Download National Retail Sales Tax as a Replacement for Income Tax

Volume 3, Number 3
May 1996
National Retail Sales Tax as a Replacement for Income Tax
What began in 1913 as just a few pages of legislation has grown into a confusing, complicated incometax code of more than 2000 pages. While most Americans agree the income-tax code needs reform, a
number of different ideas have been proposed for improving the tax code.
One such idea, a national sales tax, has been introduced in the U.S. House of Representatives by
Representative Dan Schaefer of Colorado and Representative Billy Tauzin of Louisiana. Their legislation is known as the National Retail Sales Tax Act of 1996.
The National Retail Sales Tax Act would repeal the personal and corporate income tax, as well as
estate and gift taxes. Instead, a tax of 15 percent would be imposed on the sale of any taxable good or
service sold in the United States. The only exemptions from the retail sales tax are goods and services
purchased for resale, goods and services purchased to produce another good or service for resale, and
goods and services exported from the United States. Under the National Retail Sales Tax Act, home
mortgage payments are not considered consumption, and are not taxable.
The Internal Revenue Service (IRS) would be abolished under the National Retail Sales Tax Act, and
no agency would be created to take its place. The Secretary of the Treasury would administer the
National Retail Sales Tax system. States would have the option to administer, collect, and enforce the
sales tax, provided the state conforms its sales tax base to the federal base. States choosing to administer the system may keep one percent of the sales taxes collected to offset their expenses. Additionally,
to prevent the cost of compliance from being passed on indirectly to consumers, any business required
to collect and remit sales taxes may keep 0.5 percent of the tax receipts to offset the cost of collecting
the taxes.
Representative Schaefer and Representative Tauzin introduced the National Retail Sales Tax Act on
March 7, 1996. In their announcement of the bill's introduction, Representatives Schaefer and Tauzin
stated “Under our historic reform bill, American workers will take home 100 percent of their pay —
less FICA withholding — and then they would decide how much they want to be taxed by how much
they consume.” Some of the other benefits of this tax system, highlighted by Representatives Schaefer
and Tauzin, include:
•
The National Retail Sales Tax Act imposes a tax on consumption rather than
savings and investment. The current income tax system imposes a tax on savings and
investment income, discouraging the savings and investment that are necessary to ensure
our nation’s economic growth and prosperity.
•
The National Retail Sales Tax Act provides that the sales tax must be fully
disclosed to consumers. Under our current income tax system, goods have a hidden
income tax because businesses pass taxes on to the consumers by increasing prices to
offset their tax burden.
•
The National Retail Sales Tax Act exempts U.S. exports from the sales tax,
allowing American exports to be more competitive overseas, because prices would not
include hidden taxes passed on by businesses and producers. Additionally, the National
Retail Sales Tax Act provides that imports sold in the U.S. would be subject to the
same retail sales tax as American-produced goods and services.
•
The National Retail Sales Tax Act would eliminate the time and expense of
filling out income tax forms and keeping tax records. Additionally, the National Retail
Sales Tax Act places the burden of proof on the government, unlike our current system,
in which taxpayers are presumed guilty until proved innocent.
•
The National Retail Sales Tax Act requires a two-thirds vote by both the House
of Representatives and the Senate in order to raise the rate of the sales tax or to create
new exemptions.
•
The National Retail Sales Tax Act provides a “Personal Consumption Refund.”
A refund of the sales tax rate times the poverty level will be provided as a tax credit
against the payroll tax. This will ensure that families below the poverty level will pay no
taxes, and all workers will pay no taxes up to the poverty rate.
The House Ways and Means Committee has jurisdiction over tax legislation. Representative Bill Archer
of Texas, Chairman of the House Ways and Means Committee, plans to hold a series of hearings this
spring on how to abolish the current income tax system, how changing to a better tax system can
improve economic growth, and the pros and cons of the various proposed tax systems. The National
Retail Sales Tax Act will likely be one of the systems studied by the House Ways and Means Committee.