National Retail Sales Tax: Would it simplify the tax code?
As a flat-rate consumption tax with a universal demogrant for families, the proposed national retail sales tax contains many of the features that make taxation simpler. Most individuals would no longer need to keep tax records, know the tax law, or file returns. Only those who own sole proprietorships, partnerships, or S or C corporations that make retail sales would have to file. And even for these taxpayers the complexity of filing a return would decline dramatically. But a national retail sales tax could create new areas of complexity, for example in administering the proposed demogrant, in enforcing the tax code to ensure that personal and business consumption are not mixed, and in monitoring exemptions for the importation of foreign goods.
- The demogrant that, in many proposals, would accompany a national retail sales tax would likely be based on the existing poverty line, which rises less than proportionally with the number of family members. For example, in 1998 the poverty line was $8,050 for a single individual and rose by $2,800 for each additional family member. Thus the poverty level for a family of four in that year was $16,450, just over twice the level for an individual. Basing the demogrant on the poverty line would thus create incentives to conceal family relationships so as to claim the demogrant for more than one individual in a family. It is also not obvious how the demogrants would be administered, or even which agencies would be responsible for determining eligibility and monitoring claims. Thus compliance and administrative costs could be significant.
- Another area of potential complexity stems from the threat of tax avoidance and evasion. The most likely way that people would try to avoid the tax would be by disguising personal consumption as business activity, since business-to-business transactions would not be taxed. For example, individuals might seek to register as firms, or to purchase their own consumption goods using a business certificate; or employers might buy goods for their workers in lieu of paying wages. Ensuring that all business purchases are not taxed and that all consumer purchases are taxed would require all businesses to keep records of their transactions, even though only retailers would actually have to remit the tax. Certain proposals deviate from a pure retail sales tax by requiring that taxes be paid on many input purchases, and that vendors file explicit claims to receive rebates on their business purchases. This would raise compliance costs further.
- Imports would be another potential source of tax avoidance and evasion. Under some proposals, each year a certain amount of imported purchases would be exempt from the tax. This feature would likely be exploited fully by many taxpayers, even those who do not travel abroad: it would be simple for firms to set up offshore affiliates, warehouses, or mail order houses, ship goods from them to domestic customers, and claim that the goods are tax-exempt imports. It would be very difficult to monitor such arrangements, and it seems quite likely that taxpayers could end up importing more than their annual exemption. Some related evidence on the potential extent of these problems comes from the experience with state-level "use" taxes, under which taxpayers voluntarily make tax payments on goods purchased in other states. One analyst described enforcement of such taxes as "dismal at best." The development of electronic commerce could amplify avoidance and evasion problems.