Calls renewed to dump income tax in favor of a sales tax
Republican presidential hopeful Mike Huckabee's rise in recent polls is bringing attention to the former Arkansas governor's support for a plan to scrap the federal income tax, eliminate payroll taxes and abolish the Internal Revenue Service.
Huckabee and other supporters of the so-called "fair tax" estimate a national sales tax of 23 percent could replace the revenue lost by abolishing the current tax system.
But the President's Advisory Panel on Federal Tax Reform concluded in 2005 that a sales tax rate of at least 34 percent or more would be needed to maintain the progressive nature of the federal tax system in which the highest tax rates are imposed on the wealthy.
The reason: A $600 billion to $780 billion annual cash grant program for lower-income families would keep the fair tax from imposing an undue burden on those least able to afford it.
Question: How would this national sales tax work?
Answer: A customer who buys an item for $100 would pay an extra $34 in sales taxes.
Q: What goods and services would be subject to the national sales tax?
A: Practically everything, including food, health care and home purchases. For example, sales taxes would be imposed on the cost of a visit to the doctor. "There is no state sales tax anywhere that does any of that and politically you can understand why," said Bill Gale, co-director of the nonpartisan Tax Policy Center. He predicts there would be immense political pressure on Congress to provide exemptions. But if an exemption was provided for health care, for example, the sales tax rate would have to rise even higher.
Q: Is this a new idea?
A: No. Rep. John Linder, R-Ga., has proposed legislation to create a national sales tax in every Congress since 1999. In the current Congress, Linder's bill (H.R. 25) has 68 House co-sponsors. An organization based in Texas that advocates a national sales tax has a Web site on the topic (www.fairtax.org) and has paid for academic research on the proposal.
Q: Do any other presidential candidates support a national sales tax?
A: Two second-tier Republican candidates - Reps. Duncan Hunter and Mike Tancredo - support it.
Q: What would happen without a new cash grant program to low-income families?
A: A single mother with one child who earns $20,000 annually would pay $6,186 in retail sales taxes, more than eight times the $723 she currently pays in income taxes and federal payroll taxes, according to the president's advisory tax panel.
Meanwhile, Americans in the top 20 percent of income would pay an estimated 65 percent of retail sales taxes compared with the 84 percent of federal income taxes they currently pay.
Q: Who would lose in the transition to a new tax system?
A: The biggest losers would be people with Roth IRAs. They have put after-tax savings into retirement accounts with the understanding that money eventually withdrawn from them would be exempt from taxation. Linder says a transition rule could be worked out.
Q: What about states that have state income taxes?
A: States would have difficulty sustaining their income tax collections because they piggyback on the current federal system. And taxpayers in states with income taxes still would be required to file annual income tax returns.
Q: What would happen if the IRS were abolished?
A: Advocates of the fair tax say national productivity and economic growth would increase. The Beacon Hill Institute at Suffolk University in Boston estimates $346.5 billion in administrative costs would be saved annually. However, the president's advisory panel concluded that a federal agency would have to be created to collect the tax and administer regulations on how it would be collected, as well as on the incomes of Americans eligible for cash rebates.
"The federal administrative burden for a retail sales tax may be similar to the burden under the current system," the panel said. Clint Stretch of Deloitte Tax LLP said, "The economic literature suggests that sales tax enforcement becomes very difficult and noncompliance skyrockets when sales taxes go above 12 percent."
Q: Does any other country have a national sales tax?
A: No. European countries have a "value added tax," also known as a VAT, that's imposed on goods at various stages as they are manufactured. These countries also have income taxes.
Q: So what's the best example of the fair tax?
A: Texas and Florida offer the best model because they have a state sales tax and no state income tax, according to Linder.100
Q: What are the chances of this being enacted?
A: Zero in the next couple of years. But advocates of tax reform say the expiration of the Bush administration's tax cuts at the end of 2010 and the escalating problem with the alternative minimum tax provide an opportunity for Congress and the next president to rethink the current tax code. A national sales tax would be one of several options to consider. Others include a national consumption tax and simplification of the current income tax.
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