March 1, 1996

Analysis and Summary of the National Retail Sales Tax Act of 1996

Arthur P. Hall, Ph.D.

Arthur P. Hall, Ph.D.

Download Special Report No. 57

Special Report No. 57

Executive Summary The National Retail Sales Tax Act, introduced by Reps. Dan Schaefer (R-CO) and Billy Tauzin (R -LA), proposes to replace the federal income tax system, the estate and gift tax, and all non-trust fund federal excise taxes with a sales tax on al l goods and services. In an effort to offset the tax burden on low-income taxpayers, the Act proposes a refund mechanism (administered through the payroll tax system) based on officially designated poverty levels for families of different sizes. The tax rate is set at 15 percent.

If the Schaefer-Tauzin sales tax plan were the law in 1997, it could re duce the tax-related burden for the average taxpayer by an estimated 37 percent (from $8,399 to $5,276). The reduction results from both a lower tax bill and the taxpayer savings that would result from reducing the high paperwork cost associated with the income tax. The lower tax bill results from the fact that government expenditures would be subject to the sales tax under the Schaefer-Tauzin plan.

The Tax Foundation estimates that complying with the federal income tax system will cost individuals and businesses about $157 billion in 1997. This high cost is tantamount to a tax surcharge on all taxpayers. A major element of the tax reform debate in general, and the Schaefer -Tauzin sales tax plan in particular, is the desire for a more simple, less IRS-intrusive tax system , and the reduced compliance costs that would accompany such a system. The Schaefer-Tauzin sales tax plan could reduce the $157 billion income tax surcharge by about 95 percent to $8.5 billion, and, as currently written, would reimburse businesses for about 56 percent of their estimated compliance costs.

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About the Author

Arthur P. Hall, Ph.D.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.