The National Sales Tax

There is a proposal being pushed at the federal level to fundamentally change the way the U.S. government collects taxes. This is a national sales tax, referred to by its supporters as the "FairTax," and it would replace all forms of federal taxation.

The number supporters of the national sales tax put forward as the rate for the national tax is 23%, but this is disputed by critics. Whether or not the tax is considered to be 23% or 30% depends on how it is calculated. If the tax is calculated as a percentage of the price of the good plus the tax, it is 23%. If the tax is calculated on top of the price of the good, the level is 30%. This is entirely a semantic argument, as the actual amount taxed would end up being the same.

However, both the 23% number and the 30% number are inaccurate. Depending on the size of the tax base and the level of tax evasion, the level of taxation could be as low as 34% or as high as 89%.

According to analysis by the President's Advisory Panel, the tax would result in a net tax decrease for those making less than $15,000 per year, and for those making more than $200,000 per year, but would result in a net tax increase for the middle $15,000-$200,000. In terms of income qunitiles, only the highest 20% would see a decrease in their overall tax burden.

There is an additional concern in terms of compliance costs-- due to the economies of scale created by the difference between small and large businesses, smaller businesses will end up paying a larger proporiton of their income in terms of compliance costs. Those with gross sales between $150,000 and $500,000 will pay 6.5% of their taxes in compliance cost, while firms with sales of greater than $1.5 million will pay less than 1% of their taxes in compliance costs. In this way, the national sales tax is more favorable to larger firms.