What Is the FairTax and How Would It Replace Income Tax?

The FairTax is a proposal to scrap the federal income tax and nearly every other federal tax, replacing them with a single 23% national retail sales tax collected at the register. Reintroduced in January 2025 as H.R. 25, the FairTax Act would abolish the IRS, end individual tax filing, and send every registered household a monthly cash payment to offset the tax on basic necessities.¹ The idea has been introduced in some form in nearly every Congress since 1999 and has never received a committee vote.

Which Federal Taxes Go Away

The bill repeals the personal income tax, the corporate income tax, all payroll taxes funding Social Security and Medicare, the estate tax, and the gift tax.¹ Capital gains, dividends, and interest income are no longer taxed as income because the income tax code no longer exists. The only federal taxes that survive are excise taxes on specific goods like fuel and alcohol.

The IRS itself is abolished. No annual returns, no W-2s, no 1099s for individuals. The bill creates two new bureaus inside the Treasury Department, a Sales Tax Bureau and an Excise Tax Bureau, but neither has any role in tracking your income.²

How the 23% Rate Actually Reads

The bill sets the rate at 23% calculated on a tax-inclusive basis, meaning 23 cents of every dollar you spend goes to the federal government.² If you hand over $100 at the register, $77 covers the product and $23 is the tax. The bill uses this calculation because it mirrors how income tax rates are quoted: a 22% federal bracket takes 22 cents from every dollar of gross pay.

The same rate looks different when calculated the way state sales taxes work, which add the tax on top of the sticker price. On that tax-exclusive basis, the FairTax is a 30% markup: a $77 item costs you $100 after the $23 tax is added. Both figures describe the same dollar amount. Critics tend to cite 30%; proponents prefer 23%.³

State and local sales taxes stay put and stack on top. A resident of a state with an 8% sales tax would face a combined tax-exclusive rate of roughly 38% on taxable purchases.

What Gets Taxed

The tax applies to purchases of new goods and services for personal use. A new car, a haircut, a doctor’s visit, legal fees, a restaurant meal. The base is deliberately broad. Government purchases count too: federal, state, and local governments would pay the sales tax on their own consumption and investment spending, including employee wages.³

Financial services are taxed as well, and this is where the proposal gets unusual. Explicit fees like bank account charges are straightforward. The bill also taxes implicit fees built into interest payments: the portion of your mortgage or credit card interest that exceeds a baseline Treasury rate is treated as a taxable financial service.³ Borrowing gets more expensive.

What Stays Tax-Free

Used goods are exempt. A secondhand car, a resale-shop couch, or an existing home has already been taxed once at its first retail sale, and the FairTax does not hit it again.

Business-to-business purchases for production, investment, or resale are exempt. A restaurant buying wholesale ingredients or a manufacturer buying steel pays no sales tax on those inputs. The tax only lands on the final consumer, which prevents costs from compounding at each step of the supply chain.³

Education and job training services, whether provided by private institutions or public schools, are exempt on the theory that they represent investment in human capital rather than consumption.³ Food grown and consumed on farms is also excluded for administrative simplicity.

The Monthly Prebate

The most distinctive feature of the FairTax is a monthly cash payment sent in advance to every registered household. The bill calls it the Family Consumption Allowance; it is more commonly known as the prebate, and its purpose is to ensure no household pays federal tax on spending up to the poverty level.³

The math is simple. Take the federal poverty level for your household size, multiply by 23%, and divide by 12. Using the 2026 poverty guidelines, the monthly payments would run roughly:⁴

Single person: $15,960 poverty level × 23% ≈ $306 per month
Couple: $21,640 × 23% ≈ $415 per month
Family of four: $33,000 × 23% ≈ $633 per month

Every household gets the prebate regardless of income. A billionaire and a minimum-wage worker with the same household size receive the same check. The progressive effect comes from proportion: for a low-income household spending mostly on necessities, the prebate roughly cancels out the federal tax burden. For a high-income household buying luxury goods, it is a rounding error.

To qualify, you need a valid Social Security number and must register your household with the government. Registration covers household size and composition but does not require you to report income, assets, or any other financial information. The government never learns what you earn, only what household you claim.

What Happens to Social Security and Medicare

Eliminating payroll taxes raises an obvious question: how do Social Security and Medicare keep running? The bill funds both programs from general revenue, out of the same pool of sales tax dollars that pays for everything else.⁵ The dedicated link between your paycheck and your Social Security account disappears. Congress would appropriate money to the trust funds from national sales tax receipts.

