Opinion Editorial | |
| Wednesday, December 29, 1999 | |
A National Sales Tax Doesn't Add Up |
Advocates of fundamental tax reform lament the fact that it is off the political radar screen. Among presidential candidates, only Steve Forbes talks about it much, and he raises the issue far less often than he did in 1996. Much of the blame for tax reform's demise must go to the Quixotic effort of a few radicals, led by the "church" of Scientology, to abolish the Internal Revenue Service by instituting a national retail sales tax collected by the states. In abandoning the flat tax, sales tax supporters divided the forces of reform, thereby ensuring continuation of the status quo.
Every serious analysis that has ever been done, other than those paid for by sales tax advocates, has shown the plan to be utterly unworkable. For example, in the September issue of the National Tax Journal, economist Bill Gale of the Brookings Institution estimated that a 50 percent tax rate would be needed to replace all federal taxes, not the 23 percent rate sales tax supporters advertise.
The reason is that sales tax advocates make the completely absurd assumption that the federal government would pay the tax as well as consumers. This would be like an individual "taxing" himself on his own purchases and calling it income. Obviously, he will have to pay more for everything by exactly the amount of the tax, thereby negating any benefit. The same is true when governments pay sales taxes to themselves.
Extending this analysis, economist Evan Koenig of the Federal Reserve Bank of Dallas, writing in the December issue of the National Tax Journal, points out that a sales tax, unlike the flat tax, raises the prices of all goods and services. This will require higher tax rates to maintain the real level of Social Security benefits and other programs, even if one ignores the silly notion of the government paying sales taxes to itself. Koenig estimates that it would require a 60 percent sales tax rate to replace all current federal taxes.
In any case, the sales tax has failed to gain traction despite reports of a $20 million marketing effort. (It must be one of the least effective efforts in history, because I have seen no evidence of it.) According to a recent poll by Fox News/Opinion Dynamics, the flat tax is still preferred over the sales tax by better than a 2-to-1 margin. A Harris poll found 57 percent of the public opposed to a national sales tax.
Even if the sales tax was a reasonable idea at one time, the Internet has destroyed its viability. It is becoming more and more difficult for governments to collect sales taxes, as consumers are ever more easily able to make tax-free purchases on-line. Governors of high sales tax states are fighting desperately to keep the Internet from destroying their revenue bases. Yet sales tax supporters continue to assume that the states will collect the federal government's revenue along with their own.
Even if there were a national sales tax that all domestic sellers were forced to collect, there are growing opportunities for buying goods and services in tax havens abroad. This is already a serious problem in Europe and Canada, which have national sales taxes.
The national retail sales tax was always a bad idea, the product of wishful thinking rather than serious analysis. As its supporters slowly come to realize that the Internet has eliminated any hope of making it work, they should remember that the flat tax is still a viable alternative. It may not get rid of the IRS, but it does just about everything else the sales tax does, only better.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 29, 1999.
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