NCPA - National Center for Policy Analysis


May 4, 2005

Replacing the entire federal tax system -- payroll and income taxes -- with a national retail sales tax (NRST) collected by the states, such as that in H.R. 25, sponsored by Rep. John Linder (R-Ga.), would require at least a 30 percent tax rate, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

Furthermore, with a NRST:

  • People will still have to keep records, file income tax returns and get audited because the states and some cities will continue to have income taxes.
  • There is a very severe problem of taxing business inputs under a sales tax; these must be exempt from tax in order to avoid cascading -- taxes being levied on taxes -- which creates serious economic distortions.
  • Services are by their nature much more difficult to tax than goods, yet the NRST would tax 100 percent of services, including medical services and government services.
  • In order to offset the regressivity of the NRST, it would establish a massive new government entitlement program costing hundreds of billions of dollars that would send rebate checks to every American on a monthly basis.
  • Every serious analysis has concluded that a NRST would lead to massive tax evasion.

Under our current tax system there is withholding of taxes on wages, which is the vast bulk of the tax base. Under a value-added tax (VAT), something similar occurs because taxes are paid at each point of the production-distribution system. Thus, if the retailer fails to collect the tax, only a small portion of the total revenue is lost, whereas with a NRST all of it would be lost. Primarily for this reason, every single country that has ever contemplated something like a NRST has instead chosen a VAT, which the NRST people oppose, says Bartlett.

Source: Bruce Bartlett, "Why a National Sales Tax is Bad Business," National Center for Policy Analysis, May 4, 2005.


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