The Republican-controlled U.S. House of Representatives and Senate could spell disaster for the future of the IRS.
A week before Inauguration Day, a dozen GOP lawmakers introduced the Fair Tax Act of 2025. The bill seeks to abolish the IRS and repeal all personal and corporate income taxes, the death tax, gift tax, and payroll tax.
The proposal, spearheaded by Rep. Earl L. “Buddy” Carter (R-GA), would dismantle the current federal tax code and replace it with a single national sales tax. That "consumption tax" would be paid by everyone in the country, including illegal immigrants.
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It’s not the first time the Fair Tax Act has been heard of in Congress, but it has never moved far. Now, the Trump administration appears to favor the idea — by suggesting that a tariff-led revenue system would replace the IRS.
Laying the foundation is President Trump’s plans to establish a so-called ‘External Revenue Service,’ which would collect funds from tariffs, potentially replacing the IRS and the U.S. Customs and Border Protection.
Here’s what you should know about the Trump administration’s pitch to abolish the IRS.
Can a tariff-led revenue system replace the IRS?
“Simply put, no,” according to a Peterson Institute policy brief. But why?
Trump has doubled down on tariffs since starting his second term. Now, some government officials suggest that the president aims to replace the IRS with revenue collected from taxes on foreign trade. In case you missed it, so far, the Trump administration has:
- Threatened and subsequently delayed a 25% tariff on all Mexican and Canadian imports to the U.S.
- Threatened and delayed a 25% to 50% tariff on Colombian imports.
- Implemented a 10% duty on Chinese imports, enacted February 4.
- Placed a 25% tariff on all imported steel and aluminum, effective March 12.
- Announced a 25% tariff on autos, pharmaceuticals, and semiconductors — more details to come in early April.
- Laid off more than 6,000 IRS employees, after delaying buyout offers on certain “critical” workers.
Additionally, Trump recently announced a “Fair and Reciprocal Plan” which would levy symmetrical tariffs on international trade allies. So, what’s the deal with all these taxes on U.S. imports?
U.S. Commerce Secretary Howard Lutnick recently shed more light on the Trump administration’s ultimate goals.
“Donald Trump announced the External Revenue Service, and his goal is very simple: to abolish the Internal Revenue Service and let the outsiders pay,” Lutnick told Fox News, referring to Trump’s sweeping tariffs agenda on global trade.
In other words, Trump’s policy ideas aim to replace income taxes with tariffs. However, economists warn that this plan would be incredibly damaging to economic growth, and not monetarily feasible.
By the numbers:
- Tariffs levied on imported goods totaled $3.1 trillion in 2023.
- The income tax exceeds $20 trillion, and the U.S. government raises about $2 trillion in individual and corporate income taxes
- Trump’s campaign proposal for 10% tariffs on all imports, and 60% tariffs on China would bring in about $225 billion — an overestimate, not accounting for potential trade wars or inflationary pressures.
“It is literally impossible for tariffs to fully replace income taxes,” analysts at the Peterson Institute for International Economics said. “Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax, and as tax rates rose, the base itself would shrink as imports fall, making Trump’s $2 trillion goal unattainable.”
Who’s paying for tariffs? As reported by Kiplinger, tariffs on imports are paid by domestic companies, and that added cost is generally passed on to the consumer. That’s you.
According to the Tax Foundation, a nonpartisan tax policy research organization, rather than hurting foreign exporters, economic evidence shows American firms and consumers were the hardest hit by Trump’s tariffs during his first term.
They are also known as “regressive” taxes because they disproportionately impact low- and moderate-income households.
Fair Tax Act 2025
What about the legislation that aims to abolish the IRS?
The Fair Tax Act of 2025 would replace key federal government revenue sources with a national sales tax and rebate. These include personal and corporate income tax, death tax, gift tax, and payroll tax.
According to its advocates, the consumption tax would eliminate the need for the IRS.
If enacted, the national consumption tax rate would be a tax-inclusive rate of 23% as of the 2027 tax year. Realistically, economists say that rate would increase to about 30%. According to the Tax Foundation, for every $1 spent, taxpayers would pay the federal government about 30 cents in sales taxes.
Of that share, 64.83% of total revenue would be directed to general revenue. Additionally, 27.43% would go to the old-age and survivors insurance and disability trust funds, and 7.74% would be allocated to the hospital insurance and federal supplementary medical insurance trust funds.
After 2027, the consumption tax rate would vary based on government spending. The combined federal tax rate would be determined as follows:
- A 14.91% sales tax to cover general fund spending, plus,
- Two variable sales tax rates to cover trust fund spending as determined by the Social Security Administration
In the past, economists have cited that the Fair Tax proposal is “essentially unworkable.” The Brookings Institution argues that the proposed rates would be insufficient to replace income, payroll, estate, and gift taxes, to name a few.
What is a consumption tax?
A consumption tax would shift the collection of taxes from your earnings to spending. Under current law, the U.S. collects revenue from taxing your individual income and capital gains tax, among other taxes.
Some states also levy a consumption tax as sales taxes and excise taxes.
The Tax Foundation indicates that while a consumption tax may theoretically promote savings and investment for some, the tax is ultimately “regressive” because lower-income households would spend more of their incomes than they can save.
Note: As mentioned, regressive generally means a tax takes a disproportionate amount from lower-income households.
The Center for American Progress has previously characterized the proposal as “radical,” warning that it would widen the nation’s already sizable wealth gap.
The Fair Tax is not a new proposal
As mentioned, this isn’t the first time the Fair Tax proposal has been introduced. The idea was originally shared by Americans for Fair Taxation, a Houston-based group in the mid-1990s. Former Rep. John Linder (R-GA) first introduced the Fair Tax in Congress in 1999, and it has been reintroduced during each new administration since.
Support for the legislation has lost some steam over the past years. Two years ago, the bill garnered 26 co-sponsors; in 2025, that number has trickled down to just 11.
What can the IRS expect in 2025?
The IRS and federal tax code can expect a shakeup under the Trump administration.
President Donald Trump’s tax agenda will be busy this year, starting with tackling the looming tax cliff tied to the Tax Cut and Jobs Act (TCJA). Trump has also proposed ending taxes on tipped workers, as well as abolishing income tax on Social Security benefits.
Trump has also appointed former Missouri Congressman Billy Long to lead the IRS, a move which would prematurely oust IRS Commissioner Danny Werfel. As reported by Kiplinger, if confirmed — Long would be the first politician appointed to the position in more than 80 years.
Aside from the reintroduced Fair Tax Act, The IRS is facing other challenges to its stability, including:
- GOP lawmakers aiming to block IRS Direct File.
- Massive layoffs. Over 6,000 IRS employees were fired in February. The agency's workforce may shrink further once the pause on buyout offers lifts in May.
- Privacy concerns as Elon Musk gained unprecedented access to the agency’s sensitive data systems via the Department of Government Efficiency (DOGE).
- Recently losing another $20 billion in crucial enforcement funding.
All of these looming changes impacting the IRS may affect you as a taxpayer, from something as minimal as a tax return delay to your access to free tax filing services. So stay informed on how the incoming presidential administration prioritizes your tax experience.
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