Book Description

This paper addresses a technical issue regarding the national retail sales tax: what would the required tax rate be? The paper develops four principal results. First, as long as real federal revenues and real federal spending are maintained in the transition to a sales tax, the required sales tax rate does not depend on whether federal purchases are subject to tax or whether consumer prices rise after the sales tax is imposed. Second, H.R. 25, a recent legislative proposal, would replace the existing income, corporate, payroll, and estate and gift taxes with a 23 percent tax-inclusive (30 percent tax-exclusive) sales tax on almost all private consumption, a significant portion of household interest payments, and all federal, state, and local government non-education purchases, and would provide households with payments to offset taxes on consumption up to the poverty line. Third, with plausible allowances for avoidance, evasion, and tax exemptions for some private consumption and some state and local purchases, both the required tax rates and the revenue loss from imposing a sales tax at 23 percent tax-inclusive rate climb significantly higher. Fourth, the commonly-cited 23 percent tax-inclusive rate in H.R. 25 was derived using a set of assumptions about changes in the price level that are not consistent with each other and that lead to an estimated tax rate that is systematically and substantially too low.