The idea to replace the income tax with a sales tax is not a new one. Federal sales taxes are widely used in other countries around the world, and given the low tax burden compared to Canada and Europe it is at least plausible that the federal government could obtain enough revenue from a sales tax in order to completely replace federal income taxes. The FairTax movement has come up with a scheme where income, estate, and payroll taxes could all be replaced with a 23 percent national sales tax. It is not hard to see the appeal of such a system. Since all taxes would be collected by businesses, there would be no need for private citizens to fill out tax forms. We could abolish the IRS! Most states already collect sales taxes, so a federal sales tax could be collected by the states, thus reducing administrative costs. There are a lot of apparent benefits to such a change.
There are three questions we must ask in order to analyze such a change:
- What impact will the change have on consumer spending and the economy?
- Who wins and who loses under a national sales tax?
- Is such a scheme even feasible?
We will examine each question over the next four sections.