Tax Policy Center | Urban Institute and Brookings Institution

The National Retail Sales Tax: What Would the Rate Have To Be?

William G. Gale

Published: May 16, 2005
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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

© TAX ANALYSTS. Reprinted with permission.

Note: This report is available in its entirety in the Portable Document Format (PDF).

I. Introduction

This report addresses a technical issue regarding the national retail sales tax: What would the required tax rate have to be? According to the report, the four principal results are:

First, as long as real federal revenues and real federal spending are maintained during the transition to a sales tax, the required sales tax rate would 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 noneducation purchases, and would provide payments to offset taxes on consumption to households up to the poverty line. Even if there were no avoidance and no evasion, however, the required tax rate for that proposal over the next 10 years would be 31 percent tax-inclusive (44 percent tax-exclusive). If the tax rate were set at 23 percent (tax-inclusive), the revenue loss would exceed $7 trillion over the next decade relative to current law.

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 a 23 percent tax-inclusive rate climb significantly higher.

Fourth, the commonly cited 23 percent taxinclusive 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.

Notes from this section

1 William G. Gale is the Arjay and Frances Fearing Miller chair and deputy director in the economic studies program at the Brookings Institution, and codirector of the Tax Policy Center. He thanks Barry Bosworth, John Buckley, David Burton, Larry Kotlikoff, Karen Pence, and Maria Perozek for helpful discussions, and Emil Apostolov, Matt Hall, and Shannon Leahy for research assistance.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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