What is national consumption tax? What House Republicans are trying to change with Fair Tax Act

Clare Mulroy
Updated

Do you live in a state that has a high sales tax? What about a state that imposes no sales tax at all? Consumption tax, which sales tax falls under, is often a footnote at the end of a receipt but makes an impact on your wallet all the same.

A group of House Republicans is looking to raise sales taxes with the Fair Tax Act, which would abolish the Internal Revenue Service.

With tax season upon us and sales tax in the headlines, here’s everything you need to know about a national consumption tax.

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What is a national consumption tax?

Consumption tax is a tax on goods or services – what you spend rather than what you earn. In the U.S., consumption tax comes in the form of retail sales tax and excise tax (tax imposed on certain goods or activities, like alcohol or fuel).

A national consumption tax would create a federal tax on consumer goods, perhaps emphasized over income tax, which funds Social Security, Medicare and other government programs.

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Does the U.S. have a national consumption tax?

The U.S. does not currently have a national consumption tax. Other countries do, including Japan, which has a 7.8% standard and 6.24% reduced tax rate for items like food, drink and some newspapers. Over 170 countries, including all of Europe, impose a Value-Added Tax, which taxes goods and services at each stage of production.

Consumption taxes in the U.S. are on a state-by-state basis. Almost every state imposes sales tax except for Alaska, Delaware, Montana, New Hampshire, and Oregon, which instead allows cities to charge a local sales tax. California boasts the country’s highest state sales tax rate at 7.25%.

Some House Republicans are trying to change this. The Fair Tax Act would eliminate most current federal taxes in favor of a 23% federal sales tax. HR25 would abolish the IRS as well as individual and corporate taxes, payroll taxes, estate taxes and capital gains. Tax experts warn it would mostly benefit the wealthy, who would see major tax cuts, CBS reported.

The bill faces staunch opposition from both sides, including from Senate Majority Leader Charles Schumer, who called it "a real doozy."

“It cannot be understated how devastating this would be to just about every family,” Schumer said.

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This article originally appeared on USA TODAY: What is national consumption tax? How it differs from income tax.

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