National Retail Sales Tax: What did the President’s Advisory Panel on Tax Reform say?
The President’s Advisory Panel on Tax Reform rejected replacing the current tax system with a national retail sales tax on the grounds that the tax would be too regressive and difficult to administer. The report noted that "lower and middle-income families would be especially hard hit by a stand-alone retail sales tax." The panel was also concerned that although the proposed demogrant program to provide relief for families would make the retail tax system less regressive, it would be a massive program to administer, "by far the largest in American history," and would "inappropriately increase the size and scope of government." The panel’s estimates also showed that, with the demogrant, a national retail sales tax sufficient to replace the current tax system would require a tax rate somewhere between 34 and 89 percent. The panel’s estimated tax rates are "tax-exclusive," which means that the tax rate is equal to the tax paid as a percent of the pre-tax price of the good or service.
- The panel found that a national retail sales tax would not provide substantial tax simplification. Taxpayers would still be required to complete state income tax returns (unless states abolished income taxes as a result of a switch to a national retail sales tax), which would limit the potential simplification gains from abolishing the federal income tax. In addition, a new government agency would be required to monitor both the collection of the tax and the proposed allocation of demogrants to families.
- The panel estimated the necessary tax rate under a variety of different scenarios using alternate assumptions about the frequency of evasion. Under the most optimistic scenario, which assumed no taxpayer evasion and the broadest feasible base, and excluded demogrants to low- and middle-income families, the required rate would be 22 percent (in tax-exclusive terms). And taxpayers would continue to pay state sales taxes, at rates currently averaging 6.5 percent. Under scenarios that did include a demogrant, the required rate ranged from 34 percent to 89 percent (in tax-exclusive terms).
- The panel’s report expressed concern about the level of evasion, stating, "A federal retail sales tax assessed at a rate of at least 34 percent, added on to state retail sales taxes, would provide substantial inducement for evasion at the retail level." The report stated that third-party reporting, notably absent from the proposal, would significantly improve the likelihood of compliance. In circumstances where there is no third-party reporting, "evasion rates are estimated to be around 50 percent."
- The panel voiced several concerns about the ability of the federal government to administer the tax, and of small businesses to collect it. It noted that the states would lack the ability to collect the tax, and that an agency analogous to the Internal Revenue Service would be required for administration. The panel also observed that state income taxes, whose administration relies on the federal income tax system, would become much more difficult to administer if that system were to disappear. Lastly, the report cited concern that the burden of collecting the tax would disproportionately fall on small businesses and small service providers.