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Tax
April 1997
Cato: a Sales Tax Would Work (Summary)	The individual and corporate income tax, the capital gains tax, estate and gift taxes and non-trust-fund excise taxes all could be replaced with a 15 percent national sales tax (NST), say the authors of a new Cato Institute study. A 15 percent NST on the final purchase of goods and services would raise the same amount of revenue as the federal taxes it would replace, and allow every household a universal rebate equal to the NST on all consumption up to the poverty level -- $18,588 a year for a family of four. The rebate could be provided as a refundable credit against the payroll tax. Not counting federal tax collection costs, businesses and individuals in the United States spend more than $150 billion a year to comply with the federal income tax system. Estimates of compliance costs range from 20 percent to 50 percent of total revenue raised and 1.9 percent to 4.1 percent of gross domestic product. The Tax Foundation says a national sales tax would reduce compliance costs by more than 90 percent. If the states administered the tax the Internal Revenue Service could be replaced with a small bureau, and the Social Security Administration could collect payroll taxes. Studies show the large marginal tax rate reductions in the NST combined with neutral tax treatment of savings vs. consumption would increase economic growth. Harvard economist Dale Jorgenson found a 13 percent initial increase in GDP and a 9 percent long-range increase. Similarly Boston University economist Laurence Kotlikoff predicts a 7 to 14 percent increase in national output within 20 years, with about half occurring within two years. Economic growth would allow the NST rate to decline in future years to 10 to 12 percent. Reps. Dan Schaefer (R-Colo.) and Billy Tauzin (R-La.) introduced a bill (H.R. 1325) on April 15 to abolish the federal income tax and replace it with a national sales tax. Source: David R. Burton and Dan R. Mastromarco, "Emancipating America from the Income Tax: How a National Sales Tax Would Work," Cato Policy Analysis No. 272, April 15, 1997, Cato Institute, 1000 Massachusetts Avenue, NW, Washington, DC 20001, (202) 842-0200. For a full text of the Cato study http://www.CATO.ORG/pubs/pas/pa-272.html