NCPA - National Center for Policy Analysis


August 18, 2004

It sounds so simple to get rid of the income tax, the IRS and just pay your taxes when you buy things at the store. But even at the deceptively low rate claimed by national sales tax advocates, there would be massive problems with evasion and erosion of the tax base. For example, collecting sales taxes on services is extraordinarily difficult, which is why no state even tries to collect sales taxes on all services, says Bruce Bartlett.

A bigger problem identified by economists, but ignored by sales tax supporters, is how to make sure none of the tax applies to business inputs. Unless the tax falls solely on final consumption, it is partly a tax on capital, which erodes much of the economic benefit of the sales tax, leads to cascading (taxes being levied on taxes) and distorts investment.

Again, the experience of the states is instructive, explains Bartlett:

  • Studies have shown that about 40 percent of all state sales taxes fall on business inputs that ought to be exempt.
  • At the low sales tax rates imposed in most states, this doesn't create too much of an economic problem.
  • But at a rate necessary to replace all federal taxes, it would be very severe.

The problems of properly taxing businesses and avoiding evasion are what led every country that has ever studied the matter to conclude that a value-added tax is much superior to a national retail sales tax, say Bartlett.

There is no question that the Treasury Department will oppose a retail sales tax if President Bush asks it to study the issue. However, if the president does so, then serious tax reform debate can move forward, says Bartlett.

Source: Bruce Bartlett, "An Interesting Idea," National Center for Policy Analysis,August 18, 2004.


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