ABOLISHING THE IRS? HOW DOES THIS AFFECT YOU?
What’s this news going around about abolishing IRS and eliminating income tax? Just last year, the Biden administration granted $80 billion in funding to the IRS and increased its manpower by 87,000 new agents to be able to cater to the needs of taxpayers effectively. Why the sudden change in stride? If this happens, it means Tax in the USA is about to take a huge turn.
On Monday, January 9th, 2023, the Republicans in the US House of Representatives voted to replace income tax with sales tax and abolish the Internal Revenue Service (IRS). But who wouldn’t want to be free from the IRS? If you are about to jump for joy at the sight of this, wait a minute, and let’s analyze what this means.
What Is Income Tax?
The term income tax simply refers to the kind of tax that the government levies on income gerated by individuals and businesses. The US tax law mandates every taxpayer to file an income tax return annually to calculate their tax obligation. The IRS uses a set of rules and regulations to determine taxable and reportable income such as salaries, business earnings, commissions, wages and investments.
If The IRS And Income Tax Is Abolished, What Would The New Tax System Be?
If income tax is abolished, it will be replaced by the Fair Tax System. This bill itself, coined the “Fair Tax Act,” was spearheaded by the newly-elected US House Speaker Kevin McCarthy to defund the IRS of its funding under the Inflation Reduction Act and scrap the IRS in favor of a Fair Tax that would substitute the federal income taxes with a national consumption tax.
What Is A Fair Tax Plan?
The Fair Tax Plan is a 23% resales tax that is proposed to replace the current income tax structure as well as the alternative minimum tax. This would end all taxes on estates, gifts, Social Security, self-employment and capital gains, and Medicare. Although this would reduce the stress of annual tax preparation, it could also raise the tax burden for 90% of taxpayers.
This isn’t the first time the Fair Tax Plan has been raised. It was first introduced to congress in 1999 and has been revived numerous times over the past years.
The 23% sales tax is regressive in nature because it affects the poor the most. To reduce the impact and make it more progressive, the Fair Tax Act is planned to include a provision that allows Americans to receive a monthly rebate equal to 23% of the monthly cost of living at the federal poverty level.
Why Do Republicans Want To Abolish The IRS?
Buddy Carter, the newly elected Georgia Rep. who pushed forward the Fair Tax, asserts that the Income-tax system has failed many Americans. The IRS has been accused of targeting the poorest taxpayers while the wealthy went unmarked. Rather than having a tax system that helped the wealthy to cheat the tax system at the detriment of honest taxpayers who are saddled with a heavy tax burden and lesser tax refunds, the new tax bill will eliminate the need for the IRS and simplify the tax code. This will help to create a system that works for everyone with a fair opportunity for growth.
How Would The Fair Tax Plan Affect The Tax In The USA?
The new national sales tax rate is an inclusive tax rate, which means that every dollar taxed on a purchase includes a 23 cent that will be sent to the US Treasury. A closer look shows that the Faur Tax rate would be closer to 30%. This means if you buy something that costs $100 before tax, you’ll be paying an additional $30 of national sales tax, making your payment a total of $130.
If you add in the revenue from the present state sales tax with the federal sales tax, the overall sales tax rate could eventually rise up to 45%.
If not refined to offset the financial hit most Americans would experience due to the new national sales tax, the Fair Tax Plan could pose a big problem. At present, five states in the US do not impose statewide sales tax (Montana, Alaska, Delaware, Oregon, and New Hampshire), and every state exempts a number of purchases from taxes. For example, oftentimes, groceries are not taxed, while alcoholic beverages and prepared food are. If everyone is supposed to pay a nationwide sales tax, how do we sort these statewide exemptions?
In addition, the bill allows each state to enforce a sales tax that complies with the federal tax. States may be reluctant to enforce additional sales taxes after discovering the higher sales taxes residents are forced to pay at the federal level.
In another realm, eliminating income tax could also mean abolishing the Child Tax Credit. It could mean families receiving benefits under the Affordable care act could lose their tax credits and alternatively pay a national sales tax on their premiums. It may seem that the cost of this new tax plan could have an undesirable effect on Tax In the USA. Perhaps the best option for adapting this new system is gradually shifting to a Fair Tax Plan.
What Are The Advantages Of The Fair Tax?
The most evident advantage of the new tax plan is that it abolishes the annual tax stress, especially filling federal tax returns. It would replace all federal income and payroll taxes with a more visible, simple, and efficient federal retail sales tax. Abolition of the IRS would also reduce the government’s spending. Some experts have also argued that an increase in consumer spending could leads to an increase in gross domestic product, productivity, wages, and jobs. While there would be no more federal income taxes on wages, workers would still have to pay state income taxes where it applies.
The Fair Tax Plan offers long-needed tax relief with the freedom to choose how much you spend in taxes. It would allow retirees and workers to keep 100% of their paycheck and pension benefits.
While income tax and the IRS faces a threat of extinction, they still remain the mode of operation in 2023. Until the Fair Tax Act becomes a reality, you still have income taxes to pay. Discover more details about the new Fair Tax Plan on Youtube. If you are still burdened with huge tax bills, don’t hesitate to reach out to the Tax Goddess Team to help you reduce your taxes to the minimum.