The idea of instituting a national sales tax to replace the federal income tax is one of those issues that has cropped up from time-to-time over the years but never seems to go anywhere.
While a similar approach has been used in Europe, many in the U.S. are concerned that the institution of a national sales tax will have serious negative consequences for consumers on the low-end of the economic ladder as well as businesses in sectors such as retailing.
The current primary campaign has brought the sales versus income tax debate to the spotlight again as Mike Huckabee, the former governor of Arkansas and a candidate for the Republican nomination, has thrown his support behind a national consumption tax that proponents call the FairTax.
A group called Americans for Fair Taxation, The Boston Globe reports, is promoting a 23 percent tax to be added to the cost of all goods sold. The group contends that the revenues generated by this FairTax would replace all the government takes in from the current income-based system.
Mr. Huckabee's campaign website offers several paragraphs to support the FairTax. The site states: "I'd like you to join me at the best 'Going Out of Business' sale I can imagine - one held by the Internal Revenue Service. Am I running for president to shut down the federal government? Not exactly. I am running to completely eliminate all federal income and payroll taxes. And I do mean all - personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment. All our hours filling out forms, all our payments for help with those forms, all our shopping bags filled with disorganized receipts, all our headaches and heartburn from tax stress will vanish. Instead we will have the FairTax, a simple tax based on wealth. When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness."
Gerald Prante, a senior economist at the Tax Foundation, a nonpartisan research organization, told The Globe, "They're overly optimistic on many things, such as the administration of the tax and the elimination of the [Internal Revenue Service]. It's a public relations thing because everyone wants to get rid of the IRS."
The reality is a consumption tax wouldn't eliminate the need for an IRS-like collection agency, according to Mr. Prante. Instead, 50 different state agencies would have to be put in place to cover many of the tasks now handled by the federal entity.
Discussion Question: Does a national consumption tax make sense for the retailing industry?