What Is the Fair Tax? The 23% Rate, Prebate, and Sunset

The FairTax is a proposal to replace almost every federal tax with a single 23% national sales tax collected when you buy new goods and services. Filed in the 119th Congress as H.R. 25, the FairTax Act of 2025 would eliminate the income tax, payroll taxes, the corporate income tax, and the estate and gift tax, shut down the IRS, and send every household a monthly cash payment called a prebate to offset the tax on basic spending. The proposed start date is 2027.¹

What the 23% Rate Actually Means

The 23% figure is tax-inclusive. On a $100 total transaction, $23 goes to the federal government and $77 goes to the seller.² That’s the same way income tax rates are usually described: a 22% marginal rate is 22% of the whole, not a markup on the after-tax amount.

Expressed the way state sales taxes are normally quoted, the same tax is 30%. You’d be paying $23 on top of a $77 item, and $23 is roughly 30% of $77. Both numbers describe the same dollars. Retailers would be required to show the tax amount separately on every receipt.

State and local sales taxes would still apply on top of the federal rate. In a state with a combined 7% rate, a shopper could face a total sales tax bill above 30% on the tax-exclusive basis most people are used to reading off a receipt.

Federal Taxes That Would Disappear

H.R. 25 would repeal nearly the entire Internal Revenue Code. The individual and corporate income taxes are gone. Payroll taxes are gone, so no more Social Security or Medicare withholding from your paycheck. Capital gains taxes, the federal estate tax, and the gift tax all disappear.³

The IRS itself would be wound down within three years of the law taking effect.¹ Most Americans would stop filing annual returns and stop keeping the records that income tax compliance requires.

Because the whole tax code goes away, so does every break built on top of it. The mortgage interest deduction, the child tax credit, the earned income tax credit, and education credits all cease to exist. There would be no income tax left to deduct against.

What You’d Pay Tax On

The 23% tax applies to all new goods and services purchased for personal consumption. That covers restaurant meals, cars, haircuts, clothing, appliances, and most of what you buy in a normal week. A few categories are worth calling out because they surprise people.

New homes are taxed at the full rate. On a $400,000 newly built house, that’s $92,000 in federal sales tax. Home improvements are also taxed. Previously owned homes are not.⁴
Financial services are taxed. Direct fees for banking and brokerage services are covered, and the bill also taxes “implicit fees” hidden in interest payments. Any interest on a mortgage, credit card, or auto loan above a baseline Treasury rate is treated as a taxable financial service.⁴
State and local governments would pay the federal sales tax on their own purchases. A city buying police cruisers or building a bridge generates federal tax revenue.⁴

Several categories are carved out. Used goods of any kind are not taxed, on the theory that the tax was already paid when the item was sold new. Business-to-business purchases are exempt so the tax doesn’t pile up as goods move through the supply chain. Exports are exempt.

Education is fully exempt. Tuition at private schools, public universities, and vocational programs would not be taxed, treated as investment in human capital rather than consumption.⁴ Buying stocks or bonds for investment is also exempt.²

Healthcare is less clear. The bill does not explicitly exempt medical services or prescription drugs the way it exempts education. Supporters argue the prebate covers essential medical spending for low-income households, but for spending above poverty-level amounts the 23% rate appears to apply.

The Monthly Prebate

The prebate is the FairTax’s answer to the criticism that a flat consumption tax hits lower-income households hardest. Every registered household gets a monthly cash payment equal to 23% of the federal poverty level for its size, split into twelve installments. The idea is that you get the tax back on every dollar you’d need to spend just to meet basic needs.

Using the 2025 federal poverty guidelines, a single person in the lower 48 states has a poverty threshold of $15,650. Apply 23% and divide by 12, and the monthly prebate lands near $300. A married couple with two children has a poverty threshold of $32,150, producing a monthly prebate of roughly $616.⁵ The figures update each year with the poverty guidelines.

Payments arrive at the start of each month, so households have cash on hand before they pay any sales tax at the register. A household spending exactly at the poverty level would have its entire federal tax burden rebated. Spend well below poverty and you come out ahead. The effective rate rises as spending climbs above poverty, approaching but never reaching 23%.

Everyone gets the prebate. No income test, no phase-out. A billionaire household and a minimum-wage household of the same size receive the same check. Households must register annually with valid Social Security numbers, and the Social Security Administration would manage the recipient database.

