Is A National Sales Tax A Good Idea? Speaker of the House Dennis Hastert, in his new book, has called for elimanating the IRS and considering a national sales tax to replace it.

From the Washington Times: "People ask me if I'm really calling for the elimination of the IRS, and I say, 'I think that's a great thing to do for future generations,' " Mr. Hastert told the Associated Press yesterday.

He said he had talked in general terms with President Bush about his proposals.

"I think that's a piece they don't want to bite off in the campaign. They have other things they want to talk about."

Mr. Hastert's spokesman, Peter Jeffries, said the speaker has complained for years about "the billions of dollars wasted every year in tax preparations."

Mr. Hastert doesn't advocate any particular tax measure. Mr. Jeffries said his real goal is to start a national dialogue.

In 1998, former House Majority Leader Dick Armey, Texas Republican, and Rep. Billy Tauzin, Louisiana Republican, toured the country debating tax-reform plans.

Mr. Tauzin advocated a national sales tax to replace the income tax, while Mr. Armey supported a flat income tax of 17 percent with no loopholes, tax breaks or social engineering.

House Majority Leader Tom DeLay, Texas Republican, strongly backs a national sales tax, while Democrats strongly oppose a flat tax.

"[Mr. DeLay] has for a long time supported a national sales tax," said Jonathan Grella, spokesman for the majority leader.

In April, Mr. DeLay excoriated the Internal Revenue Service and the tax burdens placed on Americans.

"The tax system in this country is an unmitigated mess. The Internal Revenue Code is a 1.6-million word, job-killing monstrosity that has to go," he said, adding that under a national sales tax, "we can free the national economy from the stranglehold of the IRS, and unleash a new era of American growth, job creation, and competitiveness, with a chance to double the economy in the next 10 to 15 years."

The Democratic National Committee in a statement released Monday said the flat tax would squeeze the middle class and favor the rich.

"According to tax analysts, replacing the current, progressive income tax with a flat-rate tax would dramatically shift the tax burden away from the wealthy — and onto the middle class and the poor," said Jano Cabrera, DNC spokesman.

Bruce Bartlett, a Senior Fellow at the conservative Center for Policy Analysis, argues against a national sales tax. His particualr critism is of a bill by Rep. John Linder.

Bartlett: House Speaker Dennis Hastert (R-Ill.) created a flurry of excitement in Republican circles the other day when it was reported that he is proposing abolition of the Internal Revenue Service in a new book. This would be accomplished by eliminating all existing federal taxes and replacing them with a national retail sales tax.

There is no indication of what tax rate Speaker Hastert thinks would be necessary to replace all federal revenue. A current proposal by Rep. John Linder (R-GA) says that a 23 percent rate would be adequate. But such a low rate can only be sustained by making completely absurd assumptions about what would be taxed. Every serious economist who has ever looked at this question has concluded that a vastly higher rate would in fact be needed.

First, an unstated assumption is that the 23 percent rate proposed by Mr. Linder is comparable to existing state and local sales taxes, where the tax comes on top of the purchase price. Thus, a 5 percent sales tax on a $1 purchase comes to $1.05.

But that’s not the way the Linder plan works. He deceptively calculates the rate as if the tax is part of the purchase price. He calls this the tax-inclusive rate. Calculating the rate the normal way people are accustomed to with state and local sales taxes would require a 30 percent tax rate, not 23 percent.

When Congress’s Joint Committee on Taxation scored the Linder proposal 4 years ago, it estimated that it would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate.

Economist Bill Gale of the Brookings Institution notes that supporters of the sales tax assume that there will be no tax evasion under their proposal and that the size of government will not grow, even though they would send a large annual check to every American in order to offset the regressivity of the tax. Making realistic assumptions, Mr. Gale estimates that the tax-inclusive rate, comparable to Linder’s proposed 23 percent rate, would actually have to be about 50 percent. A rate comparable to existing sales taxes would be close to 100 percent.

And let us not forget that state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher.

Obviously, the federal government is not going to impose tax rates this high, nor would anyone pay them if it did. There would be a massive tax revolt.

The Linder bill (H.R. 25) is also deceptive in its basic assumption that all consumption of goods and services in the U.S. would be taxed. Implicitly, Americans would be taxed on, among other things, all medical care, purchases of new homes, and services provided by state and local governments if Linder’s bill became law.

This means that if you are sick and have large doctor bills, you are going to pay 30 percent on top to the federal government. (Alternatively, you would pay 30 percent more for health insurance.) If you buy a new house listed for $150,000, your actual purchase price is going to be $195,000, including the sales tax. (Alternatively, there could be a tax on the imputed rent homeowners pay themselves for living in their own homes.) And if your children receive $20,000 worth of education each year from the local public schools, somehow or other you are going to have to pay an additional $6,000 to the federal government.

Of course, it is completely idiotic to think that the American people will ever allow this to happen. The idea of taxing all consumption sounds nice in theory until you realize just how broad the definition of “consumption” would be under Linder’s plan.

Economist Evan Koenig of the Federal Reserve Bank of Dallas makes the point that any new sales tax is going to raise prices by that amount. If the Federal Reserve accommodates it, we are going to have 30 percent inflation the year the tax is introduced. If it is not accommodated, then producer prices are going to have to fall by 30 percent, which will cause a severe recession and greatly reduce the tax yield.

Somehow or other, Mr. Linder has gotten 54 House members to cosponsor his proposal. They should all pray that their opponents overlook their poor judgment. When last the national retail sales tax was a major campaign issue—in the 1996 senate race in Louisiana—the Republican sales tax supporter was crushed by his anti-sales tax Democratic opponent. That may explain why only two senators support Linder’s plan, one of whom is retiring this year.

With all due respect to Speaker Hastert, trying to eliminate the IRS by adopting a national retail sales tax is a very dumb idea.

  ¶ 10:55 PM