May 9, 2023
Evaluation and Macroeconomic Impact of the FairTax Act
The FairTax Act of 2023 (H.R. 25), which may soon be considered by the House of Representatives, would replace the existing federal revenue system – individual income tax, corporation income tax, payroll taxes, and estate and gift taxes – with a single, national sales tax. The American Action Forum commissioned EY’s Quantitative Economics and Statistics Group to evaluate the FairTax as designed in H.R. 25 and estimate its macroeconomic impacts.
- The 23-percent tax rate in H.R. 25 is an optimistic lower bound; measured on a tax-exclusive basis, applied to a tax base typical of state sales taxes, and in the presence of significant non-compliance, the rate could reach a confiscatory level in excess of 380 percent.
- Under the FairTax, American families would face an immediate jump in inflation comparable in size to the applicable tax rate, and a reduced standard of living over the first five, and possibly 10, years.
- Ultimately, a shift to taxing consumption generates increases in capital accumulation, labor supply, and output; the most beneficial effects occur when discipline on the size of government keeps the tax rate as low as possible.