The plan

How the FairTax Works

A plain-English guide to the national retail sales tax, the family prebate, and the taxes the plan would replace.

Replace, not add

The FairTax is a proposal to replace the federal individual and corporate income taxes, payroll taxes, and estate and gift taxes with a national tax on new goods and services at the point of final retail sale.

It is not intended to sit on top of the current federal income tax system. The legislation repeals the taxes it replaces and ends federal income tax withholding from wages.

No federal income taxIndividuals and businesses no longer file federal income tax returns.
No federal payroll taxSocial Security and Medicare taxes are no longer withheld from paychecks.
One retail taxThe tax is collected once when a new good or service is purchased for personal consumption.
Visible on the receiptConsumers can see the federal tax instead of paying it through hidden withholding and embedded costs.

What is taxed?

New goods and services purchased for personal consumption in the United States are taxed at retail. The retailer collects the tax, much as retailers already collect state sales taxes.

The bill exempts:

  • Used goods
  • Purchases for business, export, or investment purposes
  • Intangible property
  • State government functions

Because business inputs are not taxed, the FairTax is designed to avoid taxing the same product repeatedly as it moves through production.

The family prebate

Every participating household of lawful U.S. residents may receive a monthly Family Consumption Allowance, commonly called the prebate. Its amount is based on household size and federal poverty guidelines.

The purpose is to offset the tax a household would pay on spending up to the poverty level. Rather than creating exemptions for particular products, the prebate untaxes a basic level of consumption for every eligible household.

Understanding the rate

The rate is commonly described as both 23% tax-inclusive and 30% tax-exclusive. Those figures describe the same transaction:

$77pre-tax price
+
$23FairTax
=
$100total price

The $23 tax is 23% of the $100 total price. It is also approximately 30% of the $77 pre-tax price. FairTax legislation uses the tax-inclusive method, which is also how federal income tax rates are stated.

How collection works

Retailers collect the tax. State sales tax authorities administer and remit it to the U.S. Treasury. Revenue is allocated to general federal revenue and the trust funds supporting Social Security and Medicare.

The current bill provides no funding for Internal Revenue Service operations after fiscal year 2027.

The FairTax is a federal proposal. It does not repeal or replace Maine income, sales, property, or other state and local taxes.

Sources: FairTax.org and the official H.R. 25 bill summary.