The Effects of Replacing Most Federal Taxes with a National Sales Tax

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Recently, there has been renewed discussion of the possibility of replacing most federal taxes with a national retail sales tax. Such an idea was broached in the 1990s, but political interest waned when it was discovered that it would take a sales-tax rate well in excess of 50 percent to replace existing federal revenues. In August of this year, however, President George W. Bush, speaking in Niceville, Florida, told an “Ask President Bush” campaign forum, “You know, I’m not exactly sure how big the national sales tax is going to have to be, but it’s the kind of interesting idea that we ought to explore seriously.” In South Carolina, Rep. Jim DeMint (R) has centered his campaign for the U.S. Senate on his support for a sales tax. Meanwhile, several dozen members of Congress continue to back specific national sales tax legislation despite the extraordinarily high tax rate and/or large deficit increases it would entail.

To assist the public in understanding the implications of replacing most federal taxes with a national sales tax, the Institute on Taxation and Economic Policy (ITEP) has evaluated such a plan using our state-by-state microsimulation tax model.1 Specifically, we looked at H.R. 25, the leading sales tax proposal introduced in Congress. Although other sales tax proposals could certainly differ in detail, the essential findings of our analysis would apply to almost any conceivable proposal to scrap most federal taxes in favor of a sales tax.

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