What Is the Federal Income Tax Elimination Bill?

The federal income tax elimination bill currently before Congress is H.R. 25, the FairTax Act of 2025. It would repeal federal income taxes, payroll taxes, and estate and gift taxes, shut down the Internal Revenue Service, and replace the entire system with a single national retail sales tax starting in 2027.¹ Representative Buddy Carter of Georgia introduced it in the 119th Congress. It sits in the House Ways and Means Committee with no hearings scheduled.

What Taxes Would Go Away

The bill repeals three major sections of the Internal Revenue Code at the same time. Subtitle A covers individual income taxes, corporate income taxes, and capital gains taxes. Subtitle B covers estate and gift taxes. Subtitle C covers payroll taxes, including Social Security and Medicare contributions from both employees and employers.¹

For a typical worker, that means your gross paycheck arrives with no federal withholding at all. The 6.2% Social Security tax and 1.45% Medicare tax that currently come out of every check, plus your employer’s matching share, disappear. Self-employed workers, who currently pay both halves for a combined 15.3%, lose that obligation entirely. The 21% corporate income tax ends, so businesses no longer owe federal tax on profits. Estates stop owing federal tax on inherited wealth, and large financial gifts no longer trigger gift tax.²

All of the repeals take effect together rather than phasing in.

The National Sales Tax That Replaces Them

The replacement is a federal sales tax on new goods and services purchased at the retail level. The rate is described two different ways, and that is where most of the confusion comes from. The tax-inclusive rate is 23%, calculated the way income tax rates work: hand over $100, and $23 is tax while $77 is the goods. The tax-exclusive rate is 30%, calculated the way state sales taxes work: a $77 item gets $23 added at the register for a $100 total.²

Both numbers describe the same amount of money. Critics tend to cite the 30% figure because it matches the markup you would see at checkout. Supporters cite the 23% figure because it maps onto how people already think about income tax brackets.

The rate is not permanently fixed at 23%. It is built from three pieces: a general revenue component of 14.91% plus two variable components for the Social Security and Medicare trust funds, with the variable pieces recalculated each year based on program spending.

What Would Be Taxed and What Wouldn’t

The tax applies to new goods and services bought for personal use. Several major categories are exempt:

Used goods. Anything previously owned, from used cars to existing homes, pays no federal sales tax. Property you already own on December 31, 2026 counts as used property under the transition rules.²
Business purchases. Anything bought for use in a trade or business, or bought for resale, is exempt. The tax hits only the final consumer.
Investment purchases. Property or services held exclusively for investment are not taxed.
Education. Tuition for primary, secondary, and postsecondary education is exempt, along with job-related training. Room, board, and recreational activities do not qualify.
Exports. Goods and services sold for export are not subject to the tax.
Small casual sales. Up to $1,200 per year in personal sales and up to $400 per year in personal imports are exempt.

Services are fully covered. Legal advice, medical care, accounting, home repair, and other professional services all carry the tax. Government purchases at the federal and state level are also taxable, though state government functions that are not final consumption of property or services are carved out.²

State and local sales taxes stay in place. The federal tax stacks on top. In a state with a combined state and local rate of 6%, checkout under the tax-exclusive calculation would run roughly 36% above the shelf price.

The Monthly Prebate for Basic Needs

The bill’s answer to taxing groceries and other necessities is a monthly cash payment to every registered household, called the Family Consumption Allowance, or prebate. The government calculates how much a household of your size would spend at the poverty level, multiplies that by the tax rate, and sends you the money in advance each month.²

Using 2025 federal poverty guidelines to illustrate: the poverty level for a single person is $15,650 per year, and for a family of four it is $32,150.³ At the 23% tax-inclusive rate, a single person would receive roughly $300 per month and a family of four roughly $616 per month. The payment goes to every legal resident household regardless of income and arrives at the start of the month, before you spend anything. Eligibility requires a valid Social Security number and registration with the administering agency.

This is what gives the tax its progressive tilt. For someone earning $30,000 and spending most of it, the prebate cancels out the tax on a large share of purchases. For someone earning $300,000 and spending well above the poverty line, the same prebate covers only a small fraction of the tax paid.

What Happens to Social Security and Medicare

The bill does not cut benefits or change eligibility for either program. It redirects part of the national sales tax revenue into the same trust funds that payroll taxes currently feed. The two variable components of the total rate are earmarked specifically for Social Security and Medicare and are recalculated each year based on projected spending.² Whether the sales tax would actually produce enough revenue to keep both programs solvent is disputed, and the revenue debate is discussed below.