What Happens to Your Retirement Savings

Money already saved under the current system gets treated in very different ways depending on the account type. Withdrawals from a 401(k) or traditional IRA would no longer be subject to income tax, and neither would pension benefits or Social Security payments.⁶

That looks like a windfall, and for retirees it partly is. The catch: when you spend those dollars, the 23% sales tax applies. You’ve effectively traded a future income tax at your marginal rate for a consumption tax on the same money. Whether that trade helps depends on your spending patterns and what your income tax bracket would otherwise have been.

Roth IRAs and ordinary taxable savings face a rougher outcome. That money was already taxed once under the income tax before being saved. Under the FairTax, it gets taxed again when spent. The bill contains no mechanism to compensate for this double taxation, and it falls hardest on retirees and older savers, who hold the most after-tax wealth.

How Social Security and Medicare Would Be Paid For

If payroll taxes vanish, Social Security and Medicare need a new funding stream. The bill splits sales tax revenue into designated shares. In the first year, roughly 65% flows to general federal operations, about 27% to the Social Security trust funds, and about 8% to Medicare’s hospital and supplementary medical insurance trust funds.⁴

That’s a structural shift. Social Security currently draws from payroll contributions tied directly to wages. Under the FairTax, it would depend on how much Americans buy.² A recession that pulls down consumer spending could squeeze Social Security funding in ways the current payroll system does not.

Who Collects the Tax

Rather than build a new federal collection agency, the FairTax pushes collection down to the states. States would use their existing sales tax systems to collect the federal tax from retailers and forward the money to the U.S. Treasury. States keep one-quarter of one percent of what they collect. Retailers get an administrative credit equal to the greater of $200 or 0.25% of the tax they remit.²

Five states have no state sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. They lack the collection machinery the plan assumes exists, and would need to build systems from scratch or hand collection to the federal government.

The Seven-Year Sunset Tied to the 16th Amendment

The bill contains a self-destruct clause. If the 16th Amendment, which authorizes the federal income tax, is not repealed within seven years of the FairTax taking effect, the entire national sales tax automatically sunsets.⁴

Repealing a constitutional amendment requires a two-thirds vote in both chambers and ratification by three-fourths of state legislatures. No amendment has been repealed since Prohibition ended in 1933. If the FairTax passed but the 16th Amendment survived the seven-year window, the whole system would unwind, potentially forcing a rushed transition back to income taxation.

Main Arguments For and Against

Supporters argue the FairTax would produce genuine simplification. No annual returns for most people. No paycheck withholding. No maze of deductions and credits that favor those who can afford tax advisors. Taxing consumption instead of income, they argue, rewards saving. Exports leave the country free of embedded federal tax. And the underground economy, from cash wages to unreported tips, gets taxed when those dollars are eventually spent.

The strongest objection is about who bears the burden. Higher-income households spend a smaller share of income than lower- and middle-income households. A family earning $60,000 likely spends almost all of it and pays the 23% on most purchases. A household earning $600,000 might spend half and invest the rest, keeping the invested share outside the tax. The prebate offsets this at the low end, but critics argue it does little for the middle, which could see its effective rate rise while wealthy households see a cut.

Revenue adequacy is another concern. President George W. Bush’s Tax Reform Panel reviewed the FairTax concept and concluded that the rate would need to be higher than 23% to replace existing federal revenue without adding to the deficit. The panel called the prebate expensive and administratively complex, and warned that a federal retail sales tax above 30% on a tax-exclusive basis would invite widespread evasion.

Where the Bill Stands

The FairTax has been introduced in some form in nearly every Congress since 1999 and has never advanced out of committee. In the 119th Congress it was reintroduced as the FairTax Act of 2025 with a proposed effective date of 2027.¹

1
U.S. Congress. H.R. 25 – FairTax Act of 2025
2
U.S. Congress. H.R. 25 – FairTax Act of 2025 – Full Text
3
U.S. House of Representatives – Buddy Carter. Carter Introduces Bill Abolishing IRS, Tax Code
4
Tax Policy Center. What Is the Fair Tax?
5
Federal Register. Annual Update of the HHS Poverty Guidelines
6
U.S. Representative Buddy Carter. Myth v. Fact: The FairTax Act