Rep. Buddy Carter (R-GA) recently spoke in support of the FairTax Act of 2023, stating that it would be more effective at taxing the underground economy than the income tax it is meant to replace. He argued that many individuals engaged in illegal activities do not report their income or pay income tax, but they do consume legal goods and services. Therefore, a consumption tax like the retail sales tax under the FairTax would be more successful at taxing them. However, consumption taxes create a different horizontal inequity as legal goods and services are taxed while illegal ones are not. Additionally, the argument is based on assumptions about tax incidence, or who bears the burden of the tax. The treatment of saving and investing and cross-border trade differ between income and consumption taxes.
Source Tax Foundation
