A national sales tax? Would that be nice?

October 1, 2004By Michael Leachman

President Bush, speaking in August at a campaign forum in Niceville, Florida, said, "I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously."

Related materials:

Tax Policy Center's brief, Lower-Income Households Spend Largest Share of Income

Oregon voters have rejected a sales tax nine times. For most Oregonians, it's not nice to hear the message coming out of Niceville.

It's not just President Bush who thinks a national sales tax might be nice. Republican Speaker of the U.S. House of Representatives Dennis Hastert announced his support for a national sales tax in his recent book. The leading bill in Congress, sponsored by Republican Representative John Linder of Georgia, already has 54 cosponsors, including the powerful Republican House Majority Leader Tom DeLay.

Linder's proposal would establish a national sales tax on most goods and services, including food, medicine, health care, new home purchases, and rent. Most current federal taxes, including corporate and personal income taxes and payroll taxes, would be abolished. The bill's supporters say the changes would be revenue neutral, meaning that the national sales tax would fully replace current federal revenue sources. They say no cuts would be required for Social Security, Medicare, the military, Homeland Security or any other popular federal program.

To continue funding the bulk of existing federal programs, the new sales tax would have to be extremely high. An analysis by researchers at the Institute on Taxation and Economic Policy estimates that the sales tax rate required for revenue neutrality in 2005 would be between 45 and 53 percent, with higher sales tax rates in subsequent years. An analysis by the Brookings Institution found that matching expected federal revenues over the next decade with a national sales tax would require a sales tax rate of about 60 percent.

Imagine your health care costs jacked up by 45 to 60 percent on top of the cost increases from the drug and insurance companies. The typical American senior would pay about $2,000 more in sales taxes on health care alone.

You wouldn't have to pay other federal taxes under the proposal the President thinks ought to be seriously considered, but for most Oregonians, the trade-off would be a loser. If the national sales tax were implemented for 2005, the middle-income fifth of Oregon taxpayers (average income - $35,400) would pay $3,600 more in federal taxes than they'll pay with the current tax structure. Only the richest Oregonians would come out ahead. The richest one percent of Oregon taxpayers on average would save $164,000 in federal taxes next year.

It works out this way because the current federal tax system is progressive - it's based on your ability to pay. The current tax rates increase as your income increases. This principle is enshrined in our culture, and has Biblical roots.

A national sales tax would result in a massive shift of taxes onto the middle class by requiring all taxpayers to pay the same rate, regardless of their income, as if $1,000 means the same to you as it does to Phil Knight.

Supporters of a national sales tax claim that their proposal would simplify the tax code. This is not so. Today's tax system is complicated largely because various interest groups over the years have argued successfully for special breaks, some for reasons of fairness. Does anybody really think we'd get a national sales tax uncomplicated by loopholes and special provisions?

Should a national sales tax really be "seriously explored?" For most Oregonians, the message from Niceville is not very nice.