Among the many concessions Kevin McCarthy agreed to in order to become speaker of the House is one that would give the so-called Fair Tax Act a full hearing on Capitol Hill. To describe the bill as radical would be an understatement. Not only would it abolish the IRS, but it would also replace all existing federal taxes with a flat, nationwide 30% sales tax. That would be on top of existing state and local rates. Sure, the bill probably doesn’t have much chance of passing, but it has some merit and is a good starting point for a discussion about tax reform.

What will House Speaker Kevin McCarthy proposed on taxes? Drew Angerer/Getty Images/TNS

The bill’s handful of supporters hope to spark a more general conversation about tax reform. Politically, most everyone outside the group of supporters calls it foolhardy. Legendary low-tax activist Grover Norquist described it as a gift to the Biden administration. In policy terms, though, the underlying idea, a flat tax on consumption, is not as crazy as it sounds.

The fiscal challenges the U.S. faces over the next decade are stark.

Both Democrats and mainstream Republicans should come to recognize that incorporating a flat tax on consumption into the federal tax system is one of the least painful ways of meeting those challenges – both in terms of the burden on working families and the economy as a whole.

The prospect of closing the projected budget deficit through spending cuts alone is bleak. It would require an across-the-board reduction of roughly 25%. If, as is likely, defense and Social Security are shielded from any major reductions, the necessary cuts would rise to 50%. That 50% would apply to Medicare, Medicaid, the subsidies that cap Obamacare premiums and other programs widely regarded as essential.

The reality is that reining in the deficit without increases in revenue is unrealistic.


Economists have long known that flat consumption taxes are less damaging to economic growth than the current system. More recent research suggests that this advantage grows exponentially as tax rates rise. The reason the Fair Tax Act isn’t a realistic way of implementing a flat consumption tax is that, like any sales tax, it places the entire burden of tax collection on retailers. This can work as long as tax rates are low, but once they start to climb into the double digits, selling goods and services “off the books” at a discount becomes so profitable that honest retailers could find themselves run out of business.

To solve this problem, most countries have turned to a value-added tax, or VAT. Like the sales tax, the VAT is a tax on consumption rather than income, but it’s collected at various steps throughout the supply-chain process based on how much each step adds to a product’s value rather than collected all at once at the end. Sweden pioneered its use in the 1960s to cover the rising cost of its expansive social welfare systems.

In the European Union, the average VAT rate is 21%. Unlike sales tax in the U.S., VAT rates are traditionally calculated inclusive of the tax itself. Had the authors of the Fair Tax Act structured their proposal as a VAT, the inclusively calculated rate would have been 23%. When you consider that EU countries levy both income and payroll taxes on top of the VAT, the Fair Tax Act, which would replace income and payroll taxes, seems like a bargain.

Yet the bill’s supporters deliberately decided to propose a sales tax despite its infeasibility because the VAT is associated with the high-tax countries of western Europe, potentially creating a public relations nightmare and triggering severe backlash among constituents.

The core of Democrats’ objection is that more of the burden falls on middle- and lower-income households relative to a progressive tax. This opposition ignores the potential for flat taxes to generate the revenue necessary to fund progressive priorities without sacrificing growth. That’s precisely what pushed western European countries toward the VAT.

Mainstream Republicans have been more open to flat taxes, and they shouldn’t be scared away now by the radical proposals of Fair Tax supporters or the surprising support flat taxes receive from left-leaning economists. Indeed, given that Republican enthusiasm for outright cuts to entitlements has waned, the need for a flat tax is greater than it has been at any time since World War II.

The deficit is not going away, and the spending cuts needed to balance the budget are enormous while enthusiasm for such cuts is tepid at best. Accepting that revenues have to increase but demanding that we use the most economically efficient tax possible is the only way to prevent wildly inefficient taxes to be rushed through once a crisis strikes.

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