What Is the Fair Tax and How Would It Work?

The FairTax is a long-standing legislative proposal, currently filed as H.R. 25 in the 119th Congress, that would abolish federal income taxes, payroll taxes, and estate and gift taxes and replace them with a single national retail sales tax on new goods and services. The proposed start date is January 1, 2027. Every household would also receive a monthly cash payment, called the prebate, meant to offset the tax on spending up to the poverty line. The bill was referred to the House Ways and Means Committee in January 2025 and has not advanced.¹

What the FairTax Would Get Rid Of

The bill wipes out several federal taxes at once. Individual income tax on wages, salaries, and investment returns would end. So would the corporate income tax, the self-employment tax, the payroll taxes that fund Social Security and Medicare, the capital gains tax, the estate tax, and the gift tax.² Nothing would be withheld from your paycheck for federal taxes, and you would not file a federal income tax return.

The Internal Revenue Service would be dismantled after a phase-out period, with remaining federal tax duties moved to two new offices inside the Treasury Department.² Federal excise taxes (such as those on alcohol and tobacco) and tariffs on imports would still exist.

The 23 Percent Rate, and Why You Will Also See 30 Percent

The proposed rate is 23 percent, but the number is calculated in a way that differs from how state sales taxes are usually quoted. The bill uses a tax-inclusive method: on a $100 total price, $23 is tax and $77 is the item. Written the way a cash register describes state sales tax, that same tax is a 30 percent markup on the $77 item.² The dollars are identical either way. Supporters generally say 23 percent, critics generally say 30 percent, and both are describing the same tax.

After the first year the rate is not fixed at 23 percent. It becomes a combined figure made up of a 14.91 percent general revenue portion plus separate components tied to Social Security and Medicare funding, which can shift year to year.² Social Security and Medicare benefits would continue under existing formulas, funded from this earmarked share of sales tax revenue rather than from payroll taxes.

What Would Be Taxed and What Would Not

The tax applies to retail purchases of new goods and services for personal use in the United States. That includes professional services like legal work, medical care, and financial advice, and it includes purchases by federal, state, and local governments on their own spending.³

Several categories are outside the tax:

Used property. Anything already taxed at its first retail sale, or held for non-business purposes before January 1, 2027, is exempt. Used cars, existing homes, and secondhand goods qualify.²
Intangible property. Stocks, bonds, securities, patents, and copyrights are not taxed.²
Investment property. Property bought for appreciation or income production is exempt.²
Business inputs. Only the final consumer pays. Purchases along the production chain are not taxed.
Exports. Goods and services sold to buyers outside the United States are exempt, while imports are taxed when consumed here.³

The Prebate

Every registered household would get a monthly cash payment, in advance, meant to cover the sales tax on spending up to the federal poverty level for its household size.³ The idea is that no American pays federal tax on the basic cost of food, housing, and clothing.

The amount is the poverty threshold for that household size multiplied by the tax rate. A single person gets less than a family of four because the threshold rises with each member. Every household of the same size gets the same check regardless of income, so a billionaire and a minimum-wage earner with matching families receive matching payments. All household members must have valid Social Security numbers and be lawful residents. Payments are monthly and require no annual tax filing.

Who Would Pay More and Who Would Pay Less

The current federal tax system is progressive. The top 20 percent of households pay an effective federal rate of roughly 24 percent across income, payroll, and corporate taxes, while the bottom 20 percent receive more in refundable credits than they owe. A flat consumption tax with a prebate changes that structure.

Higher earners save and invest a larger share of what they make, and savings and investment are not taxed under the FairTax. Wealthy households would see their overall federal tax burden fall significantly. The prebate helps at the bottom, but Progressive Policy Institute analysis cited in the research found that families earning roughly $10,700 to $53,700 could pay more than they do today, with some couples in the $25,000 to $27,000 range losing more than $5,000 in after-tax income. A $3,100 annual prebate per adult translates to about $2,400 in real new purchasing power once the sales tax on that spending is counted.

Supporters argue the prebate makes the effective rate progressive at the low end and that removing taxes on income and investment would spur growth that lifts everyone. Economists disagree on how large those growth effects would be, which is why confident distributional claims from either side should be read carefully.

What Happens to Money You Already Saved

If you paid income tax on your earnings and saved the rest, those dollars were already taxed once. Under the FairTax, spending them at the register triggers the sales tax on top. For retirees living on after-tax savings, that is effectively a second tax on income earned years ago.

The used-property exemption softens part of the blow. A home, car, or other tangible good owned before January 1, 2027, can be sold tax-free.² But everyday spending on groceries, utilities, new clothing, and services carries the full tax. A younger worker earning tax-free wages from 2027 onward gets a compensating benefit. A retiree drawing down existing savings does not.

Whether the Math Works

Whether 23 percent tax-inclusive raises enough to replace everything the bill repeals is contested. The Tax Policy Center estimated that holding the rate at 23 percent would add nearly $10 trillion to federal deficits over ten years, and roughly $18 trillion once realistic evasion is assumed. If state and local government purchases were exempted and common necessities carved out (as many state sales taxes do), a revenue-neutral rate would rise to about 46 percent tax-inclusive, or an 85.5 percent markup at the register.⁴

Supporters respond that these estimates undercount the growth effects of eliminating taxes on income and investment, and that removing embedded taxes and compliance costs from the production chain would lower pre-tax prices. Whether prices actually fall enough to absorb a 23 to 30 percent tax at the register has not been tested at national scale.

One Built-In Safeguard

The bill contains a sunset clause. If the Sixteenth Amendment (the constitutional provision that lets Congress tax income) is not repealed within seven years of the FairTax taking effect, the whole law expires automatically.² The point is to prevent a future Congress from layering a new income tax on top of the sales tax. Repealing a constitutional amendment requires a two-thirds vote in both chambers followed by ratification from three-fourths of state legislatures, or a constitutional convention. No amendment has been repealed since Prohibition ended in 1933.

Where the Bill Actually Stands

H.R. 25 was introduced on January 3, 2025, and referred to the House Committee on Ways and Means.¹ No hearings have been scheduled and no committee vote has taken place. The bill has been introduced in various forms since the late 1990s without reaching a floor vote in either chamber. The H.R. 25 designation is symbolic, matching the proposed 23 percent rate, and does not indicate momentum. Enactment would require passage in the House and Senate and a presidential signature, and the companion constitutional repeal would face a much steeper path.

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