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Tax Policy

How High Could A Sales Tax Go?

Americans for Fair Taxation has kicked off a campaign for a national sales tax to replace federal income taxes and other taxes. But how high would the sales tax rate have to be? Higher than sales tax supporters claim, says Robert S. McIntyre of Citizens for Tax Justice. The AFT says it would take a 23 percent sales tax rate to raise the same amount of federal revenue. However, McIntyre contends: At 1995 levels, a new sales tax would have to raise $1.36 trillion to replace all federal income taxes, payroll taxes and estate and gift taxes. Under its plan, taxable spending would be $4.6 trillion -- after accounting for a partial family rebate of the tax. Thus the sales tax rate would have to be $4.6 trillion divided by $1.36 trillion -- which yields a tax rate of 30 percent, not 23 percent. AFT came up with the 23 percent rate by dividing the sales tax by the cost of a purchase plus the tax -- which yields a "tax inclusive rate." This is not the usual way of calculating sales taxes, says McIntyre. Furthermore, almost one-third of the projected revenue is supposed to come from taxes paid by government on its purchases -- taxes it would pay to itself. Without those "phantom" tax payments, claims McIntyre, the rate would have to jump to 42 percent to break even. Finally, a quarter of the remaining sales tax revenues come from hard-to-tax items, such as free checking accounts -- and setting aside taxes on those items, claims McIntyre, the rate would have to be 56 percent. Source: Robert S. McIntyre (Citizens for Tax Justice), "The 23 Percent Solution," New York Times, January 23, 1998.

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