Supporters of a national retail sales tax (NRST) to replace the federal income tax have gotten a big boost from recent hearings about improprieties at the Internal Revenue Service. As a result, their claim that the NRST would allow for abolition of the IRS has caused many lawmakers to give the idea a second look. Under the NRST, federal taxes would mostly be collected by the states, thus allowing the IRS to be shut down.

One of the main arguments made by sales tax supporters is that it would tax the so-called underground economy better than the income tax. The reason is that drug dealers and others earning untaxed income would be forced to pay their fair share of taxes when they buy hamburgers at McDonald's or power tools at Sears or make any other retail purchase.

Clearly, some additional revenue would be collected from people who now evade their income taxes. But at least in the case of drug dealers, the revenue effect is likely to be a wash. That is because the person buying the drugs most likely pays income taxes on their wages at present, but under the NRST such taxes would be eliminated. However, drug sellers are no more likely to collect taxes on the sales of their drugs than they are to pay income taxes. Thus whatever revenue is gained when drug dealers spend their ill-gotten gains will be lost because no tax was collected on their drug sales.

This example illustrates an important weakness of the NRST. It is totally dependent upon retailers to collect the tax, even though it is not in their interest to do so. "This increases the opportunity for the evasion of the entire tax when just one party (the retailer) fails to meet their taxpaying duty," concluded a report from Congress's Joint Committee on Taxation in 1995. When faced with a customer who will make a purchase without the tax but not with it, it will be very tempting for the retailer to simply make the sale off the books. In such a case, both the consumer and the seller have a mutual interest in tax evasion, with only Uncle Sam being the loser.

A related problem is that producers and middlemen would need to be exempt from the tax in order to prevent what economists call cascading: taxes being levied on taxes, rather than final consumption. Thus all businessmen, including part-time sole proprietors, would have to be given an exemption certificate, allowing them to legally avoid paying taxes on their business-related retail purchases. "Unfortunately, it is not in the best economic interest of retailers to be especially suspicious of exemptions; questions may cause loss of a profitable sale, and only the government gains if the questions are asked," says sales tax expert John Mikesell of Indiana University. And of course, there can be no way for a retailer to know whether the good or service he is selling will be used legitimately in business or is simply part of the buyer's consumption.

It is true that compliance with state and local sales taxes is reasonably high. However, this is entirely due to their relatively low rates and narrow bases. By contrast, a national sales tax would have to be at least 15 percent, with state and local taxes on top, and would have to tax all consumption with no exceptions, including home sales, rent, autos, medical services and food. Consumers who will not bother to evade a tax of three or four percent will have a much greater incentive if the rate reaches 20 percent or more.