What Is a National Sales Tax? 23% Rate, Prebate, and Sunset

A national sales tax is a federal tax collected at the register on most new goods and services, designed to replace the federal income tax rather than sit alongside it. The most developed version of the idea is the FairTax Act (H.R. 25), which would set a 23% tax-inclusive rate on nearly all consumer purchases and use the revenue to eliminate federal income, payroll, estate, and gift taxes starting in 2027.¹ Every legal resident household would receive a monthly “prebate” check to offset the tax on basic necessities, and the IRS would eventually shut down. Instead of taxing what you earn, the federal government would tax what you spend.

How the Tax Would Be Collected

The mechanics resemble a state sales tax scaled up. Retailers add the federal tax at checkout, show it on the receipt, and send the money to the Treasury. There is no annual return, no withholding from your paycheck, no April deadline. For individuals, the compliance work essentially disappears.

The states themselves would run day-to-day collection, piggybacking on the infrastructure they already use for their own sales taxes.¹ The IRS would be defunded after 2027 and replaced by a smaller Sales Tax Bureau within the Treasury Department. Retailers absorb the compliance burden that used to fall on 150 million individual filers, and federal revenue becomes almost entirely dependent on retail businesses reporting honestly.

What 23% Actually Means

The FairTax rate is stated as 23% tax-inclusive, which is the same tax as a 30% tax-exclusive rate.¹ Both numbers describe one tax measured two ways, and the difference trips up almost every debate about the proposal.

If you pay $100 total for something, $23 is tax and $77 is the underlying price. As a share of the total, that is 23%. As a markup on the pre-tax price, $23 on a $77 item is roughly 30%. State sales taxes are typically quoted the second way, so a consumer used to seeing “6% sales tax” at the register would experience the federal rate as 30% added on. Proponents favor the 23% figure because it lines up with how income tax rates are described; critics favor 30% because it matches how sales taxes normally appear.

The rate has to be high because a single consumption tax has to replace revenue currently pulled in by income, payroll, estate, and gift taxes combined. Some analyses conclude that true revenue neutrality would require a rate above 23% inclusive once evasion and carve-outs are factored in. The required rate is one of the most contested pieces of the whole proposal.

What Would and Would Not Be Taxed

Under the FairTax Act, the tax applies to any new property and any service purchased for personal use.² That base is much broader than any state sales tax. Healthcare services, newly built homes, and financial services would all carry the federal tax. Tuition for primary, secondary, and postsecondary education is carved out as “education and training,” though room, board, and extracurriculars are not.

Used goods are exempt. Buy a new car and you pay the 23% inclusive tax; buy that same car from its second owner five years later and you owe nothing to the federal government. The same holds for previously owned homes. That exemption would open a real price gap between new and used items that does not exist federally today.

Business-to-business purchases, exports, and investment purchases are also excluded, to keep the tax from stacking as products move through a supply chain. The goal is one tax, collected once, at the point a good or service reaches its final consumer.

State and local sales taxes stay where they are. A federal 30% tax-exclusive layer on top of existing state and local rates, which reach roughly 10% in some places, would push the total tax at the register well above 30% across most of the country.

How It Differs From the Income Tax

The income tax reaches wages, investment returns, business profits, and capital gains. A national sales tax ignores all of that. You could earn a million dollars in a year and owe the federal government nothing until you spent it. Savings, investments, and any wealth that stays unspent would go completely untaxed at the federal level.

That flips what the tax code incentivizes. The current system takes a cut of every dollar earned. A consumption tax takes a cut of every dollar spent, which proponents argue is more economically efficient because it removes federal tax drag on saving and investing. Money that compounds in an account is never touched until it becomes consumption.

The compliance shift is just as sharp. Withholding disappears. Deductions disappear. Individual filing disappears. In exchange, retailers take on the full weight of collection and the federal government’s revenue depends on them getting it right.

How It Differs From a VAT

A national sales tax and a value-added tax both tax consumption, but they collect the money in fundamentally different ways. A retail sales tax collects the whole amount at one point: the final sale. A VAT collects it in pieces at every stage of production, with each business paying tax on its sales and claiming a credit for tax paid on its inputs.

