- The Washington Times - Sunday, August 8, 2004

House Speaker Dennis Hastert, Illinois Republican, created a flurry of excitement in Republican circles the other day when it was reported his new book proposes ending the Internal Revenue Service. This would be done by replacing all existing federal taxes with a national retail sales tax.

There is no indication what tax rate Mr. Hastert thinks would be necessary to replace all federal revenue. A proposal by Rep. John Linder, Georgia Republican, sees a 23 percent rate as adequate. But such a low rate can only be sustained by making completely absurd assumptions about what would be taxed. Every serious economist who ever looked at this has concluded a vastly higher rate would be needed.

First, an unstated assumption is that the 23 percent rate Mr. Linder proposeds 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’ Joint Committee on Taxation scored the Linder proposal four years ago, it estimated 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.

Brookings Institution economist Bill Gale notes sales-tax supporters assume there will be no tax evasion under their proposal and that the size of government will not grow, though they would send a large annual check to every American to offset the tax’s regressivity. Making realistic assumptions, Mr. Gale estimates the tax-inclusive rate, comparable to Mr. 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 state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher.

Obviously, the federal government will not 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 U.S. consumption of goods and services would be taxed. Implicitly, Americans would be taxed on, among other things, all medical care, buying new homes, and services of state and local governments, if Mr. Linder’s bill became law.

This means that if you are sick and have large doctor bills, you will 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 will 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 will have to pay another $6,000 to the federal government.

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

Economist Evan Koenig of the Federal Reserve Bank of Dallas makes the point any new sales tax will raise prices by that amount. If the Federal Reserve accommodated it, we would have 30 percent inflation the year the tax is introduced. Without such accommodation, producer prices would have to fall 30 percent, causing a severe recession and a greatly reduction in tax yield.

Somehow or other, Mr. Linder has got 54 House members to cosponsor his proposal. They should all pray 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 Mr. 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.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.


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