No More IRS and No More Tax Returns

The bill abolishes the IRS entirely, with a wind-down period to close out pending audits and disputes under the old code. Two new offices inside the Treasury Department take over: a Sales Tax Bureau and an Excise Tax Bureau.²

Actual collection is handed to the states through cooperative agreements. States already run their own sales tax systems, so the theory is that adding a federal layer would be manageable. States that participate receive an administrative fee. If a state declines, the federal government retains authority to collect directly in that state.

For individuals, the most tangible change is that you never file a federal tax return again. No W-2s, no 1040s, no April deadline. Businesses that sell to consumers handle collection and remittance, similar to how they already manage state sales tax today.

The Seven-Year Constitutional Catch

The FairTax Act includes a built-in expiration date. Section 401 states that if the 16th Amendment, which authorizes the federal income tax, is not repealed within seven years of enactment, the entire national sales tax system expires automatically.²

Repealing a constitutional amendment requires a two-thirds vote in both the House and Senate followed by ratification from three-quarters of state legislatures, meaning 38 out of 50. It has happened once in American history, when the 21st Amendment repealed Prohibition in 1933. If ratification fails or stalls, the sales tax disappears and the country is left without a functioning federal tax system unless Congress passes replacement legislation. The bill’s sponsors describe this as a safeguard against Congress stacking a sales tax on top of the income tax. Critics describe it as a ticking clock that would introduce enormous fiscal uncertainty.

Does the Math Work

Whether the 23% rate would raise enough money to replace what it eliminates is the most contested question about the bill. The Tax Policy Center, a nonpartisan research organization, estimates that keeping the rate at 23% tax-inclusive would increase federal deficits by nearly $10 trillion over ten years. Their analysis concludes that a revenue-neutral rate would need to be roughly 28% tax-inclusive, or 39% tax-exclusive, even assuming zero evasion.⁴

Factor in realistic evasion and the required rate climbs. Applying the same 17% evasion rate that currently plagues the income tax, the Tax Policy Center estimates the revenue-neutral rate at about 34% tax-inclusive, which translates to roughly a 52% markup at the register. Exempting state and local government purchases and any basic necessities would push the required rate higher still.⁴

Supporters argue that eliminating compliance costs, untaxing savings and investment, and bringing underground economic activity into the tax base through point-of-sale collection would produce growth that static models miss. The disagreement has run through every session of Congress in which the bill has been introduced.

Transition Problems for Savers and Retirees

Switching from an income tax to a consumption tax creates problems the bill only partially addresses.

The most frequently raised concern involves existing savings. If you spent decades paying income tax on your earnings and then put that after-tax money into a bank account, you would pay the consumption tax again when you spend those savings. People near or in retirement who built their nest eggs under current rules would face a new tax layer on money that was already taxed. The bill has no direct remedy; all new retail purchases are treated the same regardless of when the buyer earned the money.

Tax-advantaged retirement accounts create a different wrinkle. Traditional 401(k) and IRA contributions are tax-deferred under current law, with income tax paid at withdrawal. If the income tax disappears, those withdrawals become tax-free, which is a windfall for people who have not yet drawn down their accounts. Someone who chose a Roth IRA, paying income tax up front in exchange for tax-free withdrawals later, gets no equivalent benefit, because their withdrawals would have been untaxed either way.

Where the Bill Stands

H.R. 25 was introduced on January 3, 2025, with ten co-sponsors, and referred to the House Ways and Means Committee the same day.⁵ The committee has not scheduled hearings, a markup, or a vote.¹

Versions of this bill have been introduced repeatedly since 1999 without reaching a floor vote in either chamber. To become law, it would need to pass the House, pass the Senate, and be signed by the President. The far harder task of amending the Constitution would then need to succeed within seven years, or the entire system sunsets. Those are long odds, but the bill continues to attract a dedicated base of congressional supporters who reintroduce it each session.

1
Congress.gov. H.R.25 – FairTax Act of 2025
2
Congress.gov. H.R.25 – FairTax Act of 2025 – Text
3
HHS ASPE. 2025 Poverty Guidelines
4
Tax Policy Center. Proposed FairTax Rate Would Add Trillions to Deficits Over Ten Years
5
GovInfo. H.R. 25 – FairTax Act of 2025