That matters for enforcement. Under a retail sales tax, the government has a single collection point per transaction and no built-in cross-check, because neither the consumer nor the upstream suppliers have a reason to report the sale. Under a VAT, every business in the chain wants documentation of the tax it paid on inputs so it can claim its credit, and that paper trail makes each participant a check on the others.

Most developed countries use a VAT rather than a high-rate retail sales tax for this reason. International experience suggests retail sales taxes get harder to enforce as rates climb past 10%, because the incentive to evade grows faster than the government’s capacity to audit. A 30% tax-exclusive federal rate would be higher than any successfully enforced retail sales tax in the world.

A VAT is also usually embedded in the sticker price. The national sales tax would be itemized on every receipt. Proponents treat that visibility as a feature, arguing voters should see exactly what they pay in federal tax.

The Prebate

A flat consumption tax is regressive on its face: lower-income households spend nearly everything they earn, while higher-income households save or invest a larger share. Without an offset, a family earning $40,000 and spending all of it would effectively pay a 23% federal rate, while a family earning $400,000 and spending half would pay closer to 11.5%.

The FairTax Act tries to fix this with what it calls the Family Consumption Allowance, better known as the prebate.² Every qualified household gets a monthly check calculated to cover the tax on spending up to the federal poverty level. The formula is the poverty level for the household size, multiplied by 23%, divided by twelve. Married couples get an added “marriage penalty elimination amount” built into their poverty calculation so that getting married does not shrink the combined check.

Everyone gets the prebate at the same rate for their household size, regardless of income, so a billionaire receives the same check as a minimum-wage worker. The result is that spending up to the poverty line is effectively tax-free for everyone, and spending above it is taxed at the full rate. That makes the system progressive at the low end and much flatter as income rises. To qualify, every family member must have a Social Security number and be a lawful U.S. resident.¹

Main Criticisms

The strongest objection is distributional. Analyses of the FairTax have found that even with the prebate, it would raise the tax burden on households in the bottom 90% of the income distribution while delivering large cuts to the wealthiest. The top 1% would benefit most, because they currently pay high marginal rates on earnings but spend a relatively small share of their income. Eliminating taxes on investment income, capital gains, and estates is a windfall the prebate does not come close to offsetting.

Enforcement is the second worry. The entire federal revenue system would ride on retail businesses collecting and remitting the tax, with no withholding and no cross-reporting between buyer and seller. At a 30% tax-exclusive rate, under-the-table cash transactions, inflated business-purchase claims, and outright fraud all become substantially more attractive. Compliance experience with high-rate retail sales taxes internationally is not encouraging.

Transition creates its own problem. People who spent decades paying income tax on their earnings and saving the after-tax remainder would face a second round of federal tax when they spend those savings. Retirees drawing down already-taxed savings would be hit hardest. Any transition relief would narrow the base and push the required rate up further.

The 16th Amendment Sunset

The FairTax Act includes a self-destruct mechanism tied to the 16th Amendment, which authorizes the federal income tax. If the amendment is not repealed within seven years of the bill’s enactment, the entire national sales tax system expires automatically.² The provision exists because without repeal, nothing stops a future Congress from putting the income tax back on top of the sales tax and leaving Americans with both.

Repealing a constitutional amendment requires two-thirds of both chambers of Congress and ratification by three-fourths of state legislatures. No amendment has been repealed since Prohibition ended in 1933. Critics argue the requirement makes the proposal functionally impossible, because the sales tax would sunset before 38 state legislatures could realistically agree on anything of this scale.

Where the Proposal Stands

The FairTax Act has been introduced in various forms for over two decades. The current version, H.R. 25 in the 119th Congress, was introduced on January 3, 2025, and referred to the House Committee on Ways and Means.¹ It has not received a hearing, a markup, or a floor vote. The proposal draws intense enthusiasm from supporters and equally strong opposition from critics, but has never come close to passage.

1
Congress.gov. H.R.25 – FairTax Act of 2025
2
Congress.gov. Text – H.R.25 – FairTax Act of 2025