NCPA - National Center for Policy Analysis


August 9, 2004

Rep. John Linder (R-Ga.) says a 23 percent rate would be adequate to eliminate all existing federal taxes and replace them with a national retail sales tax. Every serious economist who has ever looked at this question, however, has concluded that a vastly higher rate would be needed, says Bruce Bartlett.

An unstated assumption about the Linder plan is that the 23 percent rate is comparable to existing state and local sales taxes, where the tax comes on top of the purchase price. Thus, a 5 percent sales tax on a $1 purchase comes to $1.05. But that's not the way the Linder plan works, explains Bartlett. Linder deceptively calculates the rate as if the tax is part of the purchase price, calling this the tax-inclusive rate.

  • Calculating the rate the normal way people are accustomed to with state and local sales taxes would require a 30 percent tax rate, not 23 percent.
  • When Congress's Joint Committee on Taxation estimated Linder's proposal would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues; calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate.
  • Bill Gale (Brookings Institution) estimates that the tax-inclusive rate, comparable to Linder's proposed 23 percent rate, would actually have to be about 50 percent; a rate comparable to existing sales taxes would be close to 100 percent.

And let us not forget that state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher, says Bartlett. Obviously, the federal government is not going to impose tax rates this high, nor would anyone pay them if they did. There would be a massive tax revolt.

Source: Bruce Bartlett, "National Retail Sales Tax: Don't Buy It!" National Center for Policy Analysis, August 9, 2004.


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