Why the FAIRtax taxes Government Entitie
The FairTax Act, H.R. 25, abolishes the federal individual and corporate income taxes, payroll taxes, estate taxes, and gift taxes. The FAIRtax taxable base includes federal, state, and local government consumption and investment.
Mechanics of Public Sector Taxation under H.R. 25
The FAIRtax is designed to be a "broad-based" tax, meaning it applies to all new retail goods and services purchased for final use. The FAIRtax treats public sector entities as final consumers and taxes their transactions.
The Definition of Taxable Government Purchases
Under H.R. 25, "government consumption expenditures" include the purchase of goods and services by federal, state, and local governments for the purpose of providing public benefits.
The following activities are subject to the FAIRtax:
- Intermediate Goods and Services: Office supplies, computers, utilities, and rent for federal and state buildings are all subject to the tax at the point of sale.
- Gross Investment: Capital expenditures, such as the construction of new military bases, highways, courthouses, and infrastructure projects, are included in the taxable base.
- Wages and Salaries: The FAIRtax applies to the gross wages paid to government employees. This is conceptualized as the government "purchasing" the labor of its employees to produce a final public service.
The Logic of Taxing Government Wages
The inclusion of government wages in the tax base is essential to prevent the "vertical integration" of government services. In a tax system where private services are taxed but government labor is not, there would be a significant incentive for governments to perform tasks "in-house" rather than outsourcing to private contractors whose fees would include the 23 percent sales tax.
By taxing government wages, the FAIRtax ensures that the "value added" by government employees is captured in the same way as the value added by private sector employees.
Economic Rationales for Taxing Government Entities
Competitive Neutrality and Market Efficiency
Competitive neutrality is the principle that tax laws should not provide an unfair advantage to one sector of the economy over another. If the government were exempt from paying the FAIRtax on its inputs, government-provided services would become "artificially cheap" relative to private alternatives. This could lead to a misallocation of resources where the public sector expands not because it is more efficient, but because it is tax advantaged.
For instance, a private security firm must charge its clients a price that includes the FAIRtax. If a local government agency could provide the same security service without paying the tax on its equipment or personnel, the municipality would have a competitive edge. By requiring governments to pay the tax, the FAIRtax attempts to level the playing field, ensuring that "lifestyle and spending choices" of the public sector are subject to the same fiscal pressures as those of private households and businesses.
Base Broadening to Minimize the Statutory Rate
The inclusion of government consumption is vital for achieving a 23 percent tax-inclusive rate. The broader the tax base, the lower the rate required to raise the needed amount of revenue.
Because government expenditures represent a significant portion of the total economy, excluding them would drastically reduce the taxable base, necessitating a much higher rate for private individuals—maybe a 33%-38% inclusive rate and not a 23% inclusive rate.
Fiscal Transparency and Voter Accountability
Under the income/payroll tax system, taxes are often "embedded" and invisible to the consumer. By explicitly taxing government purchases, the cost of public projects becomes more transparent to voters.
If a new bridge costs $77 million in construction plus $23 million in FAIRtax, the public sees the full cost of the government's consumption of resources.
Government Purchases as a Percentage of the Economy
To assess the impact of taxing the government, one must analyze the scale of government spending relative to total national consumption. Data from the Bureau of Economic Analysis (BEA) and the National Income and Product Accounts (NIPA) provide the foundation for these calculations.
Government Expenditures as a Percentage of GDP
In the United States, government expenditures (consumption and gross investment) consistently account for a substantial share of Gross Domestic Product (GDP).
| Sector of Expenditure (2024 Estimates) | Value (Trillions) | Share of GDP (%) |
| Personal Consumption Expenditures (PCE) | $19.10$ | 65.8% |
| Federal Government Expenditures | $1.87$ | 6.4% |
| State and Local Government Expenditures | $3.13$ | 10.8% |
| Total Government Expenditures | $5.00$ | 17.2% |
| Total GDP (Estimated) | $29.00$ | 100.0% |
Data sourced from BEA experimental estimates and 2024 NIPA summaries.
Government Purchases as a Percentage of the FAIRtax Base
While government spending is roughly 17 percent of GDP, its share of the FAIRtax base is higher because the FAIRtax base excludes investment, exports, and used goods. The FAIRtax base essentially consists of Personal Consumption Expenditures (PCE) plus Government Consumption Expenditures and Gross Investment (GCE).
Conclusion
The FAIRtax Act (H.R. 25) is more than just a proposal for a retail sales tax; it is a fundamental restructuring of the federal fiscal structure. The decision to tax government consumption—representing over 22 percent of the proposed base—is the mechanism that makes the 23 percent rate possible. This inclusion serves the dual purpose of maintaining competitive neutrality between public and private service providers and providing a massive base of transactions to keep the statutory rate low.
THE FAIRTAX IS THE ANSWER.
The FAIRtax is a national retail sales tax on new retail goods and retail services which provides a family credit so that all purchases up to the poverty level for each family are not taxed. There is no withholding from your paycheck, and YOU NEVER HAVE TO FILE A TAX RETURN TELLING THE GOVERNMENT HOW MUCH YOU EARNED AND HOW MUCH YOU SPENT, AND YOU’LL NEVER BE HARASSED BY THE IRS EVER AGAIN.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@fairtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.
THE SOLUTION—PASS THE FAIRTAX!
Why would D.C. pass the FAIRtax and give up this almost unlimited source of donations? The only way that they will is if the rest of us demand it!
Isn’t it time to end this ludicrous tax collection system and the IRS?
HELP BRING ABOUT REAL TAX REFORM AND STOP FUTURE IRS ABUSES
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Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.