sales tax permits work today. The five states with no state sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no existing infrastructure for retail sales tax collection and would need to build it from scratch or arrange something alternative.

The 16th Amendment Repeal and the Seven-Year Sunset

The FairTax doesn’t just repeal the tax code. It also calls for repealing the 16th Amendment, the constitutional provision that authorizes the federal government to tax income. Without that repeal, a future Congress could layer income taxes back on top of the new sales tax, leaving the country with both.

The bill tries to force the issue with a sunset clause. If the 16th Amendment is not repealed within seven years of the FairTax taking effect, the entire sales tax system automatically terminates.⁶

Repealing a constitutional amendment is exceptionally hard. It requires a new amendment passed by two-thirds of both chambers of Congress and ratified by three-fourths of state legislatures (38 out of 50). It has happened once in American history, when the 21st Amendment repealed Prohibition.

Where the Debate Concentrates

Three questions dominate the analysis of whether the bill would work as advertised.

Does 23% Actually Replace Current Revenue?

The bill’s sponsors say yes. Independent analysts are skeptical. The core problem is evasion. A 30% markup at the register creates a strong incentive for under-the-table transactions, barter arrangements, and misclassifying personal purchases as business purchases to claim the B2B exemption.⁵

Analysts at the American Action Forum modeled noncompliance rates of 15% to 30% and concluded that the rate would need to be significantly higher to match current revenue. An estimate from the Center for American Progress placed the revenue-neutral rate closer to 49% on a tax-exclusive basis. Other estimates generally land well above 30%.

Who Pays More and Who Pays Less?

The distributional impact varies dramatically across income levels. High-income households would see large tax cuts. A family earning $1 million per year currently pays over $300,000 in combined federal income and payroll taxes; under the FairTax at the 30% tax-exclusive rate, that family’s tax bill would drop to roughly $41,000, because most of their income goes to savings and investments that aren’t taxed under a consumption system.

Low- and middle-income families typically spend most or all of what they earn, so nearly every dollar they take in would effectively be taxed. The prebate softens this at the poverty level, but spending above that line is taxed at the full rate. A single parent earning about $38,000 who currently owes around $1,300 in federal taxes could owe over $7,000 under the FairTax.

Retirees face a specific transition problem. Someone who spent decades paying income taxes on their earnings, saved what was left, and is now spending those savings in retirement would be taxed a second time on every purchase. A retired couple living on $60,000 from Social Security, pensions, and savings who currently owes zero in federal tax could owe over $7,000 under the proposed rate. The bill offers no transition credit or phase-in for previously taxed savings.

Can a Single-Stage Retail Tax Be Enforced at This Rate?

No country has ever implemented a retail sales tax at a rate approaching 30%. Most nations that tax consumption use a value-added tax, which collects tax at every stage of production. A VAT is considered more resistant to evasion because each business in the supply chain has an incentive to accurately report transactions to claim its own credit. A single-stage retail tax lacks that built-in cross-checking, and the 0.25% administrative fee paid to retailers is small compared to the potential gain from pocketing 30% of a sale, particularly in cash-heavy businesses.

Current Status

The FairTax remains a proposal. It has been reintroduced in every Congress since 1999 and has never received a floor vote in either chamber.¹ Nothing about your current federal tax obligations changes unless and until it passes both chambers, is signed into law, and takes effect on its proposed start date.

1
Congress.gov. H.R. 25 – 119th Congress (2025-2026): FairTax Act of 2025
2
U.S. House of Representatives. Carter Introduces Bill Abolishing IRS, Tax Code
3
Tax Policy Center. What is the Fair Tax?
4
Federal Register. Annual Update of the HHS Poverty Guidelines
5
Tax Foundation. Fair Tax FAQ
6
National Center for Constitutional Studies. Will Congress Repeal the Sixteenth Amendment?