Federal sales tax

Could a National Sales Tax Replace Federal Income Tax?

A Fundamental Tax Reform

Lawmakers and state officials have proposed a fundamental tax reform that would replace federal income tax with national retail sales tax.

Instead of imposing the highest amounts of taxes on taxpayers’ earnings, the national sales tax would focus more on what consumers spend.

The government would levy a flat rate tax on retail sales that would tax consumer spending indiscriminately.

Replacing a Broken System

An estimated $170 billion a year is spent on tax filing.

This has prompted both Democrats and Republicans to seek a shift in the US taxing system.

Many argue that federal income tax results in reduced productivity and decreased job growth. 

“Punishes the Productive”

Forbes contributor, David John Marotta writes that, “[income tax] punishes the productive by taxing them the highest amounts, reduces jobs by increasing the cost of employees and reveals our personal finances and thus invades our privacy.”

What Would Change?

Income tax is often seen as an invasion of the privacy of taxpayers who succumb to corporate and personal income taxes.

With the introduction of nationwide tax reform, the Internal Revenue Service would be scaled down substantially.

There would no longer be a need for taxpayers to report fiscal earnings or other personal financial information. It may also help to reduce fraudulent reports caused by the retrieval of sensitive financial information.

Sales Tax: Unfair to the Poor?

Critics of the national sales tax argue that the tax would favor the rich because the poor spend a higher percentage of their income per year.

Wealthy individuals with a high standard of living would still pay the most taxes since all Americans would be taxed according their spending habits. 

Critics also warn that in some states, sales tax would soar. “In 29 of the 39 states with both sales taxes and significant income taxes, current sales tax rates would have to more than double to replace revenue lost from repealing state income taxes,” argues tax analyst, Martin A. Sullivan.

Those in Favor…

Those in favor of national sales tax say it would encourage decrease spending and reduce the price of goods by taxing consumption.

They also argue that Americans would begin saving and investing more due to deferred consumption. “In 2014, the Treasury collected $1.7 trillion from corporate and personal income taxes.

This could be replaced by a 12 percent sales tax on all private purchases,” says Peter Morici, an economist at the University of Maryland.

Supporters of the sales tax like Morici believe that it would stimulate production of goods as well as economic growth in the long run.