State Analyis of use of Natl. Sales Tax

sale0904.pdf (application/pdf Object)

The Effects of Replacing Most Federal Taxes with a National Sales Tax
A State-by-State Distributional Analysis

Recently, there has been renewed discussion of the possibility of replacing most
federal taxes with a national retail sales tax. Such an idea was broached in the
1990s, but political interest waned when it was discovered that it would take a
sales-tax rate well in excess of 50 percent to replace existing federal revenues. In
August of this year, however, President George W. Bush, speaking in Niceville, Florida, told
an “Ask President Bush” campaign forum, “You know, I’m not exactly sure how big the
national sales tax is going to have to be, but it’s the kind of interesting idea that we ought
to explore seriously.” In South Carolina, Rep. Jim DeMint (R) has centered his campaign for
the U.S. Senate on his support for a sales tax. Meanwhile, several dozen members of
Congress continue to back specific national sales tax legislation despite the extraordinarily
high tax rate and/or large deficit increases it would entail.

To assist the public in understanding the implications of replacing most federal taxes
with a national sales tax, the Institute on Taxation and Economic Policy (ITEP) has
evaluated such a plan using our state-by-state microsimulation tax model.1 Specifically, we
looked at H.R. 25, the leading sales tax proposal introduced in Congress. Although other
sales tax proposals could certainly differ in detail, the essential findings of our analysis
would apply to almost any conceivable proposal to scrap most federal taxes in favor of a
sales tax.
Description of the National Sales Tax Proposal as Modeled
H.R. 25, introduced by Rep. John Linder (R-Ga.) and others, would replace all federal
personal and corporate income taxes, Social Security and Medicare taxes, and estate
taxes with a retail sales tax on a very broad base of personal spending.2 Beyond the
usual items that are often subject to existing state sales taxes, the proposed national sales
tax would also apply to things such as health care, purchases of new houses, rent, etc..
H.R. 25 confusingly advertises its sales tax rate as 23 percent, but that’s rather
disingenuous. On a $100 purchase, for example, sales-tax proponents tell us that the tax
would be $30, which most people would accurately call a 30 percent rate. The so-called
23 percent figure comes from dividing the sales tax by the cost of purchases plus the tax. To
be sure, $30 divided by $130 does equal 23 percent, but no ordinary person would think
of computing a sales tax that way.
The fact that the sales tax, even by its proponents’ own figures, entails a 30 percent tax
rate is only the beginning of the math problems. Allegedly, almost a third of the projected
sales-tax revenues are supposed to come from taxes that the government will pay to itself.

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