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4/01/2005

National Sales Tax: Flat Out Bad Idea

I’m annoyed but not surprised at the way George Will writes about Rep. John Linder’s bill to enact a national consumption tax, and do away with the IRS and K Street along with it. Of course, he attempts to appear neutral while giving a very one-sided description of a consumption tax. And of course, there is much more to the story.

A consumption tax is simply a tax on everything you buy. Also called a national sales tax or national retail sales tax, it entails taxing all consumption at a flat rate. Rep. Linder’s proposed rate is 23 percent (which works out to a 30 percent tax). Like in Rep. Linder’s bill, most proposals for a consumption tax involve doing away with the collection of other taxes such as those on income, payroll, capital gains, dividends, etc. This means that the wealthy citizens who can afford a high sales tax keep a lot more of their wealth and would likely spend a very low percentage of what they earn in sales taxes. Low-income earners who usually spend a much higher percentage of their earnings on consumption would be hit very hard by the tax. This makes a consumption tax very regressive, even with the "rebate for the poor" that Will mentions. Families with children would be particularly burdened as they generally buy more than those without children and would not benefit from any of the numerous family-friendly deductions in the current income tax system.

In his overview of a National Retail Sales Tax (NRST), William Gale of the Brookings Institution explains that in order for a consumption tax to replace current federal tax revenue, the flat rate would have to be much higher than most proposals advocate (like well over 50 percent). And the higher the tax rate, the more chance there would be for tax evasion, cheating, and so on. As Matt Yglesias points out, the evidence suggests that it is unrealistic to actually enforce a sales tax over 10 percent.

As with any tax reform proposal, there is a lot more to it than mentioned here. But just knowing the basics on this tax is enough to convince me it is a ludicrous idea. It is kind of scary that people are actually still talking about it.

 

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