Why wouldn't the rate for a national retail sales tax be 23 percent?
A mix of evasion and exemptions would almost certainly erode the tax base. More plausible estimates show that the rate needed to replace existing revenues would be well above 30 percent.
Advocates of a national retail sales tax have suggested that a broad-based version with a 23 percent rate would generate sufficient revenue to replace the entire federal tax system. But this number is misleadingly low for several reasons. It assumes that
- there is no evasion;
- no effort would be made to legally avoid the tax; and
- no items, not even exceptionally difficult-to-tax goods and services, would be excluded from the base.
Note, moreover, that the 23 percent rate cited is a “tax-exclusive” rate. This corresponds to a 30 percent rate when calculated in a “tax-inclusive” fashion, the way income taxes are assayed. Consider, too, that the 23 percent rate is flawed: the calculation is based on a mathematical error in the way advocates computed the changes in consumer and producer prices that would occur under their proposed tax.
Thus, as table 1 suggests, a more plausible calculation of the rate needed to replace other federal taxes would be much higher.
Gale, William G. 2005. “The National Retail Sales Tax; What Would the Rate Have to Be?” Tax Notes, May 16.
Paull, Lindy L. 2004. “Budget Neutral Tax Rate for H.R. 2525.” Reprinted in Martin A. Sullivan, “The Rise and Fall of the National Sales Tax,” Tax Notes 105 (8): 916–21.
President’s Advisory Panel on Tax Reform. 2005. Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System. Washington, DC: President’s Advisory Panel on Tax Reform.