This is a structural change. Payroll taxes currently create a self-funding mechanism that makes Social Security politically difficult to cut, because workers can point to their own contributions. Shifting to general revenue puts the program on the same footing as defense spending or any other budget line, competing annually for appropriations.

How the Tax Would Be Collected

Retailers collect the tax at the point of sale, the same way they already handle state sales taxes. Each business remits what it collects to its state taxing authority rather than to a federal agency. State governments administer the tax within their borders. The two new Treasury bureaus handle federal oversight, monitor state compliance, and coordinate enforcement.² The daily work of tax collection shifts almost entirely to businesses and existing state agencies.

How Big Purchases Would Change

The proposal reshapes the math on the largest purchases most people make. New home construction is the clearest example. A newly built $400,000 home would carry roughly $92,000 in embedded federal sales tax. Existing homes are completely exempt.³ The gap creates a strong incentive to buy resale rather than new construction.

Healthcare gets more expensive at the point of service. Doctor visits, surgeries, prescriptions, and health insurance premiums all carry the 23% tax. Under current law, employer-provided health insurance premiums are excluded from your taxable income, effectively giving them a tax subsidy. The FairTax eliminates that subsidy. Proponents argue your gross paycheck rises because employers no longer withhold income or payroll taxes.

Saving and investing become completely tax-free. No capital gains tax, no tax on dividends, no tax on interest earned. You only pay tax when you spend the money. For anyone with substantial savings or investment income, that is a significant shift in their favor.

The Seven-Year Sunset on the Income Tax

The FairTax contains a built-in kill switch. If the 16th Amendment, which authorizes Congress to levy an income tax, is not repealed within seven years of the law taking effect, the national sales tax automatically terminates.³

The clause exists because the bill’s authors want the income tax to be permanently impossible, not just suspended. Without repealing the 16th Amendment, a future Congress could reinstate the income tax alongside the sales tax and end up with both. Amending the Constitution requires approval by two-thirds of both chambers of Congress and ratification by three-fourths of state legislatures, a bar cleared only 27 times in American history.

Whether the Numbers Add Up

The most contested question about the FairTax is whether a 23% rate raises enough money to replace what it eliminates. The Tax Policy Center, a nonpartisan research group, estimated the 23% rate would fall short by roughly $1 trillion in 2026 alone and nearly $10 trillion over a decade.⁶ The group calculated that a revenue-neutral rate, before accounting for any evasion, would need to be about 28% tax-inclusive, or 39% as a markup at the register.

Tax evasion makes the math worse. If the sales tax generated the same 17% evasion rate as the current income tax, the required tax-inclusive rate climbs to roughly 34%, or a 52% markup at the cash register.⁷ Combined federal-plus-state rates above 40% would create real pressure for under-the-table transactions.

Distribution is the other flashpoint. Because lower-income households spend a larger share of their income on consumption, a flat sales tax is inherently less progressive than graduated income tax brackets, even with the prebate. The Tax Policy Center found the FairTax would significantly reduce taxes for high-income households while raising them for many middle-income families.⁷ Proponents counter that the prebate makes the effective rate progressive at the bottom, that untaxing savings and investment stimulates growth, and that embedded corporate taxes in current retail prices would fall, partially offsetting the visible sales tax. The competing claims have fueled the argument for over two decades.

Where the Bill Stands Now

H.R. 25 was reintroduced in January 2025 by Representative Buddy Carter of Georgia with nine co-sponsors and referred to the House Ways and Means Committee.¹ The 2025 version sets 2027 as the year the sales tax would take effect if passed. Replacing the entire federal tax code requires extraordinary political consensus, and the proposal has not come close to that threshold in any of the Congresses that have considered it since 1999.

1
GovInfo. H.R. 25 (IH) – FairTax Act of 2025
2
Congress.gov. H.R. 25 – FairTax Act of 2025 – Full Text
3
Tax Policy Center. What Is the Fair Tax?
4
HHS ASPE. 2026 Poverty Guidelines
5
Congress.gov. H.R. 25 – FairTax Act of 2025 – Full Text
6
Tax Policy Center. Proposed FairTax Rate Would Add Trillions to Deficits Over Ten Years
7
Tax Policy Center. Deconstructing the Fair Tax